Of deficits and debts

The Israel public is confused, concerned and angry – rightly so, on all counts, although at the end of the day, it has only itself to blame. The facts are clear and are in full view; all that is necessary is to examine them, understand them and draw relevant conclusions. However, the Israeli public and the media that serves it do none of these things – with the result that it is confused, concerned and angry.

Confused? Hardly surprising, with a government that until very recently was indulging in an orgy of self-congratulation over how wise, far-seeing and determined it was, in pursuing an economic policy that enabled Israel to surf the global financial tsunami and bounce back into the fast growth track, leaving its developed-country peers wallowing in debt, crisis and austerity. But suddenly, the theme has changed and that same government is warning that same public that if it doesn’t shut up and take the medicine that Dr Netanyahu has prescribed and Nurse Steinitz is administering, it will suffer a dire fate indeed. We could become like Spain (gasp!), Portugal (HORROR!!), or Greece (shriek and swoon…). So are we doing great, or is disaster looming?

Concerned? Hardly surprising, with our own government displaying schizophrenia (see above), our neighbors displaying tendencies ranging from homicidal (Syria), via suicidal (Iraq) to genocidal (Iran), and the continent regarded by Israelis as the source of culture and civilization (no, NOT America – Europe) engaged in a prolonged and painful process of self-destruction.

Angry? Hardly surprising, with a political class that is not only overtly self-serving, but also incredibly stupid, inept and inconsistent. When the people in charge swing from one position to its direct opposite from one day to the next, the response has to be one of anger – as much with ourselves, for electing this collection of clowns, as with the clowns themselves.

The correct response to confusion, concern and anger is, first and foremost, to try and think straight. Tune out the babble of the politicians and their lackeys and focus on real facts, figures, trends, strengths and weaknesses. Let’s illustrate this via a concrete example – just one, but a very important one, with many ramifications: Israel’s debt.

Israel’s budget deficit is large and growing rapidly. That’s a fact. It is still much smaller than the deficits of not just the usual suspects – Greece, Spain, et al – but also of the US and UK. That’s also a fact. What do these facts mean? How are we going to finance this deficit? Presumably by borrowing. But that surely creates a genuine danger of “ending up like Greece and Spain”?

Really? What does that threatening phrase actually mean?

In the purely financial sense, “ending up like Greece” means that a country loses access to the financial markets – which in turn means that investors are not prepared to lend to it. If no-one will lend to the country, it will be unable to pay interest or repay principal on its outstanding debt, and it will “go bust”. It will be unable to buy the things it needs and doesn’t produce itself, such as food, fuel and medicines. Its citizens will first be “wiped out” financially, then impoverished, and ultimately – if the process goes through to the very bitter end, they will be reduced to starvation. Greece is at the beginning of that process, but there are African countries that have endured most or even all of it. In short, as the contemporary slang has it – “you don’t want to go there”.

How do you avoid it? Clearly, by not reaching the point where no-one will lend to you. But let’s be more specific: why would ‘they’ refuse to lend to you? The answer is simple enough – because they don’t believe you can or will repay the loan. As discussed in last week’s column, the world is now split between countries which people are not prepared to lend to at any reasonable rate of interest, and those they will lend to for nothing or even if it costs them money (negative interest). In a world driven mad by fear of not being repaid, it is essential not to be on the wrong side of that divide.

But why would ‘they’ trust you? There are two answers to this, both critical. One is rational, based on facts and figures. You have a record, which is public knowledge. Greece, for instance, has spent much – some would say most – of its 182-year modern history in a state of default. On the other hand, Israel, and the Zionist movement that spawned it, has never missed a payment of interest or principal in the 110 years since it started borrowing. In addition to the historical record are the current data – how large are your debts? In the Israeli case, total debt to the rest of the world is actually negative: the world owes us more than we owe it. That has been the case for the last ten years or so and Israel’s net creditor status keeps growing. If you didn’t know that – and most people don’t – then you have a totally distorted view of the Israeli economy. More recently, the asset side of the Israeli balance sheet has received a dramatic and massive boost, thanks to the discovery of large natural gas deposits off the Mediterranean coast.

Knowing that Israel has both the will and the means to repay its debts is a powerful incentive for “them” to trust us. But it’s not the only one.

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