It has been established in the previous article that a country such as Israel can take foreign aid and by the magic of the multiplier effect make the aid look like a huge addition to the Gross Domestic Product (GDP). But it can also happen that a country may borrow money, and by the same process exaggerate the value of its GDP. Two countries offer themselves as perfect case studies of this phenomenon.
Israel receives aid from America and from other sources, and she borrows money that is guaranteed by America. At the same time, America herself borrows from the Chinese, the Arabs and from the countries that supply her with goods then wait a long time to be paid thus lending her the value of the goods. The two recipients then channel the money into their respective economies and fluff up their perceived values, making the GDP look more impressive than it really is.
In general there are four ways by which a nation can use the multiplier device for legitimate and illegitimate purposes. The first way is to invest the donated or borrowed money in such a way as to widen the industrial base and give a tangible, real value to the money you print and circulate.
This would be the sensible thing to do for those countries that are still developing and those that were once industrialized but have lost their industrial edge to developing countries. The US would be a perfect candidate for this method but she is not seizing the opportunity.
The second way is to invest the money in such manner as to widen the service sector of the economy. This would be the sensible thing to do for those countries that began to industrialize but have not yet reached a level that adequately distributes the products to the emerging middle class and evenly distributes the social benefits to the needy. India would be a perfect candidate for this method and this is what she is doing.
The third way is to use the borrowed money to speculate with. This inflates the value of the economy by creating more money without producing something valuable to justify the increase. This is done mainly by greedy individuals and institutions who do not care about the country as a whole. In fact, enough Japanese individuals and institutions did it in the late Nineteen Eighties and early Nineteen Nineties to crash the economy and make the nation suffer for it. Sometimes a corrupt regime in power would resort to a similar method in order to line the pockets of the rulers and their cronies.
The fourth way is to use the borrowed money to buy from abroad the products and services you don’t make at home. This tendency is intertwined with the second way because the more you import to consume, the more you widen your service sectors, especially the merchandizing and financial ones. This is what is happening in the United States at this time in lieu of what should happen which is to use the borrowed money to repair the industrial sectors that were damaged by competition from the newly industrializing nations.
Let us now take a concrete example. A jacket made in Bangladesh from local raw material earns its maker 2 dollars. It goes to Singapore where it is "repackaged" and re-invoiced at 4 dollars. It is then sent to an importer in Los Angeles, from there to a wholesaler in New York and from there to retailers all over New England. By the time it is displayed in the widows, the jacket is carrying a price tag that says 100 dollars. The consumer buys it on credit, and by the time he pays off the loan at 30% interest, he would have dished out 300 dollars. In the meantime the folks in Bangladesh or Singapore would not yet have received their measly 2 or 4 dollars.
The GDP in Bangladesh rises by 2 dollars worth of added value for making the jacket. In Singapore it rises by 4 – 2 = 2 dollars worth of added value for handling the jacket. And in America it rises by 300 – 4 = 296 dollars worth of added value for handling, shipping, advertising, displaying and financing the sale of that same jacket.
What happened in effect is that in Bangladesh, they used the investment they received to widen their industrial base in a manner that is consistent with a large population, underdeveloped economy. In Singapore they used the investment to widen their industrial base in a manner that is consistent with a small population, advanced economy. In the United States they used the money in a manner that adds value to the GDP through merchandising which is undeniably a service but also through the lending at a high interest rate money that was borrowed at a much lower rate and calling this a financial service.
As we can see, the mere fact that they repackaged the jacket in Singapore makes them claim they created wealth for the country equal to that of the Bangladeshis who made the jacket. As for the United States, moving the jacket from the west coast to the east coast, merchandising it and financing its sale is said to have created wealth for the country equal to 148 times those who made the jacket. Horrendous. A similar scenario unfolds in Israel but this is small potato compared to what else happens there. However, this will be the subject of the next article.
For now, we ask what happened to the hundreds of billions of dollars that Israel has received from the Unites States and elsewhere, has borrowed with guarantees from the United States, and has received in the form of investments from abroad, including the United States?
To answer these questions we need to go back to the second article and recall that a 150 billion dollar GDP can be legitimately generated with a 22.5 billion dollars worth of manufactured goods. This would be equal to the production of 2.25 million cars or the equivalent thereof in appliances, electronics, chemicals, textiles, food processing, etcetera.
So, how much investment do you need to produce this much industrial products? The rule of thumb is dollar for dollar. That is, you will need approximately 22.5 billion dollars worth of investment in plant and equipment to produce that much goods which, aided by the multiplier effect will translate into a 150 billion dollar GDP.
You will also need an infrastructure to accomplish all this, however, and that can run into the tens of billions of dollars. But infrastructure is what you do locally with local currency over a long period of time. As for the 22.5 billion dollars, all or a substantial portion of it must be in foreign currency so that you may buy from abroad the equipment you do not produce at home.
Well, Israel received 10 times as much money as that, mostly from America but also from other places. In addition she always had the advantage that all immigrant welcoming countries have which is that people come into the country from everywhere in the World with skills and an education that could be worth as much as a quarter of a million dollars per head thus saving the local treasury a bundle in educational expenses and adult training.
Israel also had sympathy, contacts all over the World and markets galore for her products. And yet, Israel has but a thin industrial base that cannot stand on its own under any circumstance. If you cut the umbilical cord that feeds Israel at the expense of the American taxpayer today, the nation will be worse off than Liberia, Sierra Leon or Haiti overnight.
Acutely aware of all this, people everywhere look at the American Administration and the US Congress, shake their heads in disgust and exclaim: what monstrosity are they creating in the Middle East? They do not ask where the money went because they have a hunch what the answer will be. Rather, they reject the whole notion of implanting and nurturing a Zionist entity in the Middle East based solely on confrontation and deliberate antagonism which is what the US policy in the Middle East boils down to. And so the people of the World call for a two-state solution to the conflict there or a one-state solution that is based on the principle of one vote for every one man and every one woman.