Economic confusion from Cunliffe

March 15th, 2014 at 9:00 am by David Farrar

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today gave a speech to the New Zealand Initiative, an think tank. The talk outlines the Labour Party’s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour’s economic goal and its proposed .

Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”. 

Personally I’m very wary of any politician that makes a sweeping statement about what NZ businesses need to do. There is no one correct answer. For many businesses, volume is best, for others value is best. Having the Government declare businesses produce too much low value stuff is easy to do from an academic viewpoint –  but the businesses out there fighting for market share tend to be the best judge of what works for them.

He then claimed that “the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.

The translation of this, is Labour is campaigning for higher inflation and price increases for everyone.

A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value – the exact opposite of Mr Cunliffe’s goal.

That is a total contradiction which exposes Labour’s economic policy to be slogans around a few tried left wing canards. Their monetary policy is, as Dr Whyte points out, in total opposition to their economic policy.

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84 Responses to “Economic confusion from Cunliffe”

  1. Mighty_Kites (85 comments) says:

    Hidden due to low comment rating. Click here to see.

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  2. mikenmild (12,376 comments) says:

    Doesn’t Whyte’s argument assume that businesses will do nothing to improve the value of their exports?

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  3. davidp (3,585 comments) says:

    The NZD exchange rate for the Aussie dollar has improved from about 1:1.30 five years ago, to about 1:1.06 now. When compared to Australians, we’re all about 25% better off. Exporters and manufacturers have continued to thrive. Cunliffe (and Norman, who has said the same sort of things) wants to drop the exchange rate. This is essentially a cut to salaries and wages that will send more NZers to Australia.

    If Cunliffe wants to manipulate exchange rates to cut our wages, he needs to tell us how much he wants to cut them. 10%? 25%, to take them back to where they were under the last Labour government? If he wants us to be a low wage economy, he needs to be transparent about what “low” means.

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  4. ross69 (3,652 comments) says:

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  5. peterwn (3,333 comments) says:

    The speech seems to be pitched at the business community. Even if some business people are skeptical at whether his announced policies for the benefit of NZ, they could well recognise that they can make money out of these policies even if NZ’s overall financial position tanks as a result.

    I wonder if David Cunliffe personally believes that such policies would work, or if the over-arching priority is to announce a set of policies no matter how misconceived which will hopefully bring in the votes for him.

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  6. flash2846 (289 comments) says:

    Economic confusion from Cunliffe???? No not so.
    In fact Cunliffe and Labour are not confused; they simply care nothing for the economy or indeed this country.
    POWER POWER POWER is all they are interested in; and at ALL costs.
    They know how many stupid people there are available to vote for them and they also know the power of the misleading headline.
    Sadly we cannot write them off yet.

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  7. ross69 (3,652 comments) says:

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  8. martinh (1,272 comments) says:

    I hate glib catchcrys and this is one of them i agree. But i do find your answer actually more strikingly incorrect than Cunliffes. What a bad look!
    The value of the goods imported has not fallen. If you increase your sales you will increase revenue in $NZ which means what you can pay NZ workers and what you have left to pay the NZ bank has actually increased. Ive never heard of anyone fixing their mortgages in a foreign currency.

    Be careful when you go along with a philosopher commenting on economic policy

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  9. flipper (4,330 comments) says:

    Perhaps Mikey, Yoza, Rossie69, and all the other left wing economic nutters could help Cunners and noddy Parker by translating their gobbledegook into a policy that would achieve its claimed o9bjectives.

    On the other hand, who says economic policy is solely the o0reserve the three or four thousand idiots who promote themselves as the Labour Party.

    Back to school children.

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  10. ross69 (3,652 comments) says:

    Davidp, you forgot to say that Bill English wants to see the exchange rate fall.

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  11. alloytoo (582 comments) says:

    The value of the dollar is the market’s reflection of the value of goods and services in our economy.

    It’s no surprise that the currency has improved alongside the manufacturing crisis and improved economic outlook.

    That’s right folks the improvement in our currency shows we’re doing better than the countries we use as a measuring stick. That’s good.

    Any attempt to manipulate our currency away from market determination is going to have consequences.

    Zimbabwe and Venezuela come to mind.

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  12. Souvlaki (48 comments) says:

    Whyte is correct. The bulk of the people supporting the left,are, in my opinion at least at best….intellectually dim. The simple use of terms such as widgets, and his easy to follow logic needs to be repeatedly hammered home ! With repetition,simple examples, graphs etc even the thickest of journalists may be educated. Keep it up please !

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  13. martinh (1,272 comments) says:

    Peterwn.
    I dont think Cunliffe believes in anything apart from his given right to be the leading light for fools and twits

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  14. alloytoo (582 comments) says:

    @Ross69

    Bill English isn’t threatening the independence of the reserve bank.

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  15. burt (7,425 comments) says:

    Controlling exchange rates, introducing more state run monopolies and government incentives via handouts and loans while increasing taxes and government spending. It didn’t work out for Muldoon, but somehow rehashing his failed ways under a red/green flag rather than a blue one makes it good policy. How fucking thick are the lefties….

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  16. wat dabney (3,840 comments) says:

    you forgot to say that Bill English wants to see the exchange rate fall.

    The truth is very different from what you are implying:

    ‘Finance Minister Bill English says manufacturers calling for a lower exchange rate are calling for their workers’ wages to be cut.

    Appearing before the Finance and Expenditure Select Committee, English faced a grilling about the Government’s unwillingness to intervene in the currency markets to attempt to lower the New Zealand dollar.

    Opposition MPs, who have been taking part in an inquiry into manufacturing in recent weeks, said the manufacturing industry had been warning that the high exchange rates was eroding profits and putting off any investment. English responded that the industry was effectively calling for lower wages for workers.

    “What they’re actually telling you is they want to cut the real wages of their workers, because that is the other side of the equation. They want to cut the real wages of their workers,” English said.

    English said the strong exchange rate was helping maintain household living standards.

    “The exchange rate amounts to the purchasing power of New Zealand household and one of the reasons that households have got through the recession in reasonable shape is that the exchange rate has, where it is, helped maintained their standard of living.”

    English later said that he would prefer if the New Zealand dollar was weaker, but denied he wanted to cut wages.’

    http://www.stuff.co.nz/business/industries/8298754/English-grilled-over-high-kiwi-dollar

    It’s one thing to prefer a lower rate, it’s quite another to increase inflation to achieve it.

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  17. Simon (780 comments) says:

    Business produce according to consumer demand. Cunnlife is an economic moron.

    State intervention to lower a country’s currency is a form of protectism. These clowns have got nothing.

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  18. burt (7,425 comments) says:

    Simon

    Exactly, slogans and promises of other people’s money. It’s all they’ve got.

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  19. wat dabney (3,840 comments) says:

    Cunnlife is an economic moron.

    It’s not that he’s an economic moron, it’s that he’ll say and do anything to attain power no matter how damaging it is in reality to the workers. (Apart from state-sector union employees of course, who will benefit by other means.)

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  20. WineOh (636 comments) says:

    “But, of course, the value of those widget sales would have fallen.”

    No, in NZ dollar terms the value of those goods has not fallen. Only in USD value per widget has dropped, but if the volumes increase then the aggregate value of widgets sold likely increases.

    I kind of get the jist of what Cunliffe SHOULD be saying. Our physical distance from international trading partners and persistent high transport costs means that its better for us to pursue higher value goods rather than producing more of low value stuff. It also tends towards higher wages for those producing stuff. Not much point in competing with Pakistan and Indonesia in producing cheap garments.

    However he does not do it in a cogent way, by over-simplifying (down to the level of the “common” man) he dilutes his message and fails to show new and genuine leadership… just trotting out tired old slogans.

    He also says he wants to invigorate the ‘regions’ – well, newsflash to Cunliffe, the rural provinces of NZ are in the business of primary goods not highly skilled IT and cutting edge biotech jobs. Unless he means new call centres in Hamilton, which is what he and his fellow opposition have been chastising Bill English for encouraging – I recall reading news in the last month of 2 x 300+ seat call centres for Aus companies who have woken up to the fact that Filipino and Thai call centres don’t get the right results.

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  21. All_on_Red (1,743 comments) says:

    Supply creates it’s own demand

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  22. Colville (2,318 comments) says:

    Please correct me if I am wrong but…

    Shouldnt us rich property owning righties want inflation?

    Inflation makes property go up in price but erodes the spending value of wages, we get richer?

    Why would the coalition of morons want inflation? to make the poor poorer?

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  23. davidp (3,585 comments) says:

    So rather than dicking around with the Reserve Bank Act and manipulating the currency to effectively reduce real wages via an exchange rate cut, why doesn’t Cunliffe just leave the exchange rate untouched and legislate an actual wage cut? Perhaps pass a Competitiveness With Australia Act 2015, which immediately cuts all salaries and wages by 25%? This would be an honest policy that would allow voters to make an informed decision on whether to vote for Labour and the Greens or not.

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  24. niggly (832 comments) says:

    I kind of get the jist of what Cunliffe SHOULD be saying. Our physical distance from international trading partners and persistent high pursue higher value goods rather than producing transport costs means that its better for us to more of low value stuff. It also tends towards higher wages for those producing stuff. Not much point in competing with Pakistan and Indonesia in producing cheap garments.

    Hang on a minute (Cunliffe)! Isn’t this exactly what Roger Douglas and co were enabling during Labour’s economic reforms of the 1980’s?

    So Cunliffe (like the pilloried Phil Goff nowadays) is a Rogernome in Leftie drag?

    Or is he talking out of two sides of his mouth again? Eg a Rogernome to the business community and a state interventionist to his Left field activist base? If so which one is the Real Cunliffe?

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  25. Simon Arnold (102 comments) says:

    martinh at 9:22 am

    “If you increase your sales you will increase revenue in $NZ which means what you can pay NZ workers and what you have left to pay the NZ bank has actually increased. Ive never heard of anyone fixing their mortgages in a foreign currency.”

    You need to consider what happens on the other side of the ledger – how do importers fare? They can buy less and this includes households that consume imports and exporters that buy inputs including capital goods. So on balance you’ve probably moved resources on a one off basis from importers to exporters by allowing a bit more internal inflation. To get another improvement you’d need to allow yet another little bit of inflation – when to stop?

    But consider what the inflation has done. It has reduced the value of the NZ$, so while workers in export industries might be getting more in nominal terms it isn’t clear what’s happened to their real wages. Those on fixed incomes are worse off, and of courses importers are laying off staff.

    Now are exporters better off. Most these days lay off the risk of the dollar so they aren’t exposed (they in effect denominate part of their borrowings in overseas currencies – an idea I see is novel to you). They deliberately have structured their businesses so they are exposed one way of the other to fluctuations in the exchange rate. But they can’t escape domestic inflation so their costs go up.

    But the real downside to higher inflation is that it redistributes resources in the economy in an arbitrary way. We allow a bit on the basis that our economy is getting more productive and not all of that is captured in the national accounts. But if prices go up faster than the real value of a basket of goods then those that can protect themselves are no worse off, they move the costs on or lift their incomes, those that can’t become worse off.

    It would be worthwhile thinking about who these sections of our community are before rushing off and advocating higher inflation.

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  26. Ross12 (1,484 comments) says:

    “Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”.

    I think Cunliffe should talk to some of his Union mates , especially the older ones and ask them how things have changed over the years. I’m thinking particularly of the food industry. If he looks at the meat industry — most is now sold as cuts of meat ( not whole carcasses), much is sold chilled ready to go into the supermarket–not frozen. Much of the growth of dairy in China is through milk formula products.In the seafood area premier chilled products to Japan , live crayfish to Asia etc. has been going on for decades.
    Yes, I look in wonder at the logs stacked up at the wharf but if you have saw mills closing there has to be an economic reason for it. It is not easy — I recall a timber processing plant in Wanganui which cut the trees , processed the logs , made door and window frames etc. and exported direct to a major retailer in the USA . Exactly the business model the wise guys would push. It went well for a few years while the exchange rate was OK but it must have been on thin margins because it did not last.
    Cunliffe is dreaming if he thinks he can wave a magic Govt. wand and make it all work better.

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  27. tvb (4,554 comments) says:

    We need two exchange rates. A high dollar for importing so our petrol stays cheaper. This affects nearly everybody. But we need another exchange rate for exporting which is low. This will benefit a few exporters. The rest of us have to pay the higher prices for imports. I suppose the Labour Party thinks we can have two exchange rates.

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  28. duggledog (1,624 comments) says:

    Here’s an idea

    Clearly, a large proportion of New Zealanders (i.e. the Labour Green bloc) have no idea how the dollar works, how the RB works, or how the currency works compared to others – otherwise after listening to speeches such as Cunliffe’s you would see this voter bloc reduced to about 5%

    Yet a great deal of these people manage to navigate basic domestic budgeting, how their mortgage works, how their tax works etc.

    To combat this can I suggest National use their very own media outlet – TV1 and or 2 – to commission a very basic step by step guide to how the whole f***ing thing works. No need for an agenda, just an idiots guide; like the corny smartphone campaign that runs intermittently, but a whole series of programmes. Get someone like Jim Hickey to front it. Too easy.

    Then watch Cunliffe and co go completely spastic, as it would be educating their low info voters, but then the incumbent could simply say ‘well, it’s a public service campaign. You should have done it whilst you were in power. Sorry we put it in prime time but this stuff is important’.

    I don’t know who makes up the top table at TVNZ but lets be honest the CEO has got to be a political appointment so if that person is not on side, replace him / her and make some changes from the top down.

    I mean if TV3 could produce a show called ‘Mind The Gap’ which pointed out the evils of Rogernomics and how the whole system is f***ed basically and had it scheduled 3 days from last election, why can’t TVNZ? It’s owned by the Govt! So use it!

    And before they all start saying ‘who even WATCHES network TV anymore sniff sniff’ well quite a few – and quite a few who would be the target for said educational programmes.

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  29. bhudson (4,741 comments) says:

    It seems that Davids Cunliffe and Parker missed this study out of Massey University:

    http://tvnz.co.nz/business-news/exchange-rate-not-biggest-barrier-exports-study-5552357

    Mind you, focusing on the wrong thing is the forte of Labour, it’s people and it’s allies.

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  30. trout (954 comments) says:

    Devaluation is inflationary and yes, inflation rewards property owners and debtors. But I would have thought that the very people Cunliffe seeks to represent would be the ones most disadvantaged by a lower exchange rate. Imported goods (petrol, second hand motor vehicles, building materials etc. etc, increase in price and spending power (I guess this is what Bill English means by real wages) falls. And be aware that as a trading nation we are vulnerable to high freight costs on exported goods; guess what, freight is costed in US dollars. A high dollar is a pain to those of us that export but it represents national economic strength. Eventually as the US economy recovers the US/NZD cross rate will revert back; as to Australia, who knows what will happen there; for once we can look across the ditch without envy.
    Save us from the simplistic policies (‘I was at Harvard Business School’) of of economically illiterate but ideologically driven interventionist politicians.

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  31. Monty (899 comments) says:

    I was talking to a banker a while ago. He said that although most NZers do not realise it, the strong $ also means that NZers have in fact been well paid for their work and have been receiving pay increases as their ability to purchase any imported item ( such as petrol, electronics, furniture, cars) has been cheaper. Much like the “Big Mac” index.

    A weaker $ will mean the purchasing power of the $ earned will be significantly less. All those items mentioned will increase significantly with a weaker $. Therefore the purchasing power of the NZers income will be less. Essentially when the $ falls we will all take a hit in our income if we are not exporters. Ie farmers will benefit, but the useful idiots and the salaried workers will hurt, as will beneficiaries , those who import products in fact pretty much everyone.

    Of course it is hard to explain the complex consequences in an 8 second sound bite, so the leftist fools get away with shallow and ill-considered policy .

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  32. wat dabney (3,840 comments) says:

    Indeed. Despite its unapproachable success in eradicating poverty and increasing workers’ standard of living to today’s astonishing level, how can a free-marketeer compete with the shameless, dishonest soundbites from interventionist charlatans like Cunliffe, with his lies, crocodile tears and economic snake-oil?

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  33. Judith (8,534 comments) says:

    It would be more interesting if someone could actually write a post about one of our politicians that isn’t ‘confusing’ or has demonstrated they haven’t been ‘confused’ (except for Gerry that is – he seems to have his head screwed on right).

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  34. EAD (1,450 comments) says:

    The real reason the NZ economy has been doing well?

    It is riding on the back of the biggest credit bubble the World has ever seen in China.

    http://www.zerohedge.com/news/2013-11-25/chart-day-how-chinas-stunning-15-trillion-new-liquidity-blew-bernankes-qe-out-water

    I wonder how “strong” our economy would be if we hadn’t borrowed $55 billion against future generations over the past 6 years and had allowed interest rates to be set at a normal level?

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  35. All_on_Red (1,743 comments) says:

    Absolutely right Monty.
    If you produce and supply things that people demand the price sets it self according to the level of the demand. In our case people are demanding our products and pay the price regardless of the level of the currency. Market forces still determine the price, but supply creates demand.

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  36. All_on_Red (1,743 comments) says:

    EAD
    Stimulus is a temporary input to try to create demand and hence production. It is always unsustainable because it is false. True demand comes from producing what people want. That’s the market.
    This discussion is moving towards how Governments for the last 100 years have been Keynesian.
    For a good analysis on how this was a grave error read this by Professor Steve Kates. It’s a good place to start on understanding Says Law as it gives the history.
    I was stunned to see French Socialist President Hollande recently say ( translated)

    “The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply really does create demand.”

    http://quadrant.org.au/magazine/2014/03/dangerous-return-keynesian-economics-five-years/

    Judith, it’s long but it may answer some of your queries

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  37. ShawnLH (6,660 comments) says:

    I get what some are saying about Cunliffe just wanting power, and I think that is partly true. But in this case I really think it is just plain unforgivable stupidity on display.

    The left, on economics, are just plain DUMB.

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  38. Judith (8,534 comments) says:

    @ All_on_Red (865 comments) says:
    March 15th, 2014 at 10:39 am

    Thank you – I’ve bookmarked that and will read my way through it. I did manage to pass an economics paper at Uni years back – solely by luck, I think – so anything that helps to gain some understanding is great – much appreciated.

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  39. kiwi in america (2,314 comments) says:

    Where was Labour from 1999 to 2008 facilitating all these economic ‘upgrades’ Cunliffe spoke of? The value added economy has been a mantra for Labour since my first political involvements as a teenager – they’ve done sweet FA about it. It’s just smooth sounding rhetoric designed to make it LOOK like Cunliffe knows what he’s talking about. And, as others have pointed out, the few ideas that have merit would be vetoed by the Greens.

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  40. beautox (409 comments) says:

    As an exporter of small fairly low value things, few hundred dollars at a time, one thing that consistently pisses me off, and tells me just how serious about exporting NZ is, and that is the unbelievably crap range of services that NZ Post provides. His mate Cullen has really screwed us here, making life almost impossible sometimes. So even after he’s been thrown out of office he’s still fucking us all.

    Why? Well we send lots of small packages all over the world.

    A small package, same sort of size as an envelope, costs around $12 to post to, say, the USA. But this uses ‘hope and pray’ delivery techniques. And a good percentage don’t get there, meaning we have to resend, which of course is money down the drain.

    What we need is a track and trace service. But NZ Post in their wisdom removed that service several years ago.

    So now the only options to send this package if I want tracking is to pay $45 for Economy Courier, which I think is just track and trace email in disguise. And that is not available to many countries, where the only other option is the $70 Express Courier.

    That’s right – $70 to send a small envelope sized package (think pack of cigarettes size), if you want to know that it got there.

    Now compare this to China. I recently bought a small set of kitchen scales from China, mail order.

    This cost me nz$9 including delivery. And that included track and trace.

    God knows how much the postage costs them, but it’s got to be a lot less than $9, as that $9 pays for the scales, packaging and postage. So I am guessing maybe $3 for post?

    So what the Chinese exporters can get for $3, we have to pay $45 for.

    Fucking crazy. If that idiot Cullen ever walks in front of my car, I won’t be wasting brake pads on him.

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  41. EAD (1,450 comments) says:

    All on Red

    I think you are in agreement with me so I’ve given you a greenie. “Stimulus” as you rightly say is false. It creates a demand that is created not by savings/capital being deployed but by demand from the future being bought forward. The benefits are generally concentrated and immediate while the costs are dispersed and occur later through the rising costs of goods/services as they adjust to the new level of money in an economy caused by the inflation of the monetary base. That is why all governments have an interest in feeding people government statistics that tell a story of “low inflation” when in reality the cost of living you actually experience is going through the roof.

    That is why the story of the “rock star economy” is pure propaganda and I should be a natural National Party supporter but I can see through the smoke and mirrors that Governments (of all stripes) confuses people with.

    It’s Act or Conservatives for me as the Nats are no longer a small state party of Liberty and fiscal conservatism – they just look good compared to the Statists in Labour and Greens.

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  42. Bill Courtney (163 comments) says:

    As usual, the inherent bias on this site completely misses the point. Two points: first, Whyte is wrong to assert that the $US price of the goods sold would fall, when in reality an NZ exporter would have to price and sell in $US in the US market. So, in his simple example, the price would stay at US$850 and the NZ exporter receives more on conversion back to $NZ. Whether his bottom line rises, or not, would also depend on how his costs change under a lower NZ$, e.g., do tractor and machinery prices rise and so on?

    But the main point about the rant is that he overlooks the fact that his guru, Alan Gibbs, was extolling the virtues of Singapore only two weeks ago at his party’s (small, but select) annual conference. And what drives Singapore’s monetary policy? Yes, that’s right, it’s the exchange rate.

    There are many ways to skin the cat. Is Singapore flavour of the month, or not?

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  43. Yogibear (375 comments) says:

    It really infuriates me how politicians isolate one part of the workings of an economy and make binary good/bad statements.

    Yes, a high dollar at a point in time makes selling our goods overseas relatively more problematic than when we have a low dollar.

    It also makes investment in plant and equipment relatively less expensive (as much is produced offshore), which in turn increases our productivity by dropping our input costs and making us more price competitive.

    Just let the economy do its thing, the smart businesses always respond to the right incentives.

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  44. jcuk (756 comments) says:

    Once upon a time the NZ dollar bought two US dollars c1930-1940’s. I know this becuase five shillings was called a dollar in slang and you got four of them for a UKPound …. Various comments above have helped me to understand how this was good for the UK and NZ though I remain puzzeld at all the belly aching about the “high NZ dollar” which currently is very low compared to those days.

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  45. All_on_Red (1,743 comments) says:

    No worries Judith, I must admit I had to read it a couple of times to “get” it!
    I reckon every politician should be made to read it.

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  46. ShawnLH (6,660 comments) says:

    And the award for commonsense comment of the day goes to Yogibear.

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  47. Ross12 (1,484 comments) says:

    Bill

    What you saying is correct if the exporter keeps his current sale price in US$s but what Whyte is arguing is if the exporter wants to sell more he has to reduce his US$ price and with a lower exchange rate he can afford to do that without reducing his margin so he makes more profit from higher sales.
    In reality what probably happens for most exporters is somewhere in between the two cases.

    beautox

    You are obviously selling online. I hope it is going well for you. I have had similar gripes with NZ Post. I sent samples recently to the USA and paid for Economy Courier so I could get tracking. The samples did not arrive so I went onto the tracking system.
    It had not even been entered into the bl…dy system so no way could they find it.
    If NZ Post want to move with the times they need to reintroduce the tracking on normal postage otherwise someone will do it competition on the international scene. ( NB. for Korea there has been a cheaper courier service run by an independent for sometime)

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  48. All_on_Red (1,743 comments) says:

    Shawn/ yogi
    The way I look at it is that the lower cost of machinery enables a lower cost of production which can either increase profitability and/or enable prices to be more competitive.
    These things assist in determining whether an exchange will take place between producer and consumer but at the end of the day , even if you are producing and supplying, if there are no consumers, then you have nothing. You still have to produce what people want. If you do so, demand will follow. Supply creates it’s own demand.
    The market at work.
    Read that article.

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  49. backster (2,196 comments) says:

    ” Labour wants to “support New Zealand business in the journey from volume to value”.

    So they will bring electricity pricing under state control, increase business taxes, implement a carbon tax,increase personal income tax, and add a capital gains tax on assets and savings.

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  50. bhudson (4,741 comments) says:

    ” Labour wants to “support New Zealand business in the journey from volume to value”.

    Which also misses the point that you can do both.

    Except that Labour are opposed to foreign investment that enables that.

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  51. Anthony (768 comments) says:

    One problem is NZ does rely on the savings of foreigners to keep the economy going. But part of that is because NZers are taxed on the interest they earn (so making saving less attractive) while we have a scheme to let foreigners pay no tax on the interest they earn!

    I would suggest removing the tax on interest and also making interest payments not deductible for tax purposes. That would make saving more attractive and gearing up to avoid income/company tax less attractive.

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  52. Matt Long (90 comments) says:

    Bill is correct and Whyte is offering poor logic, a fall in the NZ $ results in higher NZ$ prices for exporters delivering Cunliffe’s goal of high value over volume. A lower dollar is also inflationary so for the non tradeable and consumer parts of the economy represents a fall in wealth.
    Despite the admirabl aim of balancing the economy toward production and the tradeable sector by Bill English governments will always pander to soft votes of consumers delivering high interest and exchange rates.

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  53. davidp (3,585 comments) says:

    KIA>The value added economy has been a mantra for Labour since my first political involvements as a teenager – they’ve done sweet FA about it.

    Mike Moore was promoting the ideas of selling lamb burgers rather than lamb, and that was back in 1985 or so. It was a huge success… you can go in to a MacDonalds or Burger King anywhere in the world and purchase a Mike Moore NZ lamb burger.

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  54. trout (954 comments) says:

    ‘All on Red’ keeps repeating the mantra ‘supply creates its own demand’. He should look at the State controlled economies where supply is maintained, regardless of demand, to maintain production and jobs. (I am reminded of the Russian factory that produced tanks for which there was no demand; after production they were scrapped, the steel recycled into, you guessed it; tanks. It is axiomatic that without demand (at the right price) there is no justification for supply.
    The fact is that in our miniscule economy the politicians have very few levers available to manipulate outcomes; all we can hope is that we can stave off the hits that come our way from overseas and not be damaged in the process. Bill English deserves congratulations for keeping the NZ economy on an even keel in very rough seas. There is so much complacency in this country (mainly from unproductive tenured academics and glib commentators).

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  55. Simon Arnold (102 comments) says:

    Bill Courtney at 10:59 am

    “.. what drives Singapore’s monetary policy? Yes, that’s right, it’s the exchange rate.

    “There are many ways to skin the cat. Is Singapore flavour of the month, or not?”

    No, Singapore’s monetary policy is driven by price stability. The exchange rate is used as an intermediate target, and the target band is moved to reflect the primary goal.

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  56. All_on_Red (1,743 comments) says:

    Trout
    Wow, you have missed the point big time. Read that article and you might understand. You should only supply goods where an exchange between supplier and consumer can occur.Supplying goods no one wants is not a market economy.
    But by supplying what people will buy, then that supply creates demand. It may be that the market didn’t know they wanted the goods until supply started.
    Get it?

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  57. lolitasbrother (774 comments) says:

    Cunliffe is certainly edging toward NZ First, in a deliberate attempt to relive himself a little from the Australian communist, and the average New Zealanders revulsion for Norman..

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  58. Fentex (1,136 comments) says:

    A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods

    Not a good way to encourage substituting value addition for volume then.

    Directly manipulating currencies is probably stupid because odds are you’re just shifting transactions around – trading currency levels for inflation levels and merely diddling with the relative levels of income and outgo. It’s also an idiotic game to play in markets with participants with a lot more cash.

    But that doesn’t mean government policies don’t have an important say over exchange rates. Central banks, lending and borrowing, and interest rates that control and influence money creation and flow are very relevant and policies regarding them can, and should, distinguish political parties.

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  59. SPC (5,665 comments) says:

    DPF,

    Cunliffe says “Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.

    Your translation “Labour is campaigning for higher inflation and price increases for everyone” is a presumption.

    What he said could simply mean that other tools to constrain inflation than just raise the OCR could be provided to the RB Governor.

    Of late there has been the new requirement that most of the home loans meet a 20% deposit criteria – and some years ago Bollard called for the option of a surcharge on mortgages (to dampen down house inflation without impacting on the OCR and dollar value). At the time Bollard made the suggestion a cowardly Bill English (frightened of angry home owners and property investors perhaps) said it was (too) courageous for someone like him to implement. Far better for the RB Governor to raise mortgage cost than a more vulnerable politician.

    The irony – the OCR will go from 2.5 to 3.5% over the next year in 4 instalments – the dollar will go to $1 Oz and 90 cents USA and export earnings will decline (and so will the tax take). Bollard’s option would have allowed a surcharge rising from .25 to .5 to .75 to 1.0 over the year – and this would raise $2B pa in tax at the annual rate of 1.0% of the mortgage. Homeowners would be no worse off than with the OCR rise but the government would have over the following year $2B extra in revenue. $1Bpa to repay debt without selling assets and $1Bpa for the Cullen Fund (Cullen English Fund once some deposits are made by National).

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  60. DJP6-25 (1,390 comments) says:

    As someone observed on another blog: Collins made a mistake. Cunliffe is a mistake.

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  61. Jim (358 comments) says:

    “No, Singapore’s monetary policy is driven by price stability. The exchange rate is used as an intermediate target, and the target band is moved to reflect the primary goal.”

    Correct. Whereas RBNZ’s main control knob is the OCR, in Singapore MAS has the exchange rate band. That makes sense given that Singapore is all about trade and not domestic consumption:

    @Bill Courtney – look at the current account balance and trade to GDP ratio:
    http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=SG
    http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=NZ

    If Cunliffe or anyone thinks they can target the exchange rate at the same time as OCR and inflation then they are economically illiterate.

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  62. Simon Arnold (102 comments) says:

    SPC

    There are no simple answers. The idea that you could simply impose a tax to dampen demand for (presumably new) mortgages and control inflation and bank the proceeds is attractive to blog commentators and on the hustings, but surely you can see it would, just like the OCR going up, have other impacts? Look at the other side of each of those transactions for the negative effects.

    In the end the economy tends to get the exchange rate/inflation rate trade-off it deserves. The way to high growth is through the hard-yards of productivity improvement, and that involves micro-economic reform. If you artificially limit the supply of land you get higher than average inflation, if your building industry is inefficient you get more expensive housing, and if it get difficult for those looking for houses to shop around for mortgages and houses you reduce the pressure on producers to become more productive.

    Read what the Productivity Commission had to say about this http://www.productivity.govt.nz/inquiry-content/1509?stage=4

    This the place to focus your attention.

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  63. Sir Cullen's Sidekick (900 comments) says:

    My economic principle is very simple folks – TAX AND SPEND. I will tax the hell out of you and spend like no tomorrow – Cunliffe PM & Norman Deputy PM and Finance Minister of NZ Nov 2014 – Sep 2023.

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  64. Anthony (768 comments) says:

    Just ignore SCS, don’t bother giving him a down tick – as someone said the other day – the joke ceased being funny after about the third post!

    BTW, my prescription of no deductibility of interest would lower demand by property investors and push down house prices. Would not change the supply of houses though as property investors just buy existing houses – they don’t build new ones!

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  65. SPC (5,665 comments) says:

    Anthony, I don’t accept no deductibility of interest as a blanket policy – those who pay CGT on their property investments (as companies do) should be eligible for interest cost deductibility (as companies have).

    A regime where those claiming interest deductibility were required to pay CGT would be appropriate.

    In terms of rental property

    1. don’t allow transfer of loss on rental property against other taxable income.
    2. set a minimum rate of 33% deposit for rental property loans.

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  66. Anthony (768 comments) says:

    Only traders pay a CGT because then what they are earning is more in the nature of income – certainly not most companies that own property don’t pay a CGT. Bob Jones doesn’t pay a CGT for example.

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  67. SPC (5,665 comments) says:

    Anthony, individuals that are deemed to be buying and selling property for profit are traders liable to tax on their CG. But any company that owns property and sells it at a profit on purchase price also pays tax on that profit.

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  68. Anthony (768 comments) says:

    Sorry, SPC but you are wrong that companies automatically pay tax on capital gains – I used to work in tax policy and there is no such rule.

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  69. Harriet (5,200 comments) says:

    “…..Only traders pay a CGT because then what they are earning is more in the nature of income….”

    It depends on who is calling who a trader. The tax office decides.

    In general – to stop people from tax evasion – in Aus if you hold shares in a company for more than 365 days you are then only taxed on 50% of your profit. The other 50% of profit is tax free. These people are classed as investors. I don’t know if this is the case in NZ.

    However there are some better tax advantages to being a trader as opposed to an investor – at tax time!
    People who sell within 365 days are not nesseceraly ‘traders’ – some simply sell their shares because they are losing money – and will then say they are ‘traders’ so that they can the write-off their losses in that tax year against their profits to minimise their tax obligation.
    [in short, if their shares are doing badly at tax time they sell them – then they say they are a ‘trader’ and write off the losses – and if their shares are doing well they then hold them – and then say they are an investor and defer their gains.]

    So the Tax Office test to decide if you are an investor or trader is largly looked at from the point of view ‘what is the pattern of their investments’. Generally if they are short term then you are a trader. So simply saying you are a ‘trader’ is not good enough. However you can be classified as a trader with longer term trades.

    The ATO and NZTO[I am presuming the NZTO do – as I live in Aus.] will go back over a year or more and look at your trading pattern to stop people from switching styles to get tax benefits. Cheers.

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  70. SPC (5,665 comments) says:

    Anthony, gain on the sale of a company owned property is part of their taxable profit – profit taxed at the company tax rate.

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  71. Anthony (768 comments) says:

    I agree Harrient, it depends on the pattern of trading. A property investment company that holds property to rent out but makes occasional adjustments to its portfolio (by buying and selling) would not generally be treated as a trader.

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  72. slijmbal (1,236 comments) says:

    @SPC

    “Anthony, gain on the sale of a company owned property is part of their taxable profit – profit taxed at the company tax rate.”

    not if bought as a capital item with no intent of selling for income/profit. You see capital gains not taxed in companies all the time. I have had this confirmed by the IRD (via an accountant) for a transaction I had involvement in.

    Anthony is correct.

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  73. SPC (5,665 comments) says:

    Anthony, it would not need to be treated as a trader as any profit made by a company is taxed, including gain on the sale of property.

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  74. SPC (5,665 comments) says:

    slijmbal, if the company is a property investment company I doubt that the property would be regarded as a capital item in that sense.

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  75. Harriet (5,200 comments) says:

    “….not if bought as a capital item with no intent of selling for income/profit….”

    True, land lasts forever where businesses don’t, so most companies don’t hold property within the business, they can then also borrow against the land at a later date – for the business, or sell it whenever they suit. Most may stay within family trusts ect.

    And why this happens is because the government say they will get rid of red tape to help businesses – they do, and fair enough as the ‘voters’ want that – and big business with all it’s resouces and paid advocates can then ‘wage a silent war’ to get their ‘wants’ done first, which then becomes a public matter for a year or two, then the next election comes around and the process starts again – and like in this case it is mostly for the ‘wealthy’ – while small business owners have to compete with an ever increasing amount of council red tape, permits, applications, application fees, codes, consultation process ect ect.

    I’m not against big business at all as they don’t do too much wrong, and they ARE reasonably well regulated in ALL their company areas when one thinks about it – it’s simply that government doesn’t listen to small business. Mr Craig is though.

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  76. slijmbal (1,236 comments) says:

    @SPC says

    “slijmbal, if the company is a property investment company I doubt that the property would be regarded as a capital item in that sense.”

    but that’s not what you started out with as you said …

    “Anthony, I don’t accept no deductibility of interest as a blanket policy – those who pay CGT on their property investments (as companies do) ”

    Which is incorrect. You are being disingenuous (deliberately) I feel.

    Any investment company will, by definition, be subject to tax on capital gains as its purpose is to make gains via a mix of capital gains and income. You are correct in your later statement but that was not the thrust of your earlier statements.

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  77. slijmbal (1,236 comments) says:

    Anyway, back to Cunliffe’s waffle.

    Sadly, he knows he’s talking s**t but that’s not the point. He’s a millionaire pretending to be a socialist so he can become Prime Minister – exceedingly selfish really and somewhat sociopathic.

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  78. Anthony (768 comments) says:

    Harriet, what makes you think Mr Craig is sympathetic to small business? The only party I see strongly advocating getting rid of red tape is Act.

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  79. SPC (5,665 comments) says:

    slijmbal, the two comments are the same, the topic was property investment which is by either individuals or companies.

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  80. OneTrack (3,362 comments) says:

    scs – “My economic principle is very simple folks – TAX AND SPEND.”

    Dont forget the other section in the lefty playbook – REGULATION.

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  81. OneTrack (3,362 comments) says:

    “Anyway, back to Cunliffe’s waffle.

    Sadly, he knows he’s talking s**t but that’s not the point.”

    So he is a fraud and not an idiot? Idiot seems more likely based on the last few weeks.

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  82. igm (1,413 comments) says:

    ross69: Waffle once again from a failed academic, unemployed, no history of commercial success, yet knowing everything about financial matters . . . must be related to “Tojo” Cunliffe. Why don’t you keep to your rainbow room.

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  83. Harriet (5,200 comments) says:

    “…..Harriet, what makes you think Mr Craig is sympathetic to small business?…”

    He has said so.

    He has also said a large proportion of his membership are self employed.

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  84. prosper (172 comments) says:

    What is this supply creates demand. Is this a new thing being taught at Uni.

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