Why Israeli Start Ups Should Be Paying Attention To the US Debt Discussion

I have written endlessly about the impact of the declining US Dollar on the cost of R&D in Israel. The political game of Mexican Chicken being played out in Washington over the debt ceiling, whether it ends in a short term deal of not, should be of concern to Israeli CEOs and to the government.

The long term trend of USD:NIS exchange rates is clear. The US economy is declining at a faster rate than the Israeli economy (which is growing nicely). The US is in danger of losing its status as reserve currency (I would argue that we are already partially down that path) and the political deadlock in Washington shows how dysfunctional US Politics is (more on that in my next post).

Today on Bloomberg (worth watching the video), PIMCO's Mohammed El Erian said,

that it will be a “big, big mess” if the U.S. defaults, spurring a sell-off in equities, the U.S. dollar and commodities excluding gold...The U.S. is the supplier of the reserve currency. The U.S. is the provider of a financial system that intermediates other people’s savings and investments. The U.S. is a AAA. The question is whether the U.S. can maintain a AAA.”

The Shekel has strengthened dramatically against the USD in the last 12+ months as per my previous posts. But, it has stayed in a reasonably tight range for the last 45 days. That may be in danger of unraveling, making R&D and operations in Israel even more expensive relative to the USA. Today, I met a company that has R&D management in Israel but develops everything in one of the FSU (Former Soviet Union) Countries where R&D is cheaper. That is 15 jobs that should be in Israel.

The dropping dollar is not a black swan event. It is a neon swan, flashing like crazy. So if you are a CEO, what should you do? First, hedge your currency exposure out for at least 12 months of burn, if not more. Second, push your team for more productivity and more innovation. Third, think through the profitability of your business model and your assumptions that you grounded your business on - your costs are going up.

As I keep saying, we cannot control the exchange rate but this real currency issue should push us to be more awesome, more groundbreaking and more innovative. We need to move quickly on to new platforms and be on the bleeding edge. Without it, we could lose our edge as a tech center of the world and with it many engineering jobs.