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Why is the shekel so strong - especially given the massive political mess the country is in? That is the most frequently heard question about the Israeli economy, posed by locals and foreigners, immigrants and veterans. Last week's column suggested that a broader perspective may be necessary, because many currencies and markets are behaving strangely of late. Slovakia, for instance.
The Slovak crown is hardly a commonly used currency in this or indeed most countries, other than Slovakia. But its performance against the puny greenback and even the supposedly mighty euro, or even against gold, is highly impressive. So the most you can say about the Israeli shekel is that its strength is perhaps an extreme case, but is part of a much wider phenomenon.
A wider phenomenon needs a more general explanation as it won't do to talk about the strong fundamentals of the Israeli economy if what is happening here is primarily a global phenomenon and only secondarily a local one. This issue, of the relative weights of external and domestic factors in explaining the strength of the shekel and the Tel Aviv Stock Exchange, is now provoking serious debate among commentators and analysts.
The evidence from around the globe suggests that primacy should be given to external factors.
However, this conclusion raises more follow-up questions than it answers.
If the markets are largely globalized and don't much care about Olmert & Co., or the political shenanigans in Poland or Hungary or wherever (other countries also have egomaniac politicos who cause endless "crises") then what DO they care about? Two main answers are on offer: the professional approach is that markets are driven by economic fundamentals. The alternative explanation is that, at least on a day-to-day basis and perhaps even over quite long periods of time, what matters is not the economic performance of countries and companies, but how much money is available in the markets. Currently, the world is drowning in liquidity, so the huge flows of money are driving the prices of all asset classes higher.
This is especially true in small markets that have previously suffered from low liquidity. Israel is such a market and, although its capacity to absorb additional liquidity is rapidly improving, this is not happening fast enough. But then all our ideas about liquidity are under assault. On Wednesday, the volume of trading on the Shanghai Stock Exchange exceeded that of all other Asian markets combined, including Japan. This would have been unthinkable until very recently and speaks volumes (pun intended) about what's going on not just in China, but globally.
A rising tide lifts all ships, as the old saying has it. In other words, unless your ship has a hole in its floor (think Turkey), it must float higher in the face of this torrent of money. But where is the money coming from? When you boil down all the complex analyses, the answer has got to be - the US. Even if the money seems to come from the Chinese or Russian central banks, it can be traced back to the US. Somewhere between shore and shining shore, John Q and Jane Public are shopping, buying foreign-made products. They pay for these with their plastic cards, using credit provided by financial intermediaries. The cost of this credit, in real terms and in relation to the US government's cost of borrowing, is incredibly low - because the intermediaries keep increasing the supply of money.
All the rest - billions of words and millions of graphs of analysis in a hundred languages and computer programs - boils down to that one basic fact. The American financial system, supported by the global financial system, lends money to American consumers to maintain their steadily rising consumption. But there are numerous derivative aspects to this Single Great Explanation. For instance: the debt explosion and the trade deficit are eroding America's competitive position vis- -vis the rest of the world. Therefore, all smart executives and investors are placing more of their companies' and their own resources overseas. Money is pouring out of America into the rest of the world - although, at the same time and for various reasons, the rest of the world is also buying American businesses and financial assets. The world goes round - money makes it do so - but the starting point of this circular cycle is the US.
That's why the ultimate source of the strength of the shekel, the Slovakian crown, the Shanghai Stock Exchange, the Russian real estate sector, and all the other phenomena generating oohs and aahs around the world is to be found in the US of A, at Wal-Mart or a surviving ma-and-pa store and at Citibank or the local one-branch bank. It therefore follows that the strange phenomena will cease only if and when a change occurs in the US, and the place to keep your eyes on is Main Street rather than Wall Street.
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