The US dollar is flying by almost 2% against the Shekel this evening after the Bank of Israel said that they were stepping up the purchase of foreign currency.

According to Globes: “The central bank says it will buy government bonds to the tune of NIS 200 million daily, and will continue its program of expanding the foreign currency reserves at an average rate of $100 million daily.”

Why the need to weaken the Shekel? It has already dropped buy almost 30% in the last 6-9 months against the greenback. Trying to ignite an economy via inflation is bad news. Come to think of it wasn’t current BOI head Stanley Fischer head of the IMF back during the Asian, Russian and Latin American financial crises at the end of the ’90’s? Isn’t this a similar policy to what he recommended then? If so, look out. I sure hope that speculators don’t drive down the Shekel, like they did to Asian currencies 11 years ago.

How about a strong currency and to attract foreign investment, and lower taxes to help ignite long term growth?

Fischer is playing with fire, and if his track record is any indication, look out!

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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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With country after country announcing ’stimulus’ plans to help supposedly create jobs and jump start the economy, it appears that there is just one leader who is sticking to capitalism. with today being election day in Israel, PM wannabe Benjamin Netanyahu has outlined his economic plan which instead of calling for more spending than the country can afford, he is calling for massive tax cuts and privatization.

With the US plan calling for more than $800 billion in spending in order to create and save jobs, it’s hard to imagine that there isn’t a better approach to try and jump start the economy. After all Prez. Obama says the program will help create/save 4 million jobs. Well at $800 billion, we are talking about spending more than $200,000 to create 1 job. That’s insane. It would be cheaper to just write each company a check for $60,000, and force them to hire 1 person.

If Netanyahu wins today’s election and sticks to his campaign promise of lower taxes, it will be interesting to see how the Israeli economy reacts compared to most other countries that have chose higher spending to try and solve their problem.

After all why after a global economic slowdown we have universally bailed on capitalism is beyond. Netanyahu has an interesting point on this same topic reported in Marketwatch: “Netanyahu therefore harshly opposes the emerging global trend of legislating expensive stimulus plans. “The fact that around the world budgets are being breached doesn’t mean we should become captive to this Keynesian concept,” he told the Marker, the Ha’aretz daily’s business-news division. His recipe is to resist new spending so as to immediately introduce an ambitious tax cut. If we send the cash to the people, he says, they’ll do a better job deciding how to spend that newly available income than the bureaucrats would.”

If he wins it will be an interesting next few years to actually compare how different economic philosophies play out during a  crisis.

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So we now have the much anticipated Barack Obama economic plan with the centerpiece being wealth redistribution. Taking from the rich and giving to the poor, or maybe we could say it’s not allowing one to become rich and making people stay poor. Haven’t we tried this before and seen disastrous results. Throw in a little capital gains tax and we have a recipe for a continued economic slowdown.

My last post about how investors are spooked about the prospect of an Obama victory sure seems even more plausible after hearing about his proposal. Taxing capital gains, increasing taxes for the so-called rich, and giving tax credits to those who don’t even pay taxes to begin with sounds like a rehash of European economic policy for the last few decades and look at their situation.

While the tax raise is troublesome enough, the most scandalous part of his plan is to raise death taxes across the board to 45%. What a scam. We are about to enter into the biggest generational wealth transfer in the history of the world and Obama wants to take 45% of it? Where is the outcry? Why should the government see a penny of inheritance money? Hasn’t it already been taxed multiple times? Everyone speaks about how Obama is all about justice; well where is the justice in taxing already taxed money?

If he gets elected this plan will come back and bite the very same people he is trying to help. Inheritance as well as letting workers keep more money of what the earn is the way to increase individual prosperity. If you were to confiscate all the joint net worth of both Bill Gates and Warren Buffett, and you would distribute it evenly among all Americans how much would they end up getting? A couple of bucks at best. What kind of difference will that make to anyone.

This plan is outrageous, and will do nothing to help grow the economy. But heck, Barack, if you are in the giving mood, how about sharing some of the millions you made on your book?

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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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