This is what would happen if Israel were under the gold standard

Cars as an example: The Money Printer vs the Money Saver

Imagine for a moment that I want to buy a car for 100,000 shekels. I’d rather not work and save, so instead I decide to simply print 100,000 shekels in cash so I can buy the car. I print it, I hand the pile over to the car dealer, and the car is now mine.

What just happened here? I counterfeited 100,000 shekels and increased the money supply by 100,000 when I handed those shekels over to the car dealer. The average person, the kind that has to work for his money would say that I stole 100,000 shekels. But today’s economic experts like Stanley Fischer and Ben Bernanke and Paul Krugman would say that I gave “economic stimulus to the automobile industry.” So what really happened?

When an average person works in the private economy and saves money to buy a car, he produces more than he consumes, hence savings. In other words, he puts more into the economy than he takes out, the difference represented by the money he saves. There is now more value in the economy, more stuff because he worked harder, and he takes that real value represented by the money saved and buys a car for 100,000 shekels.

The car dealer now has 100,000 shekels of real value to invest in expanding his business, and thanks to the value that the saver added to the economy through saving, there is now more value in the economy with the same money supply. The value of the shekel goes up and prices drop just a little bit, and everyone owning shekels gets a bit richer thanks to the saver. The car dealer can now expand his business and safely assume the demand is there to match his increase in supply. The economy grows.

Now, if I simply print up 100,000 shekels and give it to the car dealer, I added zero value to the economy. There is no more useful stuff. Just paper. I did not save a thing. All I am doing is taking from the economy without adding anything to it. Worse, the 100,000 shekels I added to the money supply makes the value of the shekel go down a little bit, since more shekels are now chasing the same amount of goods. Prices go up. Everyone gets poorer, except for me of course, because I got to buy the car before the money supply went up. The act of me buying the car was itself the action that made the money supply go up in the first place. I, the money printer and the first new money user, am up one car. Yay for me. But everyone else besides the first person to use newly printed money loses.

Now, let’s say I stop printing money and the car dealer expands his business with the new shekels. Since everyone is now poorer, there is no new demand to match his new supply. The signal he got of new demand for his cars was wrong, because the 100,000 shekels I printed did not represent added value to the economy through saving. Demand is not there, his business overexpands and he has to cut back and contract by selling cars for cheaper and taking a loss. His business shrinks or “goes into recession”, but cars get less expensive for everyone else.

But let’s say I keep printing 100,000 shekels every day and buy another car with it day after day after day. The car dealer will keep misinterpreting the sales as new demand that doesn’t actually exist. He will keep expanding. It will look like the economy is growing and growing, the statistics the government puts out on car sales will skyrocket. But really, only I and the car dealer are benefiting. Everyone else is suffering inflation and getting poorer and poorer every time I print. At some point I will have to print more than 100,000 to buy each car since the money supply is expanding so rapidly, but that’s no big deal for me. It takes the same effort to print 150,000 as it does to print 100,000. I keep getting richer. Inflation doesn’t bother me. The car dealer keeps expanding and cars become so expensive that no one can buy them. Then let’s say suddenly I stop printing shekels and stop buying cars. The car dealer’s business totally crashes, and he goes out of business in a bankruptcy sale. All the cars get sold to the public for ultra cheap. His business “goes into depression,” but cars are suddenly cheap for everyone else.

So we see that every time money is printed:

  1. The ones who receive it first are the ones who benefit the most
  2. The ones who receive it first also become entirely dependent on it
  3. The ones who receive it last suffer inflation and a rising cost of living

And we see that every time I stop printing money:

  1. Those who were receiving it first, suffer the most
  2. Everyone else benefits from deflation and a falling cost of living

What happens in reality?

But this is not exactly how it happens in reality. The institution in charge of printing shekels, the Bank of Israel headed by Stanley Fischer, does not “stimulate the automobile industry”. No no. That’s not his job, at least not directly. When Fischer expands the money supply, he buys none other than government bonds with printed money and stimulates the government. The government is always the first to get the new money.

The government then puts most of the money into the banking system, and uses a small tiny percentage of it to hire more government ministers in order to satisfy coalition partners, give raises to government workers in order to keep up with consumer prices (because God forbid a Knesset Member should suffer the ravages of inflation), cave in to unions like the Histadrut when they threaten a general strike which gives them even more power to shut the country down in future spats, and pass out more welfare to the four corners of the Earth to get more voters. So the first ones to receive new money from Fischer are:

  1. The government and its workers
  2. The banks

Who is the next in line? After buying votes and coalition stability with printed money, the banks then take most of the money and invest it in the stock market and mortgage loans. So the next in line are:

  1. The stock market
  2. The real estate market

As the real estate market rises, so do rent prices, not only on the middle class wage earner who is always last to get the new printed money, but on other renters like Supersol and Rami Levy, so your food bill goes up, too. Meanwhile the government and the banks expand blissfully, and the stock market goes up, but you don’t have enough money to invest there because, with inflation and rent and food going up, you are going into debt. To the banks of course.

And so it goes, that every time the Bank of Israel prints money, the government and the banks and the land owning tycoons get richer and the middle class gets poorer. The wealth transfer from middle class to rich is a necessary part of this process. Why? Because if, for example, the Bank of Israel wants to raise the money supply by 5% and instead of giving the money to the government and the banks, it simply adds 5% to all of our bank accounts overnight, the prices of everything would go up 5% in a day or two and the Bank of Israel would have accomplished nothing but stark and immediate price inflation. The trick is to give it to one group and its buddies, being the government and the banks first. That way it takes time for inflation to affect prices and people don’t even realize they’re getting poorer, or if they do, why it’s even happening.

In order for it to work, the inflation it has to be slow and insidious so people don’t even realize what’s going on. It has to look something like this:

Israel's money supply
Israel’s money supply

It has to take place over years and decades, so suddenly 50 years pass and people wonder why it now takes 2 salaries and 30 years to pay down a mortgage instead of 20 years and 1 salary, like it did 50 years ago. And then innocent people led by ignorant populists like Daphne Leif suddenly go out in the streets and protest, but they don’t know what to demand in order to fix it. Just that the government “do something,” like print money and hand it out or something.

Why is this happening? It’s because your money is losing more and more value every year while your wage grows at a slower and slower pace. You are always the last to receive any new printed money. You are a middle class wage earner. You are not a government buddy. Every time money loses value, the rich get richer, because they are always the first ones to get the new batch first. Government, banks, stock market, real estate.

If you want to blame someone for the cost of living going up and your paycheck staying flat, someone to blame for the rich always getting richer and the middle class always shrinking, blame paper money and the Bank of Israel, and the government for forcing you to accept its garbage money.

Israel's Inflation Rate
Israel’s Inflation Rate

Inflation is not “better” when it is lower and “worse” when it is higher. It is always, always bad, because the effect is cumulative. Inflation of 1% one year does not “make up” for inflation of 4% the year before. If prices go up 4% one year while your paycheck only goes up 2%, you now have 2% less purchasing power. If the next year prices only go up 1% and your paycheck only goes up .5%, you lose another .5% purchasing power in addition to the 2% you already lost. It only gets worse. Every year. And the losses keep adding up for the middle class. You are being robbed. Every year. All the time.

Eventually the wealth transfer will become so extreme that the system will collapse. It is inevitable. Unless we act to fix it, right now.

How? By honest money, money that cannot be printed up and simply given to the government and to the banks. Money like actual silver or gold. With honest money, the middle class always gets stronger. How? Because with honest money, the money supply stays constant or increases only very slowly, but the supply of goods in the economy grows much faster, so everything gets cheaper over time.

To give you one stark example from the United States, over the last 50 years, the price of a house in dollars has risen 780%. But the price of a house measured in ounces of silver has actually dropped 64%. What about the middle class wage earner? The average wage in dollars has gone up 766%, but the amazing thing is that, in ounces of silver, or real purchasing power, the average wage has dropped a dramatic 65%. In other words, it looks like wages have increased, but there is actually 65% less purchasing power even in that increase. That’s how insidious inflation is. It looks like you’re gaining but you’re actually losing. The middle class and the poor always lose with paper money, but they would gain with real, hard money.

What needs to be done

What needs to be done is this: The Bank of Israel needs to sell all of the foreign currency it owns and buy gold, which has been natural money for thousands of years. Then it needs to sell all the government bonds it owns and buy gold. All of them, as quickly as possible, and destroy the shekels it reabsorbs through the sale. Then it needs to announce that it has stopped printing money forever, divide the amount of shekels left in the economy by the amount of gold it now owns, and announce to every citizen of Israel and any holder of paper shekels in the world that he can now go to the bank of Israel with, say, 5,000 shekels and get 1 ounce of gold in exchange, at a set rate forevermore. Anyone holding shekels can also deposit gold in the bank of Israel and get 5,000 paper shekels in exchange, at a set price forevermore. Only when someone deposits gold can the Bank of Israel print more paper. Then, and only then.

What would happen if this were done? It will not be pretty. Not at all. In fact, the first year will be very rough, like a heroin addict going off drugs cold turkey. The ones who were first to receive printed money, they will crash badly, just like the car dealer. The government will have to shrink dramatically, many banks will go bankrupt, the stock market fed by paper money will crash, and real estate prices will plummet. Bondholders will lose almost everything. Exports will drop dramatically initially, but imports will become extremely cheap to compensate. It will be very painful for everyone who relies on inflation.

But it will be very helpful for everyone who is hurt by inflation. We will see a massive transfer of wealth away from the banks and the government and the stock market and real estate which will all crash and back to the wage earning middle class who will now be earning gold.

Unions like the Histadrut will have to forego all legislative advantages its members now have, or risk massive unemployment throughout the country. They will of course force a general strike and they will have to be stripped of their power. The minimum wage which discriminates against unskilled workers, will have to be eliminated. Wages will fall in nominal terms, but the purchasing power of wages will increase dramatically.

Instead of wages going up but the price of goods going up even faster, the situation will be reverse. Wages will go down but the price of goods will drop even faster. This is what builds the middle class.

The crash will happen eventually anyway. But if we take these steps now and free the economy, the economy will be radically restructured in about a year, the middle class will be earning real, hard money that gains in value every year instead of loses it and they will become richer. The poor will become the new middle class. Banks will be smaller, the stock market more stable, unions much much weaker if they exist at all, and the distribution of wealth will be much more even throughout the country. And 50 years from now, it will take 5 to 10 years and only 1 salary to pay down a mortgage.

It will be a very hard transition, but either we make it now, or it will be forced on us anyway at some point in the near future. We are supposed to be a light unto the nations. Let’s make  Jerusalem truly of gold. As the only country on the gold standard, gold will flow in from everywhere in the world and the shekel will be stronger than any currency on the planet. Israel will shine as an economic light to the nations as a beacon of honest, hard money for all the world to see.

6 thoughts on “This is what would happen if Israel were under the gold standard

  1. Excellent. Clear, concise. This explanation of sound money versus fiat money is one of the best I have ever read. Have you considered submitting it to Lew Rockwell? Mises.com?

    I’ve been toying with a similar explication, boiling down economics to the base elements of the production and exchange of goods and services. Then, introduce money and see how it does not change the essence of production and exchange….then introduce infinitely expandable money and see how it gets manipulated, distorted, and ultimately ruined.

    I like your straighforward style. Mine tends to get wordy, as I always assume that the reader won’t get it unless I spell it out.

    • Thanks Ron. I’ve gotten one article published on LRC, but haven’t submitted this one. Lew only publishes people with connections. The one that did get published was sort of a tour de force and Walter Block insisted to Lew to publish it.

  2. I don’t know if “slutty capitalism” (not my term I also heard it from a Jewish man) is the cause of a society (global term) obsessed with games (a.k.a. wars in final form) but it definitely is a result. The only cure can be to fix it with results satisfactory to all involved (a.k.a. humankind). Now economy being my weakest point I can only say that your idea seems right, as in with good results. And no I don’t think the world economy will flop without solution if the Bank of Israel sells all foreign currencies simply because they run on a different system of life. But the example and success will definitely create waves which I consider equal making people stop and consider, or re-consider.

    This being said :) I would like to wish you Happy Independence Day! (today is 15.04.2013, number of the day is 7 which is a good number I don’t know if you believe in numerology). I don’t know if this is the traditional wish but I hope my feelings will compensate for the lack of accuracy and knowledge! Good blessings and health to you, your family and friends and of course Israel!

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