The state's 7.5 million citizens swelled with pride on Sunday after they learned that Bank of Israel governor Stanley Fischer was declared central bank governor of the year by Euromoney magazine. There was, however, one citizen left smarting. He couldn't understand how the writers of such a respected journal could err to such an extent as to hand an award that he deserves to somebody else. After all, who but Yuval Steinitz is responsible for extricating Israel from the financial crisis and leading it on a path of substantial growth?
Yes, the governor was magnanimous, saying that the economy was handled by two doctors (him and the finance minister ) who were treating one patient (the economy ). But it turns out that the two doctors loathe one another. Once they enter the patient's room they begin arguing loudly over the proper treatment while blaming each other for any mishaps. Meanwhile, the sick patient is overcome with fear.
The ailment that both doctors are trying to treat is a disease of the rich. It is an illness that was brought on after the Israeli economy grew faster than that of Europe and the United States. Exports are up while unemployment is down, the budget deficit is at tolerable levels and the public debt is on the decline. Such good fortune should also trigger the weakening of the dollar against the shekel. It is this weakening that hurts exporters. If there is a drop in exports, factories are likely to feel the pinch and economic growth would slow down -it is this disease that the two doctors are trying to treat.
The weakening of the dollar is not an ailment that affects Israel exclusively. It is a global problem that affects every individual on the planet. Thus it's no wonder that "the currency wars" was the main topic of conversation when finance ministers and central bank governors met at the International Monetary Fund's annual conference which wrapped up its deliberations on Sunday in Washington.
The issue has become particularly critical because President Barack Obama is quite disturbed by the high unemployment rate in the U.S. on the eve of Congressional elections. Thus he must find a scapegoat, and China is always a good candidate for that role.
Indeed, China is part of the problem because its government is keeping its currency, the yuan, pegged at an artificial rate lower than its market value. The result of this policy is that Chinese exports sell for cheap in the U.S. while American exports to China are more expensive. This allows the Chinese to maintain high employment rates, while unemployment in the U.S. has reached 10 percent.
The Chinese are refusing to yield to American pressure to revalue the yuan. The Chinese finance minister told the IMF conference in Washington that floating the currency would cause major fluctuations vis-a-vis the dollar, resulting in a collapse of China's export sector. The ramifications of such a development would be higher unemployment and civic unrest. To put it more succinctly, it would endanger the stability of the Communist regime in Beijing. So China continues to buy up enormous sums of dollars in hopes of artificially maintaining the weak value of the yuan. For all intents and purposes, this is the government's circuitous way of subsidizing its export market.
Astoundingly, we have adopted a similar modus operandi. Fischer is also subsidizing Israel's exports by purchasing large amounts of dollars in an attempt to prevent a drop in the greenback's value. It is also true, however, that Fischer is doing so in a manner that is far more gentle and subtle than the Chinese.
Israel and China are not alone in this regard. A number of countries have begun to intervene in the currency market, whether directly or by lowering interest rates, or even taxing short-term capital movement. The list of countries includes Japan, Brazil, Indonesia and Colombia. Others, like Switzerland, South Korea, Thailand and Chile are threatening to similarly intervene. There is concern that other countries will join the "currency wars" in order to try and claim a bigger piece of a shrinking global pie. The next step could be levying protective tariffs on imports (a threat that the U.S. has made toward China ). Such a move would deal a blow to world trade, and the global economy would enter a recession the likes of which has not been seen since the 1920s and 1930s.
This nightmare scenario is keeping major world leaders awake at night. Fortunately for us, they couldn't care less about Israel, and are not pressuring Fischer to stop intervening in the currency market. Our country is simply too small, and when there is no international pressure, Fischer and Steinitz can find time to quarrel over who receives the credit for leading the economy out of the global crisis and putting it on the road to quick growth and shrinking unemployment. After all, everything is personal. Everything is visceral. Everyone is looking for some recognition and love.
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