With Israeli interest rates near zero, it appears that local consumers are moving money out of deposit accounts into non-interest bearing checking accounts, thus creating the beginnings of a liquidity trap. According to a Globes report: “Bank of Israel officials now note that a liquidity trap has developed. The minutes state, “Despite the fact that the Bank of Israel’s interest rate is still positive, the interest the banks pay depositors is close to zero, and they have little room to reduce it further. In this situation, in order to preserve the interest rate spread (also known as banking spread), the transmission mechanism from a reduction in the Bank of Israel interest rate and the rate charged to borrowers is weakened. “In these circumstances, there could be a switch from time deposits to current-account deposits, which would make it more difficult for banks to manage liquidity and to balance deposits and loans to different terms. The public may also switch from bank deposits into other assets that could create an undesirable increase in risk for savers in the financial system.”

Now what? I say forget about interest rates. They are low enough. Fischer needs to get on the Benjamin Netanyahu bandwagon and start calling for lower taxes, and privatization. Want to see huge amounts of private investment. Privatize the land authority and watch the Israeli economy take off. The answer is to incentivize people to take risk, not to encourage them to stick money in the bank at 0.25%. No wealth or economic growth will come from that.

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The well respected rating agency, Moody’s has said that the recent Israeli war with Hamas as well as a slumping economy, are not enough for the agency to lower Israel’s credit rating. The firm said that Israel has has both economic and geo-political issues in the past and is well equipped to deal with these issues.

As reported in the Jpost.com, the firm said, “Israel’s present political and financial shocks do not pose an immediate threat to the country’s risk profile, including its A1 rating and stable outlook,” said Joan Feldbaum-Vidra, Moody’s analyst for Israel, in a special country report.

Along with historically low interest rates and a stable credit outlook, we have the potential set-up for a huge economic recovery moving forward.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Due to the economic slowdown, which will hurt tax receipts, as well as an expected pickup in government spending, the Bank of Israel has estimated that the Israeli budget deficit will reach 3% of GDP. This happens to be a great number compared to the rest of the developed world where it is much higher, over 4% in most cases.

According to a JPost article, Stanley Fischer has nonetheless called for a reduction in taxes: “The government should go ahead with its plan to reduce taxes next year, even while the deficit is expected to grow, as tax receipts fall due to the slowdown and government spending rises.”

The fact is that by cutting taxes, government tax collection will actually increase, as supply-side economics has continually taught us. If people make more money, even if they pay a lower tax rate, the amount they pay will actually be greater. It’s the beauty of economic growth and lower taxes. Too bad the world, in its’ rush towards nationalization, has forgot this basic principle.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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So you thought that you did great work and you are due to get a big pay raise? Well, think again. According to a report by the The Manufacturers Association of Israel, there is a good chance that your employer is about to cancel any potential pay raise. In an article in Globes: “46% of industrial companies have canceled employee pay hikes planned for 2009, and 40% of companies have canceled bonuses, according to a new survey by the Manufacturers Association of Israel of 50 companies. The firms surveyed ranged from small to large, and included all manufacturing sectors.”

This is just more evidence that the Israeli economic growth has come to a standstill, and the outlook is not all that hot. The good news is that companies are taking these cost cutting steps before things get really bad. What that means is that when things recover, and yes they will recover- this is not the end of the world, Israeli firms will be much more trim and agile and be ready to aggressively gain market share.

Please see our Disclaimer HERE.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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