Make no mistake, there are no free meals

Along came European leaders with a trillion-dollar rescue plan – and depression was immediately replaced by euphoria.

sarkozyMerkelEucrisis311 (photo credit: ASSOCIATED PRESS)
(photo credit: ASSOCIATED PRESS)
It has been a nerve-racking week. European debt woes have shaken the world’s capital markets, sending Wall Street to one of its steepest plunges ever last Thursday, while crashing the euro and European stock markets. And just when it seemed like a horrible déjà vu of the September 2008 crash, along came European leaders with a trillion-dollar rescue plan – and depression was immediately replaced by euphoria.
The leaders of Europe, once an icon of fiscal discipline and conservative monetary policy, yielded to the bailout fad that has already seduced their counterparts in the US, Britain, China and Japan. Indeed, as was the case in the US, the firm commitment by governments to do whatever it takes – including printing new money like crazy – to maintain stability has achieved the primary goal of relaxing nervous investors and enabling the banking system to keep going. But no one in Brussels, or in any other capital city for that matter, is foolish enough to believe that this unprecedented and expensive intervention is for free.
The European plan will force countries that suffer from the heaviest debt burden to enact painful austerity measures, cut their fat public sector, raise taxes and reduce public services. Spain has already announced a cut in public workers’ wages, 13,000 layoffs and elimination of infrastructure projects. Greece vowed to undertake even more painful measures. Ireland has already taken that road, and it seems the new UK government understands it has no other choice but to do the same.
The US, which embraced the bailout policy, will no doubt have to take similar measures. The Obama administration already declared it would eliminate the Bush tax cuts, which expire this year. On top of that, most of the states in the US suffer from huge deficits that will force them to increase taxes and cut services.
The next ramification will be harsher and will affect citizens of countries that were luckier than Greece or Spain: global inflation that will lift prices of almost every commodity. You might argue that other massive public injections of money have not resulted in inflation. After all, price indexes in developed countries have not risen dramatically, remaining within a range of 3 percent to 4%. Well, they did, but it doesn’t indicate inflation is modest.
Actually, in such a severe recession you could expect prices to fall significantly. That they didn’t fall, and even rose slightly, indicates that inflation is already here. We are still quite far from the horrifying scenario of hyperinflation, like we experienced in Israel in the 1980s or the one that destroyed the Roman Empire in the 4th century.
Indeed, oil prices even dropped this past week. But we can learn a lot from an important commodity that hit an all-time high: gold. The surge in its price, which is considered to be an excellent gauge of inflation expectations, shows that an increasing number of investors predict a rise in global prices, together with a lack of trust in paper money, which could spell disaster for price stability.
In Israel we can already see the beginning of this dark storm. The price of meat is expected to surge 25% this month, and the nation’s biggest dairies announced that milk products will cost more. We also suffer from unique pressure in the housing sector: While home prices fall all over the Western world, here, thanks to the Bank of Israel’s policy of supporting the dollar by printing billions of shekels, home prices are soaring and rental costs are rising.
Another burden we have is the banking system. While central banks all over the world try to ease credit markets by holding interest rates close to zero, our banks are continuing to rip people off by charging outrageous rates of 10% to 14% on loans, raising commissions and cutting credit lines for small enterprises. Once again, households and small businesses are paying the price of the bankers’ reckless behavior. But there are reasons to believe that things are about to change.
US lawmakers re working on new bills and regulations for bettersupervision of the system that runs the world’s money. All over theworld, decision makers are realizing that the people who caused thiscatastrophe need to pay for their mistakes. Rules that restrictcompensation for bankers are being written. Even more important is thenotion that banks and financial institutions should bear a heavier taxburden than regular businesses, since it is ordinary people who pay forthe bankers’ mistakes.
Politicians in Washington, Brussels andLondon are struggling to find a balance between the need for highertaxes and the fear of hampering growth. In Jerusalem, our governmentfeels strong enough to lower the tax burden. This is always good news,but it still leaves us with the problem of financing the country’surgent and expensive needs – first and foremost the defense budget andthe Iranian nuclear threat.
The solution is to adopt a specialbank tax and levy higher taxes on excessive salaries paid to executivesin publicly traded companies, many of whom are bankers. This way theaverage person can enjoy get some tax relief, while the fat cats in thebanking sector – who can print money out of thin air and whose profitsare private but losses are nationalized – will finally do something forthe greater good.