The Bottom Line / Hold the back page!
On the 10 A.M. news broadcast yesterday Israel Radio announced there would be a dramatic event at 1:30 P.M. - a news conference with Finance Minister Silvan Shalom.
On the 10 A.M. news broadcast yesterday Israel Radio announced there would be a dramatic event at 1:30 P.M. - a news conference with Finance Minister Silvan Shalom. The reporter said the minister would make an announcement "connected with the security situation," broadcast live. We started quaking in our boots.
Within minutes several worried people phoned. "Surely its a devaluation," said one. "Why didn't I buy dollars, do I still have time?" Another feared Shalom was about to foist a set of draconian measures on the public, such as a war levy, or raising fuel taxes - citing a need to raise funds for the security expenditure.
These two reactions taught me that human memory of catastrophe is a mighty thing, that whoever was here during the crises and the dramatic economic measures of the early 1980s, when the lights of the treasury were lit all night, finds it difficult to accept that today the situation has completely changed.
Today, the finance minister does not set the exchange rate. Supply and demand set the rate on the open market - as long as the shekel stays within the fluctuation band. And besides, since the beginning of the year the shekel has already depreciated 7-8 percent against the euro and the dollar, which is a real depreciation of 5-6 percent.
I also quickly dismissed the notion of extra taxes or draconian measures. Shalom has repeated again and again that he will not raise taxes which are too high in any case. Higher taxes will only slow down growth anyway. Shalom is also not the man to impose harsh measures, as it is really not very popular.
Then I concluded that the minister was calling a press conference in order to announce some "good tidings", a little gift, a freebie, something positive - and so it was. As soon as Israel Radio understood the content, the live broadcast was canceled, because Shalom was only announcing a tax break for foreign companies wishing to invest in Israel venture capital funds.
There is no foreign VC investment to speak of anyway - and not because of tax reasons. And if tax cuts are good for high-tech, then why not cut taxes for the whole economy? Because then you would have to cut back government expenditure, and Shalom is hardly the expert of that.
Fear of depreciation and harsh economic measures brings us round to the interest rate. Yesterday David Klein announced that he would not cut the rates in October, even if in all the world around him rates have been slashed. And he repeated his reasoning - the long public memory of catastrophes.
We all remember the hyper-inflation of the early 1980s, when price stability was not a forgone conclusion. Americans and Europeans do not carry such a "heavy past" with them. For them, price stability is a solid fact and no politician there talks of increasing inflation as a way out of recession. Here, the central bank governor has to be much more wary than Americans.
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