Where is the economy heading?
Sever Plocker

Warning: Economic winter coming

Bad news for Israel: America is headed towards recession

Meteorologists are promising a very warm winter, perhaps the warmest of the century.


Economists agree: The world economy has made gains during 2004-05 that haven't been seen for decades.


But unlike the meteorologists, economists warn that an economic cold season is coming.


Not that the world economy will cease to flourish, but rather, the current reality is distorted and given to disruption.


That reality must undergo a painful correction.


America buys, everyone else sells


The roots of this distortion are to be found in America's insatiable buying habits. In short, Americans buy, and the rest of the world sells. Americans waste, everyone else saves up to offset that waste.


But can America forever feast off the savings of others? Of course not. The day of reckoning will surely come.


There is no choice: America's standard of living will have to drop temporarily, both the federal government and private citizens will once again have to start saving, and they will have to turn deficit spending into a positive statistic.


Rising interest


In order to achieve this, Federal Reserve Chairman Alan Greenspan has consistently raised interest rates, soon to reach 4.25 percent - a 300 percent rise in just two years.


The high tech sector is already smelling tough times. One measure already points to suspicions: The technology stocks index, Nasdaq, reached a high of 2,210 points at the beginning of August, but since then has fallen, slowly but steadily, to 2,040 points at the end of last week, a drop of 7.5 percent.


In addition, look at the business movements of companies such as Apple and Google. Their directors are running around like mice peddling this-or-another new beta product or new (unproven) idea.


They know something the public doesn't: The high tech river is weakening, and we must begin making plans to float, so we don't go under.


Real estate and high tech will provide the fuel for America's other sectors. Yes, taxes will go up. Yes, the axe will fall on politicians. Yes, unemployment will rise.


Effects on Israel


How will an American recession affect Israel? The truth is, it is already showing effects.


High tech exports are already limping along. Israel has already withdrawn – "delayed" – a request for a 1-2 billion dollar foreign aid package to finance both the Gaza disengagement program and a Negev-Galilee settlement plan.


Most Israeli Nasdaq-listed stocks are falling steadily, taking with them the dreams of many start-up companies for funding.


Sooner rather than later, Bank of Israel Governor Stanley Fischer will be forced to choose between two unattractive options. Either he will have to reconcile himself to a weakened shekel, or link Israel's interest rates to America's.


This won't be good for the economy, for growth, for demand. Expensive money hurts.


Israeli business types, who now buy and sell companies wholesale - for hundreds of millions of shekels - are pushing a new theory, according to which our future is wrapped up with what they call the "old economy," as opposed to the "new" high tech economy.


Because the old economy is more exposed to local, as opposed to global, swings, because it is less global, the theory goes that it is also more protected, and therefore we have nothing to worry about.


Even if there is a recession in the American economy, they say, Israel's economy will continue to flourish. And they can realize their purchases with a healthy profit.


Dangerous scribble


This is dangerous scribble. The engine that drove the Israeli economy throughout the 1990s was technology exports. They were responsible for half of our business growth and most of the foreign investment here.


They are very exposed to the world economic climate, and any small change in the direction of the wind blows them around like a fallen leaf.


Sustained Israeli economic success will not come from anything other than technology exports. The old branches of the local Israeli market that currently look healthy enough – trade, marketing, finance, non-residential building – will not replace the world market.


Significant recession in America will not bypass Israel, even given a macro-economic position that, at its foundation, is the opposite of America’s.


But recession there will influence us less than in the past, because over the past two years we have created economic excess for times of need. And as everyone knows, each winter is followed by spring.


To those now buying Israeli supermarket chains at astronomical, the next winter is apparently not important.


Perhaps the investor thinks about the coming spring and summer, or perhaps he just doesn't think about it at all.


And you would be shocked to hear just how many businesspeople don’t think at all, when thinking comes in the way of business.


פרסום ראשון: 10.16.05, 14:57
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