Fallow on monetary policy

January 31st, 2013 at 4:00 pm by David Farrar

writes in the NZ Herald:

Listening to a procession of manufacturers say their piece to the parliamentary inquiry into manufacturing this week, two things were clear.

One is that the high dollar is causing real and lasting damage to their sector.

The other is that the idea that an overvalued exchange rate is the fault of the framework has hardened into dogma.

Cast off outdated neoliberal doctrine. Change the Reserve Bank’s mandate. Then New Zealand manufacturers will have a fighting chance. That was the message.

It echoes statements like this from Labour leader David Shearer last Sunday: “We’ll make changes to monetary policy so that our job-creating businesses aren’t undermined by our exchange rate.”

It is glib. It glosses over difficult questions about what changes they have in mind, and what the costs, risks, trade-offs and spillover effects would be

All correct.

And it misdiagnoses the problem, which is that the rather enfeebled state of much of the other 99.8 per cent of the world economy has led to policies abroad which are unhelpful from New Zealand’s point of view and which we can only hope succeed.

This is in fact the major point.  The US and Europe are poked (for now) and their dollars are weaker. Politicians preaching how we can rectify this are dreaming. If we want proof that this is about the weakness of the US$ and the Euro, not a strong NZ$ – look at this graph from ANZ:

nzaud

As you can see we are in fact historically quite low against the Australian dollar.

If the object of the exercise is to ensure that in the future the Reserve Bank runs monetary policy looser than it otherwise would, consider this: higher would lower real wages, and real incomes more broadly, in the hope of protecting jobs in the favoured sector. Should the union movement support that?

Lower interest rates would increase the risk of a housing bubble that, this time, bursts messily all over us. Ask the Irish tradesmen flocking to Christchurch how much fun that is.

If it succeeds in making New Zealand exports cheaper to foreign buyers – a pretty big if – it will also make New Zealand assets cheaper to foreign buyers. That should give economic nationalists in New Zealand First and the Greens pause.

So nice to have someone print this out.

 

Tags: , ,

55 Responses to “Fallow on monetary policy”

  1. Andrew (31 comments) says:

    I find Matt’s example about the best i have seen anywhere:

    http://www.tvhe.co.nz/2013/01/29/a-hypothetical-chat-exchange-rate-overvaluation/

    But Brian’s is also very good.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  2. wreck1080 (3,522 comments) says:

    Maybe Brian could talk to the good people in Oamaru who lost their jobs today. I guess they won’t be able to buy cheap imported goods at all from now on.

    The danger is that many exporting businesses are at the end of their tether. This is resulting in plant closures etc which will be very hard to re-establish when the dollar inevitably falls to normal or less levels.

    I think there are a lot of people with their heads in the sand thinking milk will save the day.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  3. JC (838 comments) says:

    “I find Matt’s example about the best i have seen anywhere:”

    Second the motion. The high exchange rate is a sign of something(s) structural in the economy, ie, housing prices, overborrowing in the private sector, persistent current account deficits.

    But there’s another reason as well.. buyer choice. In NZ (and the US) manufacturing was 30% of the economy in the 1950s, now its 10-11%.
    See the direction? Manufacturing in these two countries has been declining for decades because the US and NZ customer is happy to buy the cheaper product from first Japan, then Korea and then China and soon Vietnam and India. And going the other way our overseas customers are buying elsewhere because we lost the race to the bottom of the market.

    Its tough, it costs us export dollars and jobs, but if you want to see 10% current account deficits, inflation and higher prices for imports and rating agencies’ downgrades.. run a loose monetary policy.

    JC

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  4. thedavincimode (6,117 comments) says:

    Fallow’s comments won’t help the people who feel like shouting and blaming the Government feel any better.

    Whereas, if he had simply said: ” … righto, turn the inflation dial to 1.5%, the exchange rate dial to 0.72, the OCR dial to 2.5%, the GDP dial to 2.5%, the unemployment dial to 3.5% and the house inflation dial to 0.00%, then she’s all good …” they would all have felt much better. After all, surely it’s that simple, isn’t it? :roll:

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  5. Reid (15,531 comments) says:

    It’d be good if someone could explain why our currency is the 7th most traded in the world and give us some line graphs of the volume vs the price movements over say a ten-twenty-thirty year period. I tried to google that but it wasn’t available, but since supply and demand operates in currency same as in anything else, you have to ask whether or not the inexplicably high volume also influences the price.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  6. davidp (3,320 comments) says:

    >higher inflation would lower real wages

    This is the key point. Our exports would only be more competitive because everyone in NZ would have a real reduction in income. Rather than dick around with monetary policy, why aren’t Labour and the Greens brave enough to legislate a reduction in salaries, wages, and benefits? Why don’t they promise to cut benefits by 10% and force all workers to take a 10% reduction in income, and let people vote for or against that at the election.

    If I were John Key, that’d be my election policy… “Vote National, because the other parties want to slash your income and make you poorer”.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  7. SPC (4,639 comments) says:

    Reid, google carry trade.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  8. SPC (4,639 comments) says:

    davidp

    We do not include housing in the CPI and so the RB Governors allow inflation in this area.

    Ask yourself what the cost of a doubling of house values is on those wanting to own a home – and how that impacts on after tax and after housing cost income.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  9. SPC (4,639 comments) says:

    David Farrar,

    Our OCR has been consistently high against those of Europe and the USA and also Oz – thus leading to a higher currency value via either the carry trade or the inflow of foreign funding (some now QE sourced) for local mortgage finance.

    The only variation of late is that the Oz OCR is also now historically high, thus we are finally at a truer cross Tasman currency value. That must be a real boost to those exporters focused on the CER market. One small bright spot for the economy.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  10. Johnboy (13,386 comments) says:

    I seem like a man out of synch. When I had debt the going rate was up to 21%.

    Now I have none all I can hope for is 4.5%.

    Oh why have you forsaken me God?? :)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  11. SPC (4,639 comments) says:

    Today the RB Governor signalled a possible increase in the OCR because of the house value rise. This is a mistake.

    Targeting the OCR is the scorched earth option. It means harm to exporters, it means continuing high unemployment, it means a slower growth, it means budget deficits continue for longer, it means more debt builds up.

    His deputy had it right earlier – options that target housing alone. He mentions loan to value and more.

    http://www.nzherald.co.nz/residential-property/news/article.cfm?c_id=76&objectid=10861410

    1. require banks to fund more of their mortgage finance from local deposits. This forces deposit rates up (more interest income tax to government) and increases mortgage costs to dampen mortgage borrowing demand. All without impact on the OCR and the dollar – that harms exporters and related job creation.

    2. require 10% deposit from home owners and say 20% from rental investors. This also lowers mortgage borrowing demand – as people have to save the deposit first. The delayed demand eases pressure on values and thus the panic to buy before values rise higher also diminishes.

    There are more radical options.

    3. Instead of increasing the OCR allow the RB Governor to raise or fall a mortgage surcharge. Thus a base OCR that keeps the dollar at a level good for competitiveness and on top of that a mortgage surcharge to restrain mortgage demand. Bollard mentioned this after witnessing the harm that simpy raising the OCR rate caused – when we went into recession before the GFC.

    A mortgage surcharge raises funds for government.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. bhudson (4,720 comments) says:

    The argument over our exchange rate tends to miss an important perspective – the NZD is high not solely because our economic system, strucutres and market participation are sound [which they fundamentally are, outside, arguably, of residential property speculation], but because our trading partners are discounting away their value like crazy, chasing some Keynsian dream the stimulus (borrow and spend) can create value, when it actually erodes real income for the sake of quantity of demand.

    It is not so much our economy strengthening to make our dollar more valuable, as it is them undervaluing theirs to up demand if their goods in a global market – it’s a global-level, supermarket, ’2c a packet of biscuits is great if I can sell enough of them’ play.

    Why on earth would we want to devalue our dollar to join them in a ‘race to the bottom’ discount war – which we must surely lose because of our lack of scale and real global market power [dairy possibly excepted to a degree]???

    You see, that’s exactly what the ‘intervene to lower the dollar’ cry is. Sure, on the face of it, it looks like making our exporters a little more competitive. But it is at the cost of ruthlessly undermining the value of the goods and services we export.

    Paying the game our (large) trading partners are playing is discounting our value not to save our own economy, but to save theirs!

    And that is without considering the significant cost of living increases which means that it is our workers that will be paying (in reduced value of income) for us to join the race to the bottom for the benefit of our trading partners, not us. Which also happens to be an extremely regressive approach to dealing with the situation.

    They do not appear to be preaching the sacrifice of workers’ wages to feed the profits of the farmers (which is exactly what their policies will achieve.)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. wreck1080 (3,522 comments) says:

    @spc : according to real estate gurus the housing bubble in auckaldn is being fuelled by asians paying by cash.

    Not sure if any of that will address this issue.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. SPC (4,639 comments) says:

    bhudson,

    The major problem for farmers is not actually the dollar – it is the value of the farmland. Our farmers despite high historic prices (despite the high currency value) are struggling to make profits because of the farm mortgage debt cost. This leaves without the profits to invest in added value production (why the Chinese are the ones doing this) – leaving us as raw material suppliers (milk or farm stock) in the area where we have so called expertise.

    Banks will lend for inflated value housing and farmland but not for productive investment ….locals will invest in CG from rising property and share values but invest in new ventures.

    Something goes wrong when the only investment motive is CG and CG from investment unrelated to new or increased production.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. nasska (9,505 comments) says:

    If our balance of payments looks crappy now imagine how bad it would be if we didn’t have Chinese buying up Auckland’s housing stock with cash? A couple of thousand sales at North of $500K must make an impression on the books.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. Johnboy (13,386 comments) says:

    Once they have it all nasska perhaps they will build a great wall along the spine of the Bombay hills.

    It could be much shorter than the last one they built! :)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. SPC (4,639 comments) says:

    wreck1080, … it is not beyond our control ….

    Why is our mortgage debt increasing (when some people are paying back their mortgages faster taking advantage of the lower mortgage cost)?

    It is not because the demand is from people paying cash.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  18. nasska (9,505 comments) says:

    Johnboy

    If ol’Slaphappy doesn’t get his trainset built before the Chinese take control I don’t think much of his chances. :)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  19. bhudson (4,720 comments) says:

    @SPC,

    So if the dollar is not the problem, then you are saying that Labour and the Greens are wrong to propose policies to have the RBNZ to intervene to reduce the value of the dollar? (Especially the ‘printing money’ insanity)

    For it matters not whether or not the farmers have other pressures to deal with – if the dollar is devalued to aid other manufacturing industries, they will will benefit – on the face of it – along with those manufacturers. Of course it will only take a very short time before they, and their workers, are complaining about their income being worth less because of the weaker dollar and higher inflation.

    Now in the Weimar Republic the unions were strong enough to see that the workers’ wages were adjusted to match inflation – sometimes daily. How did that great economic plan work out? [Hint: about as well as Zimbawe's]

    Davinci hit the nail perfectly, in his typical sardonic manner… There are not independent knobs, dials, switches, sliders and levers that can be set at arbitrary levels to create some pixie magic outcome. Every action results in a reaction – most often counter to the ideal outcome – e.g. Actions to reduce our dollar value will undermine wealth for every New Zealander. And there is not a single way to prevent that happening (other than exiting the global economy, which actually leads to a worse outcome – so proves the point, rather than being an exception to it.)

    Take your OCR example – keep the rate high and you risk continuing high exchange rates. Reduce the rate and the property market overheats again. Your extraordinary interventionist approach of creating an entirely separate market and rates for property is just a nightmare re-entry to a highly regulated, stifled, almost closed economy that I can remember from my youth. And starting with ‘just residential’ property is nought but a guarantee that said regulation will grow to encompass most, if not all, of the economy (again.) I suggest you try reading Hayek’s “Road to Serfdom” – I certainly don’t want the World Trade Centre to reopen in Wellington just so I can pay through the nose for the imports that the gift deign me able to purchase.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  20. Ross12 (927 comments) says:

    bhudson
    You are absolutely right with both your posts. Those attending that conference need to be asked the simple question — what does he Govt. do to reduce the dollar against the currency it is being measured againt (ie the US $ ) when that currency is falling through the floor? (Other than competing with the speed of their printing presses or going back to a fixed currency )

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  21. Reid (15,531 comments) says:

    Reid, google carry trade.

    Thanks SPC.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  22. SPC (4,639 comments) says:

    bhudson,

    You should note first that the RB often trades in currency. It does so to make money for itself. But the side benefit is to ease the peak value of the dollar and to hold the floor. I say it does this to make money, as it does not do so to target or secure any particular value – it does not have the presence to do that but it can make a little money from time to time and usually it does.

    The Greens are suggesting a modest expansion of that (QE makes this possible without risk of any monetary loss – the Swiss national bank has made money via QE and buying Euros, all to help its export sector be more competitive). I say modest as the amounts Greens suggested were very low and quite specifically allocated. Some of the QE money used to own offshore assets (using the QE to buy foreign currency holds down the dollar I suppose) to re-build up the Earthquake Commission’s reserves and the rest for the Christchurch rebuild. The few billion each year would have little impact on the currency – but it would mean less public debt. It is really a way to hold down debt costs.

    Is there inflationary impact?

    1. the amounts are too small.

    As for a wider change to monetary policy to cover economic objectives rather than just contain inflation.

    2. Yes these could result in inflation via a lower dollar and domestic stimulous.

    But conflating the two is not accurate.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  23. davidp (3,320 comments) says:

    The other odd thing about Labour’s policy is that on one hand they want to make NZ exporters more competitive by reducing the income of every NZer, and on the other hand they want a significant increase to the minimum wage. Those two policies will balance each other out and nothing will be achieved, except that busy-body Labour MPs will enjoy manipulating the economy and NZ workers.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  24. SPC (4,639 comments) says:

    bhudson

    You note “OCR … – keep the rate high and you risk continuing high exchange rates. Reduce the rate and the property market overheats again”

    Sure, and propose to mitigate the impact of a lower OCR on the property sector.

    As for your alarm about an attempt to regulate housing finance (property finance rules are common around the world), we are probably the only country in the world so dependent on foreign money to bid up our own propertty values and this pyramid selling scheme occurs under the blessing of a tax regime without a CGT.

    I should clarify, I would include farmland property (for reasons I mentioned earlier).

    Nice the attempt to imply that an attempt to regulate finance for property speculation for CG would lead to attempts to regulate the real economy as well. Nice but wrong. The distinction is the point.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  25. bhudson (4,720 comments) says:

    SPC,

    Firstly – the Greens are NOT proposing QE. QE is a defined term – it is the injection of new money into an economy when interest rates are already effectively zero and the banks are still reticent to lend for investment. It is achieved by govt printing money and using that to buy assets from banks, such that the banks have greater cash to lend. [incidentally, a good plan will have a sell down period where those assets will be disposed of, which also results in removing the extra cash from the money supply.]

    The Greens are NOT proposing this; they are NOT proposing QE!

    Your point re: Switzerland does not counter mine. The fact that the EU is successfully lowering the value of the Euro does not mean they are better off (let alone the holders of it.) They are simply exchanging real value for quantity of demand. It is ‘fool’s gold’

    The few billion each year would have little impact on the currency – but it would mean less public debt.

    You cannot print money without consequences. Every cent the Greens would add to the money supply though the mint would devalue every other cent. You cannot print money to pay for Chch and pretend that every other dollar would be unaffected.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  26. SPC (4,639 comments) says:

    davidp,

    They simply want the productive sector to flourish, workers do best when this happens. Workers get nothing from the untaxed CG of others.

    PS Most minimum wage labour is in the domestic services sector – the two areas (exports and minimum wage jobs) are rarely linked.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  27. bhudson (4,720 comments) says:

    The distinction is the point.

    The indistinction is exactly the point – you are proposing central control of an element of the economy. Somehow treating that part as separate and distinct from the rest of the market-based economy that it can be monitored and managed as a distinct entity.

    That is errant nonsense. Not only is the economy not that simple or compartmentalised, but the simple reality is that as soon as you introduce that level of central planning into a part of the economy, it is going to grow to swallow up others ( and then the whole.) In project terms it is called ‘scope creep.’

    As I noted, you should read Hayek’s “The Road to Serfdom.”

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  28. bhudson (4,720 comments) says:

    PS Most minimum wage labour is in the domestic services sector – the two areas (exports and minimum wage jobs) are rarely linked.

    Nonsense. If we are not exporting, then where is the money coming from to feed the domestic economy – where does the latte-buying disposable income come from if not from exports and their associated supply chain inputs feeding the rest of the domestic economy?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  29. SPC (4,639 comments) says:

    bhudson, is debt inflationary?

    If the Green “printing” was to finance something (rebuild) otherwise financed by debt …

    The only difference is one involves paying the debt back later – still inflationary in the short term.

    PS RB measures to regulate housing finance demand are counter inflationary.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  30. SPC (4,639 comments) says:

    bhudson,

    your post at 9.37 is gibberish, do Hayekian books lead to this?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  31. bhudson (4,720 comments) says:

    SPC,

    Printing money injects cash into the money supply with no debt recourse elsewhere – it simply grows the supply with Ono corresponding obligation. Money is a product and subject to the same rules of supply and demand – at a macro level, if you add money with no corresponding debt, you will undermine the value of every dollar in the system.

    Printing money to rebuild Chch is reducing the real wages of every worker to pay for it – hell, two years ago at least the Greens were trying to say they’d do it by taxing the wealthy more – that would create other growth issues, but it is quite frankly laughable how they have now switched to taking the money from the low and middle income earners to pay for it.

    Re: your point on housing finance being counter inflationary – another argument that bypasses the simple facts of supply and demand – finance is also a product like any other. If you artificially increase its price in one area, you will reduce demand [which you think is good], but that reduced supply, which reduces revenue and profit for the banks, which will see the price of finance rise elsewhere to compensate. That you should be able to relates to – the bank’s aggregate supply and demand setting the average aggregate price – just like Keynes said it would

    It goes back to my point of the inanity of thinking you can compartmentalise parts of a market economy and think you can some defy the laws of physics [to paraphrase dear old Scotty.]

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  32. bhudson (4,720 comments) says:

    your post at 9.37 is gibberish, do Hayekian books lead to this?

    @SPC,

    It was no such thing. It was questioning where you think money comes from if people are not selling things. Where money comes for to fuel domestic service industries if we are not selling our products internationally to bring income to our exporters and every other business [and worker] in their supply chain.

    The answer is very simple to most people – if we are not producing goods and services to sell to people offshore, then we have no employment, no money, to spend in the domestic service industries.

    I’m sorry that eludes you

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  33. thedavincimode (6,117 comments) says:

    It goes back to my point of the inanity of thinking you can compartmentalise parts of a market economy and think you can some defy the laws of physics

    Ay, Captain, I can`t hold her much longer. She`s gonna blow any minute!

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  34. cha (3,534 comments) says:

    If we are not exporting, then where is the money coming from to feed the domestic economy

    Been wondering about that myself since reading P Buchanans post about the size of the US service sector.

    What is noteworthy about the US service sector is that, at over 75 percent and growing, it is steadily occupying a bigger and bigger percentage of the national GDP (agriculture is less than 2 percent and manufacturing is at 20 percent).

    So I went looking for something short and succinct to confirm that the US service industry does indeed represent such a large share of the economy. From 2009:

    Private-sector production of goods accounted for 19.6 percent of GDP as follows:
    • Manufacturing, 11.0 percent.
    • Construction, 4.1 percent.
    • Utilities, 1.9 percent.
    • Mining, 1.6 percent.
    • Agriculture, forestry, fishing and hunting, 1.0 percent.

    Private-sector production of services accounted for 66.8 percent of GDP:
    • Real estate, 13.0 percent.
    • Professional and business services, 12.1 percent.
    • Finance and insurance, 8.4 percent.
    • Health care and social assistance, 7.3 percent.
    • Retail trade, 5.9 percent.
    • Wholesale trade, 5.6 percent.
    • Information (including broadcasting and telecommunications, publishing, motion pictures, sound recordings, and data processing), 4.4 percent.
    • Accommodation and food services, 2.9 percent.
    • Transportation and warehousing, 2.8 percent.
    • Private education, 1.1 percent.
    • Arts, live entertainment, and recreation, 1.0 percent.
    • Other private services, 2.5 percent.

    http://iipdigital.usembassy.gov/st/english/publication/2011/04/20110426122518ecurb0.6431325.html#ixzz2JXchRwqD

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  35. thedavincimode (6,117 comments) says:

    In all seriousness, it’s remarkable that we have people sitting here in Godzone ignoring all the publicity about, for example Greece, who think that we can ignore the fact that elsewhere people are chucking rocks at police officers because their Government has for years adopted economic policies that are now perceived here as the panacea to the economic woes of a couple of rocks at the bottom of the Pacific. This is the case for IQ testing of potential voters.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  36. krazykiwi (9,188 comments) says:

    davinci 10:14pm, +100

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  37. bhudson (4,720 comments) says:

    Davinci,

    It is a (very small) relief that at least the MSM called Russel Norman on the stupidity of printing money.

    It is tragic that the Greens are not called on their 40bn*(?) borrowing policy for housing, nor Labour (until today) on their pie-in-the-sky housing prices, but at least we have progressed from the point where everything Normanl said was swallowed as gospel without question.

    * As was shown in the 2011 election campaign, the govt cannot report ‘net debt’ – I.e. asset value as cancelling borrowing – despite what those houses might be worth now, or someday, the full amount of gross debt would have to be reported. [It is somewhat unfortunate that the MSM didn't call Norman or Turei on that.]

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  38. thedavincimode (6,117 comments) says:

    hudson

    It would be a relief were it not for the fact that any criticism of Norman is lost in a sea of irrelevancy regarding warrants of fitness and Shane Jones soiling his hotel sheets.

    Anyway, I suspect that Norman was only called on the money printing because in addition to it actually being stupid for NZ, it actually sounds so stupid as to be newsworthy and nobody inadvertently killed a blue penguin that day. That was good luck for the blue penguin population but bad luck for Norman. Life is so cruel.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  39. Jack5 (4,220 comments) says:

    BJ Hudson has moved his debate on this from the general thread to this dedicated threat of DPF’s, and I follow him.

    It’s understandable that DPF supports current Reserve Bank currency policy, which National is firmly behind. However, IMHO, for a newspaper commentator, Fallow gives a one-sided interpretation of possible currency strategies.

    Hudson, DPF, and Fallow assume that the only way to control currency is by printing money – by interest rates, and that this will spark inflation. They ignore the success of the Swiss central bank whose successful cap has NOT set the Swiss inflation rate soaring.

    They assume there is no alternative to a free floating currency, presumably influenced by the way Muldoon put the country in economic peril by stubbornly refusing to weaken the peg in his final time in office.

    Fixed currencies have worked well for some countries. The yuan of China, our ultimately major trading partner, China, is very tightly controlled, ultimately by the politburo of the Communist Party.

    In the Asian monetary crisis of 15 years or so ago Malaysia stood out among those defending their currencies by adopting measures that were heresy to free-marketers.

    Within the last five years, Israel’s central bank governor, Stanley Fischer, intervened successfully in the currency markets for more than a year, stabilising the shekel and in the process more than doubling lifting Israel’s foreign reserves from the original US$29 billion. Fischer drew on his experience as No. 2 in the IMF during the Asian financial crisis.

    To think that the world’s best economic brains are all in New Zealand would be gross narcissism.

    Fallow is sceptical about the Swiss National Bank cap, which has blown out the country’s foreign reserves. However, Reuters reported this month that the reserves are now falling. Meanwhile, the bank, which, of course is Switzerland’s central bank, has made a large profit for the second year in succession. The 2012 profit was over NZ$8 billion.

    The bank’s president, Thomas Jordan, introduced the cap of 1.20 francs per euro introduced in September 2011 and vowed to maintain it “with the utmost determination.”

    There are reasons why politicians favour a strong NZ dollar, regardless of whether it is wrecking export industries. For example, it provides better terms for borrowing overseas and rolling over our foreign debt. It makes our Treasury bureaucrats who run the Debt Office look better, too.

    Most MPs don’t plan to spend forever in politics. They know they will be out of politics when the ticking IED of decades of balance of payments deficits finally blows the train off the tracks.

    DPF stresses that the NZD is not historically strong against the Australian dollar.

    For many decades, perhaps most of a century, NZ had a stronger per capita economy than Australia. This has been reversed.

    The relative strength of the NZ dollar to the Australian dollar over 80 years or so is pretty irrelevant. Apart from the changing rates of development, there have been different prices for hard v. soft commodities, even among the soft commodities, factors such as sugar price v meat prices, even prices for Australian fine wool v NZ medium and coarse wools.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  40. bhudson (4,720 comments) says:

    Davinci,

    Well I would certainly consider a blue penguin to be more newsworthy than the econo-babble from Russel Normal. Just wait till he feels what it is like for Gareth to swap him for some ginger beer.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  41. bhudson (4,720 comments) says:

    @Jack5,

    We don’t have the capital to play their games with currency – Fallow pointed that out. We have tried a couple of times – it failed miserably, creating nothing but shirt blips in the value of our currency. We do not have the wherewithal to trade in our own, or other currencies to manipulate the value of the NZD.

    I am interested to hear from you how exactly NZ could effectively manage our dollar value, given our (comparatively) meagre resources. And without massive borrowing – take a look at the economies of our trading partners around the world. And their outlook for the years to come. Now is not a good time to be borrowing even more to fuel Keynesian dreams. (which would actually only see us in a price-driven race to the bottom against our trading partners who are busy eroding their wealth to try to fuel demand.)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  42. Jack5 (4,220 comments) says:

    Re Bhudson (10.50):

    What capital don’t we have? Cap risk doesn’t relate to capital, but to movements in currency.

    If the Swiss Bank issues francs to buy euros it lifts its currency reserves, and it can use the foreign currency it buys to buy gold, or other currencies, or keep the euros, invested as it may.

    So far the Swiss have been on the winning side. They are billions ahead. You will say they are lucky. But luck favours the intelligence they have and we don’t have. The Swiss are controlling their currency, making money doing so, and protecting their great export industries in financial services, tourism, and high value manufacturing from watches to medical equipment.

    Trying to prop up a falling currency is highly dangerous and impossible for the weak, as Muldoon found out. Applying a cap is a different matter. There are risks, but they are very different risks, and you would have thought the one country in the world with a top currency trader as its leader would have relished following the Swiss path.

    NZ would be far better off, if Key stepped aside as leader and NZ gave him a commission to hack into the kiwi, Swiss style. The rest, Brash, Bollard, and co, would be hopeless for this.

    The idea that NZ is too small to consider a cap is ridiculous, given the performance of other small countries such as Switzerland, Israel, and Malaysia.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  43. bhudson (4,720 comments) says:

    The cries for fixing our exchange rate are also laughable. Most often cited is China.

    Our currency is also a product , just like any other. And also subject to supply and demand rules, and the impact of pricing (exchange rate.)

    Sure, we can fix our exchange rate so that we are favoured in a transaction (it is cheaper for our partner to buy our stuff), but trade is based on a mutuality. Our trading partners trade with us based on an expectation that, in return for them buying stuff from us, we will be buying stuff from them. Fixing the dollar to the advantage of our exporters, disadvantages our trading partners trying to sell their products to us.

    It is extraordinarily arrogant to think that we are such an important producer that we can set our exchange rate to favour our sales, while disadvantaging our trading partners’ sales, and expect them to buy even more of our products

    [You can delve into all sorts of intricacies of arbitrage of currencies, but the simple bottom line is that we sell stuff in NZD - as that is all that can be spent here - and we buy stuff in our trading partners' currencies - as that is all that they can spend. If you seek to artificially construct a value for your currency, you upset the mutuality of the trading.]

    As for China – they have an incredible advantage beyond scale – they hold the savings that have enabled the West to charge ahead with their debt-fuelled consumption. That buys them a great deal of power with respect to their own currency (and might help to explain that, while a lot of incessant grumbling from the likes of the States, little is really done to stop the spending with China – they need the access to their savings too much.)

    NZ cannot compete with that! (Even if our private debt was not so high, we still couldn’t.)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  44. bhudson (4,720 comments) says:

    If the Swiss Bank issues francs to buy euros it lifts its currency reserves, and it can use the foreign currency it buys to buy gold, or other currencies, or keep the euros, invested as it may.

    As we could Jack5. But where do the dollars [equivalent to the Swiss francs] come from? How can we ‘issue’ them?

    - We can print them – inflationary and a very bad call.
    - We can sell a future debt to release them – that is just borrowing – highly speculative and not a great idea for little old us in the current climate.

    What we don’t have is some great store of them to use – we don’t have the capital reserves to play that game without printing or major borrowing.
    Even if Key was of a mind to take on the gamble, as Fallow pointed out, the size of the stake required to sustainably affect our dollar is huge ($180bn IIRC?)

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  45. Jack5 (4,220 comments) says:

    B Hudson posted at 10.50:

    It is extraordinarily arrogant to think that we are such an important producer that we can set our exchange rate to favour our sales, while disadvantaging our trading partners’ sales, and expect them to buy even more of our products …

    If the Rt Hon. Hudson had been Finance Minister of Germany, Japan, China, they would never have got their arses off the ground after World War 2. All have run cheap currency strategies and boomed. Would he have been regarded as extraordinarly arrogant? I think so.

    Mr Hudson also posted (10.50 as above):

    …Now is not a good time to be borrowing even more to fuel Keynesian dreams..

    If National’s present borrowing isn’t to fuel Keynesian dreams, what is it for? New industries (which ones), new infrastructure (fibre-optic cable?). If so, why didn’t they just float companies to perform these and give NZers a chance to invest?

    As for Mr Hudson’s assumption that currency intervention is necessary inflationary: there has been no surge in inflation in Switzerland, and I doubt there was in Israel or Malaysia, either.

    Face it, Mr Hudson. NZ’s currency strategy threatens to wreck the country’s export industries. Without them, NZ has no future.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  46. bhudson (4,720 comments) says:

    All have run cheap currency strategies and boomed.

    We also used to do same Jack5. And we required Supplementary Minimum Pricing and the likes to make us think it worked (when it certainly didn’t.) We even tried to hold back the tides with freezes. How did that managed economy and managed exchange work out for us?

    It was the floating of the exchange rate and market driven practises that made us competitive – allowed us to ‘boom’ in the modern world.

    If National’s present borrowing isn’t to fuel Keynesian dreams, what is it for?

    To pay for Labour’s bribing of the electorate through Working for Families and Taxpayer-Funded-Student Loans.

    Funding of core infrastructure by govt is not the master stroke of Keynes, but a long acknowledged reality that where an asset is shared by many and cannot be justified by the single (or few), then the only way it will ever be developed is through govt. irrespective or whether or it you buy into the rationale, or cost-benefits, of UFB and the RoNS, they fall into this category.

    there has been no surge in inflation in Switzerland

    I would imagine they are disappointed as an increase in inflation is exactly what they took their measures to achieve – they experienced deflation as the result of them, and their currency, being seen as a safe harbour, during the EU crisis. Their cap was not to defeat inflation, but to create some.

    NZ’s currency strategy threatens to wreck the country’s export industries.

    I don’t think anyone claims that the current exchange rates hurt our exporters. The disagreement is how to address the challenge (not the rate as such, but continued growth.)

    I don’t agree with attempts to artificially manipulate the rate – neither through borrowing/printing, nor through artificially setting a rate (which actually encourages our partners to trade less with us.)

    The answer – no silver bullet, for sure – is to open new markets, encourage bi-lateral trade (mutual trading), encourage innovation and diversity, support innovation through education and skills training (the right workforce for our future), keep interest rates down (for cheaper investment), encourage investment (domestic and foreign.)

    It will take time, but I think it is a more sustainable approach – it adjusts us to the ‘now’ and prepares us for the future.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  47. bhudson (4,720 comments) says:

    ^^ Above: “I don’t think anyone claims that the current exchange rates don’t hurt our exporters…”

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  48. thedavincimode (6,117 comments) says:

    bhudson raises the very good point that gets ignored in all of this; namely that it isn’t the policy framework that the present Government is working within that is at fault. It’s the decisions that New Zealanders and Government make that determine the success of that policy framework. The WFF and student loan gravy trains are two examples of poor quality decisions that are entrenched through self-interest and now represent a significant political barrier. The framework itself isn’t broken, but it’s providing a convenient scapegoat for those who don’t want to share in the collective responsibility for bad decisions. The reality is that it’s working under extremely difficult circumstances. It is understandable that after five years of this crap that people have had enough but it beggars belief that anyone might seriously think that we can ignore the GFC or wish its consequences away, or continue to indulge in bad quality decision-making because it was more fun in 2006.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  49. Jack5 (4,220 comments) says:

    BHudson posted at 11.45:

    We even tried to hold back the tides with freezes. How did that managed economy and managed exchnge work out for us?

    What the Swiss are doing and the Israelis have done and may still be doing is far different from the Muldoonian tactics of price freezes.

    Managed exchange, in one form or another, has worked well for CHina and Germany among others.

    He also posted:

    It was the floating of the exchange rate and market driven practises that made us competitive – allowed us to ‘boom’ in the modern world.

    Boom? Boom? National and free-marketers like Brash are always on about how we have fallen behind Australia and how we have slipped down the rich list of developed nations. What about our unsolved balance of payments deficits?

    BHudson further posts:

    The answer … is to open new markets, encourage bi-lateral trade (mutual trading), encourage innovation and diversity, support innovation through education and skills training (the right workforce for our future), keep interest rates down (for cheaper investment), encourage investment (domestic and foreign.)

    All with results immeasurable in the short term, and vague enough to keep the voters fooled the country is in the hands of astute politicians and brilliant bureaucrats. What bullshit.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  50. Jack5 (4,220 comments) says:

    thedavincimode posted at 7.22:

    he WFF and student loan gravy trains are two examples of poor quality decisions that are entrenched through self-interest and now represent a significant political barrier.

    Well at least the present Government is consistent. Hands off is its currency strategy. Hands off is its strategy on the appalling WFF and interest-free student loans of Labour.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  51. bhudson (4,720 comments) says:

    What the Swiss are doing

    What the Swiss are doing, Jack5, is creating some inflation to ward off deflation. Perhaps you should look into the drivers for their action a little closer.

    Managed exchange, in one form or another, has worked well for CHina and Germany among others.

    Do you notice any significant differences between the likes of China & Germany and NZ, Jack5? Like scale? Like inherent , full access to an enormous market (Germany in the EU), like the power of being the source of world credit (China)?

    We don’t have those – what you are claiming is that because you think that something has worked for another country, with different characteristics, circumstances and advantages, it must therefore be the right thing for us. I contend that is very superficial reasoning.

    Boom? Boom?

    Try comparing what we have achieved against where we were, and were heading, before the float, Jack5 – we are extremely better off.

    Nor is it a zero-sum game – our success does not have to come at the expense of Australia. In recent times, for example, Australia has lept ahead of us on the back of natural resource exploitation – our conservative approach in this area has a consequence of limiting growth.

    What about our unsolved balance of payments deficits?

    The best way of addressing this is to open markets for our goods. A corresponding upside to the high dollar is that imports are cheaper – food, clothing, petrol, (long-term) finance (before even considering ‘luxury’ goods such as cars and consumer electronics.)

    Try to address a BoP deficit through exchange rate control and you raise the cost of living for everyone.

    No one is claiming that the high dollar doesn’t create pressures and make things more challenging for exporters. What most people seem to understand, or accept, is that there is no silver bullet to address that – take measures to ease the exchange rate and you have corresponding upward cost pressure elsewhere. Demanding a lower dollar is the same as demanding that NZ citizens pay more for their goods.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  52. Paulus (2,296 comments) says:

    Print Money – yes

    In the USA the Mafia controlled Casinos and the Drug Trade are most grateful, as it puts more cash into the systems for them to use.
    The Casinos in New Zealand, and the Pokies, along with Lotto, would be most grateful for more cash in the system.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  53. Jack5 (4,220 comments) says:

    bhudgson posted at 10.10:

    …Try comparing what we have achieved against where we were, and were heading, before the float, Jack5 – we are extremely better off.

    Where do you get this from, bhudgson? From National’s PR propganda, or are you creating that?

    NZ floated its currency on 4 March 1985, and joined the OECD in 1973.

    In 1999 NZ was ranked 20th in the 0ECD in GDP per capita. By 2006 it was 22nd. In 2011 it was still 22nd. (These figures on the purchasing power parity technique of determining the relative value of currencies. On current booming exchange rates NZ was still only 19th.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  54. bhudson (4,720 comments) says:

    @Jack5,

    How were we looking with our traditional European markets all but closed to us and farmers heavily subsidised prior to the float? That was the comparison I asked you to make.

    We are a lot better off, now that we actually have some markets. And far more efficient producers.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  55. Jack5 (4,220 comments) says:

    Sadly, with the imminent collapse of the euro zone, some West European countries, such as France will be tempted to return to farm subsidies. That would stuff up world dairy prices.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote

Leave a Reply

You must be logged in to post a comment.