Dear Readers,
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-NZ
After some consideration and consultation, we decided to move Stuff Jewish Young Adults Like to its own side project. It’s a cute idea, but we are trying to maintain some level of integrity and seriousness with this site. Feel free to check out the updated side project here. Enjoy
(Note: Even though I am a graduate student in Economics, I must admit that Monetary Economics and Monetary Policy is a field of economics that I know little about. My interest is in other fields in econ, so this post is based solely on my opinion. I will try to do my best to explain what is going on, to you and to myself, but please be kind as Monetary Policy is one of the more confusing and convoluted subjects. Definitely comment if you have better knowledge than I)
There has been a significant increase in economic turmoil over the past month, primarily stemming from the United States. While news coverage has been primarily about the possibility of a recession, the credit crunch, and subprime mortgages, the nature of a globalized economy is that whatever happens in one major player has a ripple effect on those players in the periphery. One of the biggest ripple effects that have been immediately felt is the rapidly decreasing strength of the dollar.
The recent confusion in the US has affected Israel in an interesting and unprecedented way. Last week Stanley Fischer, head of the Bank of Israel, announced that Israel would buy up $600M of US currency in the hope of propping up the quickly decreasing value of the dollar with respect to the Israeli Shekel. This event is quite unique in that a month ago Stanley Fischer went on record that the Bank of Israel would not intervene in the currency issues of the US. So why the reversal of policy?
In order to understand Fischer’s decision, or rather reversal, we need to dig a little bit deeper into the Israeli economy. Israel’s exports are overwhelmingly based on technology and high end finished goods. In addition, over 40% of Israel’s exports go directly to the United States. (The US accounts for roughly 6% of Egypt’s exports and 20% of China’s exports, just for a reference point). What this means is that, for a small country, a disproportionate amount of Israeli income is dependent on the United States. Now, this isn’t necessarily a bad thing, and the weak dollar does not mean that Israel will stop exporting to the United States. Actually, the weak dollar means that American goods are cheaper, and Israel can import American goods on the cheap.
So why buy up a crappy currency when you can just buy cheap goods instead? The answer lies in the fact that an overwhelming amount of Israeli firms deal only in dollars; they run their business in dollars, they trade on US stock exchanges in dollars, or they run their financial transactions in dollars. But, being Israeli based, eventually all of these business dealings need to be translated back to Shekels to pay salaries, pay rent, pay electricity bills, or whatever. So in effect every item that Israeli firms export is worth less and less.
Therefore, I think a large reason why Fischer reversed his previous statements is because the business community in Israel put pressure on the politicians, and on the Central Bank of Israel to stop the drop in the dollar. Buying dollars with Israeli shekels is not going to salvage the US economy, but the hope is that it will create some balance between the two currencies. And by hopefully stopping the drop of the dollar, Israeli businesses will not see the value of their products drop.
As interesting as this idea sounds, there is massive risk and potentially calamitous economic ramifications. First and foremost, the Bank of Israel simply does not have the financial resources to prop up the dollar. While it may help a little bit, six hundred million dollars is nowhere near a big enough boost. If the dollar keeps sliding, the Bank of Israel cannot keep continuing to buy as it will create massive inflationary pressure.
The second problem is that the risk of increased issues in the US economy has actually increased over the last week, dramatically in fact. The Bear Stearns fiasco, lowering mortgage requirements and increasing the risk of subprime issues, plus questionable actions from a Federal Reserve Board that seems to be more interested in avoiding recession than avoiding inflation. All of these issues have created massive insecurity about the US economy, which is going to further push down the dollar.
There is one other issue that might come in to play as well. Israel is not a very well diversified country when it comes to exports, and such heavy correlation to a potentially shaky US economy could spell trouble. The term that economists throw around is “decoupling”, which occurs when emerging markets increase economic interaction with each other, and decrease their reliance on heavy hitters like Japan, the EU, or the US. It is very similar to portfolio theory; by diversifying your investment you decrease the risk because any one bad investment will not ruin your whole portfolio. So while other emerging markets have been decoupling, Israel has maintained it status quo of putting most of its financial eggs in one American basket.
Because of these three reasons, the scope of the currency imbalance, the instability of the US economy, and the concentration of Israeli financial wellbeing in one location, Fischer’s decision to buy US dollars is rife with uncertainty. Already the results have been mixed. The day of the announcement there was a brief blip on the radar, but soon thereafter the same downward trend emerged in full force, which can be seen below.
It is very hard to predict what will happen in the near future, and it is even harder to predict what will happen in the long run. There are too many variables and too many unknowns. My personal disposition on Fischer’s decision is pessimistic. In the worst case scenario the US economy continues its downward spiral into recession, taking the Israeli economy with it (now more so considering the additional $600M payload), and in the best case scenario Israel will find itself holding a bunch of dollars that are worth less than what they were bought for.
(Additional info on currency rate fluctuations from the Chicago Fed here)
(Additional info on decoupling from a recent Economist article here)
I wanted to share some thoughts I have about the recent shooting at Merkaz Harav Yeshiva in Jerusalem.
First, to refresh our memories, late last week, on the 6th, a lone Palestinian gunman of allegedly Eastern Jerusalem origin opened fire on a on a bunch of young students at the Merkaz Harav Yeshiva in Jerusalem. The gunman was shot and killed, but not before emptying 500 bullets in the place and killing eight people.
There is plenty about the event in the news, so I won’t get in to the details, but I did want to point out some thoughts I have on this horrific tragedy.
First, this event immediately struck me as different from other terrorist attacks in that it wasn’t the typical suicide bomber, and none of the usual suspects claimed responsibility for it. As the news has pointed out, the situation was really a “lone gunman” type of situation, where one person took it upon himself to lash out without any outside influence. To me, this represents a different class of terrorism, one that, frankly, I’m rather shocked doesn’t happen more frequently. The motivation seems to be radically different. A Hamas-sponsored suicide bomber is indoctrinated with years of fanatic education and extremist rhetoric. A lone gunman comes from the perspective of deep individual frustration and desperation.
Secondly, what struck me is the symbolic specificity of the shooting. Merkaz Harav Yeshiva was founded in 1924 by Rav Kook, and has since been an active proponent of the Religious Zionist movement in Israel, and the more right wing settler Hardal supporters as well. Most terrorist acts are random attacks on strangers, without any consideration of who will be there and what their nationality is. Yet here the shooter chose to attack the same people who are looking to move his family out of Eastern Jerusalem. Therefore the symbolism of attacking Merkaz Harav cannot be ignored, and arguably is a major factor in why the shooter snapped.
Thirdly there is the response of the religious movements. I was reading a number of talk-balks and comments about the tragedy on a number of more religious online sites. The bulk of the comments are calls for vengeance and frightening Kahane-style militancy, which is not surprising, but there were also a second group of comments that caught my attention. Specifically, the comments where asking things like “Where is Hashem?” and “Why doesn’t Hashem protect the religious?” (paraphrasing). Now, this is the first direct attack on a religious establishment that I can recall (again the symbolism), and the religious movements are rightfully questioning the meaning of such an attack. I don’t really know how to predict the outcome of this, as I am well removed from the Yeshiva spheres of Jerusalem, but it seems to me that this event will cause people to either strengthen their faith dramatically or leave the faith dramatically.
Lastly, there is the political issue. Even though the shooting is an isolated incident, in that it is not backed by any one of the usual Anti-Israel terror supporters of the region, the response is immediately political. There have been extreme reactions to the politicians, as many are correlating this event to the decision to rekindle peace talks, and the whole issue of dividing Jerusalem. Olmert has been called on to resign, and Education Minister Tamir was practically driven away when she went to visit the Yeshiva.
Some people equate this terrible event to Columbine, or the more recent incident at Virginia Tech, while others equate this event to Baruch Goldstein. The reality is somewhere in the middle. Incidents like Columbine really are the acts of lone gunmen, those who take out their own personal issues on the public, choosing targets that symbolize their frustration. The backdrop of the Baruch Goldstein shooting was one of politics and politicization, where the lone gunman was not acting on his behalf, but on behalf of a whole movement. Yes, Goldstein pulled the trigger, but he pulled in on behalf of a larger e