Sheltering with the weak? 6

We stumbled upon this article, which appeared originally in an Israeli paper we don’t read and hardly ever quote because its view from the left annoys us, and found it interesting.

The shekel is in the news this week because its soaring value is proving to be a problem for Israel’s exporters. Reuters reports that the appreciation is forcing Israel’s foreign customers to pay more for the country’s exports. Some Israeli companies are moving operations overseas to shelter in countries with weak currencies.

Cheer up, I say. Writing from a country that is in the midst of a historic collapse of its currency, I have long since come to the view that a strong currency is better than a weak one. Even better is a currency that has readily exchangeable into gold (or silver) at a legally defined rate. Could it be that Israel is in circumstances in which it could lead the way back to such a system?

No doubt most economists would say no. After all, Israel’s economy, however healthy, is too small to play a leading role on the world stage. I’m less sure of that. It could well be that the relatively modest size of Israel’s economy could give it the agility to make a move where the giants are too timid to tread. It’s not as if the big economies have a lot of credibility left.

This, in my view, is a central lesson of our times. It has been coming into ever clearer view since 1971, when America defaulted on the dollar, closed the so-called gold window, and launched the world into the age of fiat money, meaning money that has no set value in terms of specie — gold or silver — but must be accepted as a matter of law because of governmental fiat. This was known as the Nixon shock.

Nixon brought to an end the international monetary system that has been set up at the end of World War II at Bretton Woods. That was the New Hampshire resort where the victors in the war set up a gold exchange standard. The Bretton Woods Treaty guaranteed the right of foreign governments to redeem their dollars in gold. The system crashed after America pursued a policy of both guns (Vietnam) and butter (the war on poverty),

The scale of the collapse since then has been breathtaking. A dollar that was fixed by law during the years of Bretton Woods at a 35th of an ounce of gold plunged in value to, a year or so back, but a 1,900th of an ounce of gold. It soared something like 46% since then, but is still valued at less than a 1,300th of an ounce of gold. The shekel, meantime, has soared something like 54% from its low in late 2012.

It has taken decades for the size of the catastrophe of fiat money to come into focus. But with the perspective of more than a generation we can see the impact. My own favorite statistic is that the average unemployment rate in America between the end of World War II and the end of Bretton Woods was 4.7%. Since the end of Bretton Woods, the average rate has been 6.4%.

This has been political hell for President Obama and the liberal politicians who think that they can fight unemployment by ballooning up the Federal Reserve’s balance sheets. Meantime, big American corporations are keeping more than $1 trillion overseas for fear of taxes and regulations at home. This is a trap into which Israel, whatever the Bank of Israel might fret, doesn’t want to fall.

Yet it is the trap that is brought to mind by reports like the one Reuters moved (and the New York Times published). The nub of it is that in an effort to dodge the gyrating shekel Israeli companies are moving operations overseas. Small so far, but not a good sign. It raises the question of whether Israel can use its prosperity and the boon that will come from its vast natural gas discoveries to begin laying in gold and silver specie in reserves?

Israel has eschewed such a strategy in the early decades of the modern state, but that’s no reason not to take the lead now.

So the effects on  a small country of achieving a strong currency in the midst of world-wide recession are ambiguous. Is it more of an economic blessing or curse? We look forward to our readers’ comments.

Posted under Commentary, Economics, Israel, United States by Jillian Becker on Monday, April 7, 2014

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This post has 6 comments.

  • Roger

    I’m one of those who is just barely old enough to remember 5 cent colas. I remember my shock when my favorite fudgesicle went from 5 to 6 cents!

    When the currency is not pegged to something of real value, and the government goes on a borrow/tax/spend spree, the currency just floats along. The whole thing was only possible because the USA emerged from WWII as the sole political, military, and economic super-power. It wasn’t hard for the rest of the world to go along, since we were throwing money around like it grew on trees. Having most of the gold helped, and we had developed a manufacturing base second to none.

    I continue to be amazed at how the FED has been able to hide in plain sight all of these years. I don’t think it’s so much cleverness as it is lack of education of the masses, especially in macro-economics. It’s mind-boggling that our government gave away the central banking function to a private corporation over 100 years ago. It was a very clever scam. Using the name “Federal”, and having the POTUS and Congress appoint the Chairman, made people think it was part of the government. Then, ostensibly, to make them “independent”, they were allowed to operate in secret, with no real oversight. If that’s not bad enough, our government then borrows it’s own money at interest from the FED. Just amazing!

    The apparent prosperity the USA has enjoyed over the last 60 years or so has been accomplished by the creation of a huge credit/debt bubble that is about to burst. I hate to use the word, but it truly is “unsustainable”!

    • Don L

      You sound like me with a new perspective. I love it!!!

      You’re right, and so am I LOL, They get away with it because the progressives control the compulsory schooling system…yeash, let’s spend more on education, yeah.

      And, therein lies the fix…exposing the FED. Shine the light of “look see”. Ron Paul tell the story, in his book “End The FED”, how it was about 3000 students at a rally he spoke at that began the chant End The FED. And, the word has been spreading and people are paying attention. Spread the word anyway you can.

      Good explanation Roger!

  • Don L

    The newish Bank of Israel Governor Karnit Flug doesn’t seem to play the typical print and borrow central bank games nicely with the european central banks or America’s FED. It’s not that she isn’t a wrong-headed monetarist…it’s that she has peace talks and more to consider and to her a strong shekel is what’s needed. She has told Netanyahu to stop spending but also, wronglyy, to not cut taxes.

    The peace talks have had a historical impact on Israel’s economy…shocks is more like it. If it looks good for peace…good things happen; the converse is also true. Needless to say, the shocks always wind up being bad.

    Given that the not playing nicely tends to get central banks (the FED) upset…I wonder if the stupidity of the Kerry initiative is more along the line of punishment…more Obama friendly gestures. And, a strong shekel…the bill for attacking Iran will be paid for in advance…not a borrow-come-lately; like America and the europeans.

    I have no proof…just a thought.

  • liz

    It’s a wonder our system hasn’t collapsed already, what with Lincoln setting up a central bank and cronyism, Wilson the Fed, Nixon throwing out the gold standard, and Obama putting us trillions in debt, among other disasters.
    Actually, (according to Limbaugh), it has collapsed already, but it still functions anyway, after a fashion.

    • Don L

      Limbaugh is right. And so…

      Ever since I was a kid, I have heard older folk talk about how the movie was only a dime, the ice cream cone was only a nickel, and many more comparisons of today’s price with yesterday’s. It was just accepted, by me and about everyone I knew, that prices just always go up. Never thought or questioned it.

      Then about 7 years, ago I found out what the FED was and what it did…And, I discovered that every bank is already bankrupt, that the dollar is not even as valuable as toilet paper…And, that this has all been kept secret from Americans…And, that one might as well put your head between your knees and kiss your a__ goodbye! It was a scary and shocking discovery.

      But then, I began hearing about End The FED, came across this site, have been able to educate others…(gulp, finger running around inside of collar…not wanting to offend) I remembered the words of some coach-like mentor type from a movie yell at a deer-in-the-headlights protagonist…”Get over it. Quit yer whining, get your a__ off the couch and go do something about it!

      Man, I hope your laughing!!! LOL.

      • liz

        Your right.
        Truly a dismal prospect, but there’s no alternative to at least making the attempt to fight this grotesque leviathan our government has become.