Congregation Ohav Sholom |
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The Israel Experience - Hyperinflation |
By MICHAEL ROSENBLOOM |
The Israel Experience - Hyperinflation by Michael Rosenbloom (spidermr@aol.com) One of the most bizarre eras in Israel’s existence, certainly from a financial standpoint was the period of hyperinflation that Israel suffered in the early 1980’s. Like all countries in which inflation is rampant the name of the game is to part with the local currency as quickly as possible. Invest or spend! Don’t dawdle. It was similar to the children’s game “hot potato.” Don’t be left with shekels in your hand or bank account, when the music stops (i.e., when price increases go into effect). So, the populace would purchase dollars, invest in dollar denominated instruments, or in durable goods, like furniture, appliances and televisions, for example. Rumors of price rises of 20% or more (sometimes a lot more) on food items would spread among the public and supermarkets would become total chaos, as the public would hoard goods from supermarket shelves. After all, what you don’t buy now will cost you at least 20% more tomorrow. The same applied to gasoline and other consumer goods. So, why not buy now? One area in which absurdities reached extreme heights was housing, or more specifically mortgages. Before I made aliyah in 1978, I invested some money with Bank Tefahot, an Israeli mortgage bank. This investment gave me the option of receiving at a later date a secondary mortgage, equal to the amount of the initial investment, at a 5% fixed annual interest rate (in addition to my initial investment accrued with interest). When my wife and I purchased a condominium in Rishon LeZion in 1981, interest rates on mortgages were already at a 39% annual rate, a very high rate one might think. At a fixed 5% rate, we decided to take advantage of the cheap credit and took the secondary mortgage from Bank Tefahot. No one could foresee that the annual rate of inflation would soon exceed 800% a year. Fixed rate mortgage payments became laughably easy to make as inflation shot up to 800% a year. That is because salaries more or less kept pace with inflation, in a wage-price inflationary spiral, a typical phenomenon in high inflation economies. The coup de grace came when I received a notice from Bank Tefahot canceling my secondary mortgage, because the cost of record-keeping it had become more costly than the value of our monthly payment. Yes, inflation had eaten away at the value of our monthly payment to such an extent that the mortgage bank wrote off the mortgage. During this period, it seemed that Treasury Secretaries or Ministers, as they are referred to in Israel, were replaced, every few months. Currencies changed from Israeli Liras to Shekels and from Shekels to New Israeli Shekels. This latter change had the effect of truncating two or three zeros from the currency. So for example, 1000 Shekels would now be equal to ten new Shekels, in a futile attempt to stave off a complete loss of public confidence in the currency. Eventually the powers that be exercised enough monetary discipline to bring inflation under control with the inflation rate falling to about 20% a year. In the 1990’s, the rate of inflation dropped even more and leveled off to that of many Western countries. But for a while, living through this period of hyperinflation, as a wage earner in Israel, was like a dog chasing his tale, trying to catch up but always coming up short and breathless. February 2001 Next Article: Nationless City? |
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