Excuse, perhaps, my economic ignorance, but I have some questions revolving around the Israeli economy, specifically centering on the drastic weakening of the shekel in the past year or so, and the responses of the Ministry of Finance and the Bank of Israel. people who feel job security are willing to put out more on consumer items.
External Factor Inflation: Rising costs for raw materials due to shortage, embaro, natural disaster, etc. Plus relative weakness of a local economy compared to world market, means rising price of foreign goods. Which may be fine for an economy which has many domestic raw-materials, production, etc., however, for an economy like
First off, it seems to me that there are basically two general types of inflation (I don't know real definitions so I am just making up my own names for them):
Strong Economy Inflation: Falling unemployment, rising real wages, higher consumption levels, better worker benefits, etc. In this scenario inflation is partially due to businesses raising prices due to trying to keep profits up and increasing while having to increase wages at the same time, plus raising prices due to a perception that Israel, which imports a huge majority of its raw-materials, energy needs, and even finished consumer products, relative rise in foriegn goods without any competing quality local made goods means rising costs across the economy.
Obvioulsy Israel is in the second type of Inflationary period...which in our case seems to me pretty much a form of stagflation: an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.
Israel has raised the interest rate several times in the past year (last week rasing it 1 1/2 percentage points), all at a time of rising unemployment, lack of growth, etc. In a Strong Econmy Inflationary period, (so the neo-liberal economists tell us) raising interests rates is done to slow the economic growth down, create more 'slack' in the workforce, etc. However in the External Factor Inflationary period, falling unemployment, rising real wages, higher consumption levels, stock market growth, etc. are anything but the problem, and therefore, rasing interest rates are not going to get at the problem at all, but they will exacerbate the slow growth, unemployment, they are a disinsentive to take out business loans, etc.
So where is the logic?:
Perhaps, if I have this correctly, raising interest rates makes your currency relatively more desireable to buy, thereby strenthening your currency in relation to others. Further, higher unemployment and falling wages can make your country look more desirable to foreign investors who want to move production to an econmony which will cost them relatively less to manufacture goods.
However, with the regional political situation as it is, and the still high wages and production costs in Israel in comparison to India, Thailand, etc. I don't see foreign investors flocking to Israel and thereby boosting our economy. So any benefit that could come from the actions of the Bank of Israel, wont...
So we are getting the insanely bad results of their economic moves, without the benefits they forecast.
So, if anyone can explain this all to me, and inform me of any lapses in my economic logic, I would be most pleased.
For background see: http://news.haaretz.co.il/hasen/pages/ShArt.jhtml?itemNo=%20175397&contrassID=2&subContrassID=2&sbSubContrassID=0&listSrc=Y&itemNo=175397
or any of the various articles published on the matter in Ha'aretz of late.
Best,
Bryan -------------- next part -------------- An HTML attachment was scrubbed... URL: <../attachments/20020612/ba0b1170/attachment.htm>