You are right about Israel's foreign aid received from U.S. Economically, it benefits both countries because of the cycle you described. The Palestinians received more than enough money to build decent lives. A few billion dollars would take care of all the Palestinian "refugees." But as we all know, the money was mishandled and the blame is on Israel as always.
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Former IDF general Avigdor 'Yanush' Ben-Gal dies at 80 (Haaretz)
from the article: Don't count on America