●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity starves the economy to feed the government, and leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
[Disclosure: I am a very distant relative of Netanyahu. My daughter’s mother-in-law is his cousin. I never have communicated with or met the man.]
Israel is the latest Monetarily Sovereign nation to fall for the “debt-is-too-big” myth. As readers of this blog know, a Monetarily Sovereign government has the unlimited ability to create its sovereign currency, thus the unlimited ability to pay its debts – even without collecting taxes.
Israel is Monetarily Sovereign. It can create endless shekels, which are feely exchanged for the U.S. dollar and for other world currencies. It does not need to ask anyone for shekels, not its taxpayers, not the U.S. et al, nor does it need to ask anyone for dollars, euros, yuan or yen. It simply can create and exchange shekels for all major currencies, just as it has been doing since Israel began.
This contrasts with Greece, Italy, Illinois, Chicago, you and me, all of whom are monetarily non-sovereign, so cannot create a sovereign currency, simply because none of us has a sovereign currency.
While debt is no burden to a Monetarily Sovereign nation, debt is a burden to monetarily non-sovereign entities. U.S. leaders pretend not to understand this, and the U.S. media go along with the charade. Apparently, Israel’s leaders now have joined the tribe of feigned ignorance for the benefit of the upper 1% income cabal.
Chicago Tribune, 8/27/12
JERUSALEM — Israel’s once-envied economy, which dodged the recent credit crunch and grew even amid the international recession, is heading toward choppier waters.
The government is taking steps to avert a slump, and is already facing criticism over the moves.
After assuring Israelis for nearly three years that their economy was outperforming the rest of the world, Prime Minister Benjamin Netanyahu surprised many this month by abruptly pushing through a platform of austerity measures, including higher income taxes for top earners, new levies on cigarettes and beer, and raising the VAT, a kind of sales tax, from 16% to 17%.
Israel appears on track this year to expand its gross domestic product — a key measure of economic health — by more than 2.8%. That’s down from last year’s impressive 4.7%, but it’s still almost twice the recent growth rate reported in the U.S. and far better than Europe’s contracting economies.
Israel has had a negative Balance of Payments since its beginning in 1948. Every year, more money leaves Israel than enters. The U.S. too, has had a negative Balance of Payments for many years. Because both nations are Monetarily Sovereign, each can create endless sovereign currency to pay its bills. Both nations survive and grow, because each is able to create money to replace the money that leaves. They do this by deficit spending.
(Sadly, the euro nations can’t do this, which is why they are sliding down the toilet.)
Now, because of increasing (and meaningless) debt, Israel leaders have decided to save their economy by increasing taxes. Remove money from an economy to save it??? Does that make sense to anyone?
Israel’s budget deficit has doubled over the last year, leading economists to predict that the government won’t meet its 2013 goal of keeping the deficit at 3% of GDP. The Bank of Israel issued a stern warning this month that missing the deficit target could erode international confidence in Israel’s fiscal policy, which the bank said had been crucial to the country’s economic success in recent years.
Perhaps the least meaningful fraction in all of economics is Debt/GDP. Now Israel has joined the Kool-Aid, austerity clan. If taxes are increased, Israel’s leaders will be amazed that despite their “best efforts,” Israel’s economy begins to tank.
Netanyahu defended the tax increases as a preemptive step to keep the nation on a responsible fiscal path. He told Israelis that there was no “free lunch,” a comment that immediately drew attacks from opposition leaders who accused the prime minister of being out of touch with the financial struggles of the middle class.
Lacking any supporting data, Netanyahu falls back on the old “free lunch” slogan. It is meaningless in this context, but he must believe it sounds wise.
Bank of Israel Governor Stanley Fischer called Netanyahu’s austerity measures “courageous,” but he warned that they may not be enough, particularly if the debt crisis worsens in Europe — the destination of many of Israel’s exports.
I agree it is courageous to pull money out of your economy when you also expect exports to decline – courageous and stupid. Why would anyone think a tax increase will grow an economy that soon will have less money coming in? When the economy does tank as a result of austerity, Fisher will declare that not enough blood was drawn from the anemic patient, and insist on more taxes and less spending — a perfect, downward helix will ensue.
But some economists say the government is using Europe as a scapegoat, insisting that the bigger problem is Israel’s increased government spending in recent years. Since lifting a fixed 1.7% cap on annual spending increases in 2010, government expenditures have ballooned, particularly for defense and social services.
“Some economists” must be stupid, too. Has it occurred to anyone that those increased expenditures pumped money into the economy, thereby stimulating the “almost twice the recent growth rate reported in the U.S. and far better than Europe’s contracting economies”?
Worse, critics say, the approved austerity measures provide only about a third of the revenue Israel needs to meet its deficit target. That’s partly because Netanyahu backed down on several provisions, including a middle-class tax increase and cuts in benefits for religious families, amid opposition from his coalition partners.
That’s what Israel’s economy needs: A middle-class tax increase and cuts in benefits. Yikes!
Dear cousin Netanyahu, please repeat after me: Austerity never works. Never, never, never. Austerity always causes economies to crash. Always, always, always.
Got it? Good. Now, please tell America’s politicians.
Rodger Malcolm Mitchell
I hate to do this, but cousin Netanyahu deserves 5 dunce caps for his plan to destroy Israel’s economy.
(Dunce cap deficit grows, but still no danger of running short. I’m sovereign in dunce caps.)
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports
21 thoughts on “–Israel drinks the austerity Kool-Aid”
Print 9000000000000000 shekels every day all in israel will be fabulously wealthy! And within 45 months will own the world!!!
Do you think the productive capacity of Israel would be able to keep up with that much money?
Even if Israel’s productive capacity were zero, they could buy what they need from other countries.
Rodger Malcolm Mitchell
My understanding was that if as a foreigner I have no tax obligations in that currency and if there is nothing to be bought that is denominated in that currency then I wouldn’t really have much use for it.
Am I missing something or are we misunderstanding each other?
You could use it to buy Israeli land.
Ah! good point
I discovered your site last evening by a chance link, and I’ve been reading it for hours since.
Have you or anyone you know ever tried giving free seminars based on these ideas?
I would think people along the whole political spectrum would find it interesting to hear about these ideas. People are worried and hopefully willing to learn.
One way to begin re-framing.
Others believe as Monetary Sovereignty does. There is another school of economics called “MMT” (Modern Monetary Theory), taught primarily at the University of Missouri, Kansas City, which has many similarities to Monetary Sovereignty.
We all spend hours and years trying to get the word out.
If you try to explain the facts of Monetary Sovereignty or MMT to your friends and relatives, you will be met with disbelief and sarcasm (“Why not give everyone a trillion dollars?” “What about the Wiemar Republic and Zimbabwe?” “How is it possible the government doesn’t know this, but you do?”)
Be prepared for the frustration you’ll feel when your facts are met by determined ignorance.
Rodger Malcolm Mitchell
But there are (you have) fact-based, logical answers to those common dis-believing questions. Isn’t it worthwhile planting the seeds?
I actually voted for W in 2000 but during the 2004 campaign a progressive friend gently encouraged me to consider other points of view and I ended up doing a 180.
Since then (8+ years now) I’ve been educating myself as best I can and that path led me to your site last evening. And I’ve stayed there for several hours now. Something I’ve done only a couple of times previously. There’s something very appealing about these ideas, like there’s enough here to work with, to start the conversation and make some progress.
I completely agree with you that calling these people names only makes them more stubborn, its human nature. That’s why I can’t listen to the clowns on MSNBC any more, they’re tribalists.
What gives you hope? How do you keep from despairing about the future (it can’t all be the wonderful wife you describe, or is it)?
The real point is that contrary to popular belief, money doesn’t represent production, though production is measured in money. For a Monetarily Sovereign nation, money merely is an accounting notation over which the nation has complete control.
Are you familiar with the platinum coin “solution” to the federal debt?
Yes I am. Operationally it makes a terrific point but I wonder how long the irrational market effects would last before everyone realized nothing had changed.
With regards to productive capacity though, I thought you agreed with the idea that if you increase the money supply to such an extent that demand effects try to push employment beyond 100% then inflation would occur?
Demand can be met by imports, which would not affect employment.
The world has changed in the past couple of decades, but most economists still have the same old beliefs. They think of America as a closed economy.
That’s why people believe deficits cause inflation. They forget about the rest of the world.
Now excuse me while I go eat my Australian perch with grapes from Peru on a dish made in China.
Rodger Malcolm Mitchell
Right I can understand that. I know the gut is often wrong but I feel I need to offer a bit more than my land for people to accept my currency. Or at least for the deal to last after all the land is sold off.
Even in a world market my countries land would still be finite.
But not its value.
Gregg, various authors have said, in essence, “Insanity is doing the same thing over and over again but expecting different results.”
By that definition, I am insane or close to it. I have been writing about the fallacy of federal deficits and debt for about 15 years. Though I’m not expecting different results, I keep hoping there will be enough people like you, who actually are ready to open their minds and accept facts.
So far, they are the distinct minority.
Rodger Malcolm Mitchell
I gave an extreme example to make a point, and now you’re arguing about it.
I really don’t expect Israel’s production to fall to zero, and you don’t really expect every square inch of Israel land to be sold.
The point remains that money does not represent production, nor does it represent national assets. It is an arbitrary accounting notation.
No you misunderstand me. I’m your biggest fan.
I realize it’s an extreme example. Just trying to get it sorted out in my head.
Another thing I was wondering about, Israel does not need dollars but I understand we send them monetary aid of some sort?
This seems to me to be unnecessary for them as well as being no burden to us.
Once again old school misunderstanding of the monetary system I suspect. Maybe profitable to some as well…
You’re right. They don’t need the dollars we send them, and the dollars cost us nothing to send. This Alice-in-Wonderland craziness is what happens when people don’t understand Monetary Sovereignty.