Most Israelis would agree that this week saw their country’s politics plunge to a new nadir in terms of morality and behavioural standards. Indeed, opinions polls confirm that an overwhelming majority want to see Ehud Olmert leave office immediately and feel no need to find out if there is sufficient evidence to indict him, let alone find him guilty of something beyond reasonable doubt. They have heard, seen, read and generally had enough. For them, Olmert is an embarrassment of which they wish to be relieved.
How ironic, then, that the same week saw a slew of data testifying to the fact that the country’s economic situation has climbed to new and still higher highs. In the first quarter of 2008, GDP maintained its strong showing of the last three years by growing at a surprisingly healthy 5.4% annual rate. The main engine driving growth is private consumption, but investment and exports are also doing well, despite fears that they would be hit by the global financial crisis and the recession in the US. Unemployment fell yet again in January-March, to the lowest level since 1997, with the employment rolls expanding by almost 50,000 persons. And, of course, the shekel continued its relentless march upwards against virtually every other currency in the world.
In most countries facing a prolonged period of political paralysis because its government is plunged into crisis, the currency would take a hit as local and foreign investors and speculators adopted a sceptical and cautious approach. Not us. The response here is Olympian: stronger, higher, faster. The result: the shekel is at its highest rate since January 1997 against the American shmatteh currency and since early 2003 against the supposedly powerful euro-garbage. The other rubbish foreigners stuff their envelopes with – yen, sterling, Swiss franc and assorted global junk – are not worth talking about. Supershekel rules, OK!
Not that long ago – about six months to be exact – serious economists earnestly debated whether the ‘true’ value of the shekel was 3.90 to the dollar or perhaps even 3.80. Very few of these savants expected it to get to those levels, or to hold them for long if it did, but it was an interesting theoretical debate, using advanced econometric modelling tools. Today, the shekel’s value would have to fall (and its nominal price to rise) by 20% — twenty percent! – to get back to those levels which, until recently, seemed as remote as Antarctica.
Economists are usually very good at explaining ex post why what happened actually happened, although they didn’t think it would. In this case, however, understanding how we got from there to here is far from straightforward and explaining it to others is a thankless task. The simple truth is that there were more buyers of shekels than sellers, but that merely begs the more serious questions of who were the buyers and why were they buying, and where were the would-be sellers and why weren’t they selling? Yet when all the attempted explanations are said and done, the brutal fact remains that the shekel is at these incredible, surrealistic levels. What do they suggest, or indicate, or portend?
They suggest that something is seriously out of kilter in the Israeli economy. They indicate that rational people should spend as many shekels as they possibly can, and then some, on imported goods and services. Buy that fancy TV, lounge suite, new car, round-the-world cruise – whatever it is you want, grab it now while you are empowered by Supershekel. You don’t need to be Olmert to spurn business class – for a few shekels more, you too can upgrade yourself to first class. It’s no more than your due, for whiling your days away earning a paltry salary denominated in the most powerful currency on earth.
You had better hurry and cash in while the going is good, because the lunacy in the foreign exchange market portends bad things for the Israeli economy. Most exporters cannot survive for long at these levels of exchange, especially when their input costs are rising because of the commodities boom and/or shekel-denominated wages. Even the high-tech sector is threatened, because Israeli programmers now cost as much or more than their American counterparts, and far more than the guys in Hyderabad. The shekel is now a direct threat to the well-being of the Israeli economy, with every day that it remains in its inflated and over-valued state generating additional damage. The sooner this weird state of affairs is over, the better for the country and its citizens. Just like Ehud Olmert’s premiership.