Financial Crisis to bring recession to israel

We’ve all been watching the recent developments of Wall Street with a keen eye.  How, if at all, will it affect us individually?  Will Israel be dragged into a recession as well as the rest of Europe?

An inevitable part of the US’s historic $750 billion bailout package is the huge amount of paper that the government has to print.  The money has to come from somewhere, and usually that means selling more treasury notes and bills, or bartering paper with foreign governments.

With all that new money hitting the markets, you’d expect the dollar to drop in value.  However, the world economy follows the USA like a herd to a shepherd.  All the talk about Euros, shmooros…  When you want a safe currency in times of crisis, you don’t look to Europe with one of its EU members (Iceland) on the brink of bankruptcy, nor do you look to China or Japan, as they are having their own crises.  You buy dollars.  And that’s exactly what’s been going on since the US bailout plan was passed.

As a result, major and 2nd tier currencies alike have lost approx 5% in value against the US Dollar in the past week.  In Israel, the drop was sudden and major.  Two week ago, the Shekel (NIS) was trading against the USD in a range from 3.48 to 3.50.  Almost overnight, the Shekel devalued against the dollar to 3.70.  That’s a 5 percent change.

That’s very good for Israeli exporters, tourism, and for Israelis who’s salary is linked to the dollar, and for technology companies who raised funds in dollars.

That’s very bad, however, for importers, most Israelis who do not have linkage on their salary, and just about every consumer.  Prices will start to rise at the supermarket, which will in turn reduce consumption, and bring on inflation, and then recession.

Much of the strength of the Israeli economy over the past few years has been related to the strength and new found autonomy of the Israeli currency.  Breaking with the norm of the past 60 years, for example, Real estate was being quoted in Shekels.  Israelis had a new sense of pride in our national currency.

Now with this recent crisis, and the fall of the Euro as the other viable currency alternative to the almighty dollar, it appears Israel’s economy will be waiting for the other shoe to drop.