Beyond all the free market reforms I will spearhead as a Knesset Member, first and foremost will be a free market in money itself. Technically, the solution is extremely simple: Allow Israeli taxpayers to pay their taxes in any currency they choose, even the shekel if they choose. This would make any currency legal tender de facto, and would end the Bank of Israel’s monopoly over the shekel supply.
In order to understand why this is so necessary and exactly why it would free the economy so effectively, we need to understand how and why a monopoly on money creation by the Bank of Israel is so destructive, why it makes the middle class poorer continually, and precisely why it causes the boom/bust cycle.
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 money 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:
- The ones who receive it first are the ones who benefit the most
- The ones who receive it first also become entirely dependent on it
- The ones who receive it last suffer inflation and a rising cost of living
And we see that every time I stop printing money:
- Those who were receiving it first, suffer the most
- 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 Karnit Flug, does not “stimulate the automobile industry”. No no. That’s not her job, at least not directly. When Flug expands the money supply, she 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:
- The government and its workers
- 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:
- The stock market
- The real estate market
As the real estate market rises, so do rent prices, effecting the middle class wage earner who can’t afford to buy a house and who is always last to get the new printed money. 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 government-connected 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:
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 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 not a government buddy, so you never get the new money first. Every time money loses value, the politically connected 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 by forcing you to pay taxes with it. The Bank of Israel has destroyed savings entirely once before.
Inflation 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.
The Solution: Competing Currencies
If taxes are payable in any currency, the Bank of Israel loses its monetary monopoly. If it prints too much, the value goes down relative to other currencies and Israelis will prefer earning those currencies instead and the bank will have to cut back on its printing or stop it entirely in order to support the shekel’s value. If Israelis can pay taxes in dollars, euros, gold, silver, bitcoin, whatever, they can then earn those currencies and they can start circulating in the Israeli economy.
Competition breeds honest money, and 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 monopoly (literally, not the game) money, but they would gain with free market money.
The way to do it so make taxes payable in any currency, thereby making any currency legal tender, and breaking the government’s monopoly on the money supply.