If we're so rich, why are we so poor?

Poverty Photo: Tamar Matsafi
Poverty Photo: Tamar Matsafi

The paradox of Israel's apparently booming economy combined with poverty stems from the mechanism of so-called growth.

The 2016 Poverty Report was published last week and revealed a worrying fact: Israel has the worst record of poverty in the OECD. At the same time, its economic growth rate is double the OECD average. This gap is explicable by the huge distortion that the current "growth" model creates in the economy, and in people's minds.

One of the great absurdities in the measurement of growth is that in order for the economy to grow every year, our debt to the banks must also grow. That was one of the conclusions of Lord Adair Turner, one of Britain's foremost economists, formerly chairman of the Financial Services Authority and a candidate for Governor of the Bank of England. In a paper published in 2014,

As long as new credit in Israel flowed to productive private industry, we had a healthy economy. In 2008, however, the private sector was hit by the global financial crisis, and credit began to flow mainly to consumers. Total household credit has burgeoned since then by over 110%, reaching the fantastic sum of NIS 466 billion. Along the way, it overtook business, credit to which expanded in the same period by only 10%, to reach NIS 400 billion today.

What, though, made people take so many loans? Very simply, you reduce interest rates, and thereby make savings unattractive and loans so cheap that only a sucker wouldn't borrow - it's money for nothing. Large quantities of cheap money then seek an attractive form of investment. It could be stocks, bonds, or even Bitcoins. In our case, a large proportion of the money we have borrowed from the banks since 2008 has flowed into real estate. The mortgage market has swollen since then by more than 150% to NIS 311 billion. We have all felt, and are still feeling, the effect - in the high cost of housing.

If you want to know whether this mechanism can carry on forever without anything happening, well Turner finds that the paradox in the system is that at some point the level of debt climbs so high that the economy goes from growth to crisis. This is precisely the famous boom and bust cycle that the global economy goes through almost once a decade.

So next time Kahlon or Netanyahu repeats the refrain of Israel's wonderful economic growth, remember that it is largely thanks to the fact that you are sinking under a mountain of debt. For their part, they won’t stop the party, hoping that it won't end on their watch.

The writer is an independent journalist and editor of the "Hakalkala Hamitit" ("The Real Economy") website.

Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Poverty Photo: Tamar Matsafi
Poverty Photo: Tamar Matsafi
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