By John Walley*
In a world of currency manipulation in other countries the argument that we can do nothing with our currency is disingenuous at best.
The simple fact is our politicians and Reserve Bank officials are choosing to do nothing.
That choice threatens our very future as that future is built around export success, not just export success in the sale of dairy products, but export success across the board.
A distinction must be made between currency intervention at the top and bottom of the exchange rate cycle.
Bill English commented earlier this week that New Zealand would need US$200 billion ‘in the bank’ to effectively manage the exchange rate; extensive currency reserves are only really needed to hold up the value of a currency.
The fact is there is no limit to the intervention possible if it is aimed at devaluing the currency.
Selling New Zealand dollars to foreigners expands our foreign currency reserves and we should make money if successful.
Intervention aimed at holding up the value of the currency is limited by foreign currency holdings; that should not be used as a justification for not intervening at the top.
This quote from Business and Economic Research Limited’s October Monthly Monitor sums up the situation:
“On the grounds that New Zealand is too small to move ‘the market’, our authorities have traditionally opposed intervention notwithstanding the fact that sterilised intervention is a long established concept in finance literature and widely implemented around the world. Of course, it can run into trouble when authorities are trying to maintain an over-valued exchange rate, without adequate foreign currency reserves with which to intervene.
But when the intervention is to prevent over-valuation, the only limit is the supply of a central bank’s own currency. This is not a problem for a truly independent central bank that is not facing inflationary pressures. When countries as small as Mauritius are intervening to stabilise their exchange rate and are being complimented on it by the IMF, one wonders why the New Zealand authorities think it is beyond them.”
The issue here is the potential inflationary impact and the ability of inflation control mechanisms, fiscal and monetary, to deal with that impact. This argument gets back to the inability of current monetary and fiscal policy instruments to deal with domestic inflation.
Earlier this decade monetary policy failed to restrain inflation in the non-traded economy, the OCR response simply attracted yet more speculative money into New Zealand and that money fuelled our domestic asset bubble – it was easier to borrow the money than earn it and the policy tools chosen did nothing to restrain inflation in the domestic economy.
On the other hand, the ever higher OCR succeeded in lifting the exchange rate, killing exporters and lowering the cost of imports, so at a headline level inflation was within the RBNZ’s policy band.
We can do better.
A quick look at the performance of the Monetary Authority of Singapore demonstrates that it is as much about what we choose to do as it is about what others choose to do.
There is no doubt that there will be a cost involved, but doing nothing and simply letting our exporters suffer is a much higher cost that we cannot sustain. We can do nothing about gravity; monetary and fiscal policy is not an immutable, it is a matter of choice. Singapore has recognised it is an export dependent economy and has strategically aligned its policy and institutions behind that export dependence; New Zealand policy makers have chosen to bias the economy towards consumption and debt.
That makes a mockery of the talk around economic rebalancing, job expansion and an export led recovery.
*John Walley is the Chief Executive of the NZ Manufacturers and Exporters Association (NZMEA).
No chart with that title exists.
24 Comments
"Singapore has recognised it is an export dependent economy and has strategically aligned its policy and institutions behind that export dependence; New Zealand policy makers have chosen to bias the economy towards consumption and debt."
Before anyone opposes on the basis that we don't have a political system and culture like Singapore and therefore cannot do exactly the same as them - so what, we don't have to do a direct copy to get the same kind of results and could do things well within the bounds of our kind of political system and culture. The lesson, as always, is that it could be done, there are no technical impediments to solving this problem for NZ, it's something else - tell me what it is?
Cheers, Les.
Singapore is also not much of a democracy....
If anything their policy of Govn building up cash reserves in the good times? and having it there to use in the bad would seem far more keynesian....
For me saving in the good to make life easier in the bad seems a sensible and normal approach, but oh now we have "spare" taxes so lets give it back........in the bad tie we then have to borrow and then are beholden to those ppl.....just look at Ireland.....the Govn is frightened to do some haircuts becasue everyone would run and no one would buy their debt.....its their own stupidity....
I kind of lose patience with such ppl who wanted less taxes then but now want intervention....cant have both, you cant cherry pick the different bits you like out of various economics practices and expect it to work as you go along on the fly.
Im all for taking a look at Singapore's but indeed Asia and how they have coped....they seemed to have learned from the last crisis and taken action and are now in a viable/enviable position....we one the other hand have not and dont seem to be....
Why worry about the USD/NZD? why not say Asia has the same issue as us so the asia/nz exchange rates will change little, export there....
Instead of whinning get on and do it yourself.
regards
The problem with this piece and the comment from Les above is that being like Singapore means BEING like Singapore - I'm not sure that there is any political consensus for the type of policy options being like Singapore really means...
Rather than this bleating on about why NZ has it so wrong could either gentlemen please enlighten us on what these policies are and what change they would mean for the economy and populace.
I'm not unsympathetic to emulating Singapore's more hands-on approach as clearly our policy of the last 25 years has failed spectacularly.... but, are Kiwis ready for a compulsory savings scheme like their CPF where the combined employer/employee contribution is 35.5%? To me this is an essential element of their strategy that gives them control over their currency, our huge longrunning deficits and subsequent massive debts to offshore leave us much less wiggle-room to manage the currency through the cycles.
Walley makes a point, why not print some money and buy US Treasuries? (Everyone else is doing it!). Of course to be on the safe side you will need to buy some of our own Government Bonds too, just to make up for a little nervous selling by foreign investors.
Now if you get the balance right, what could possibly go wrong? You'll have a stockpile of US currency to sell if the dollar gets too low, but best of all if no one notices you'll have a massive pile of foreign cash to repay foreign debt, all without having to earn it! Budget deficits gone, nothing to worry about!
It all seems to good to be true, rather like one of Dilbert or Wally's schemes!
"Everyone else is doing it!"
This is my vote for quote of the day. The rules have changed - ignoring this fact is not only blind, but foolish and possibly ultimately disastrous.
Sooner or later the NZ$ is going to get caned again (perhaps after the manufacturing sector has completely expired). This will be very painful (we are a net importer of oil and manufactured goods remember), unless we actually have a bit of ballast in the vault to stop the market going completely rabid on us. Not sure treasuries are the best assets out there - wuld prefer gold/platinum and a basket of bonds from healthy countries are a little less capable of "doing whatever the damn well like".
Other successful economies... did we get beyond Singapore? Meanwhile, on Jeckyll Island, fighting breaks out
http://dailybail.com/home/fed-fight-over-qe2-at-jekyll-island-video.html
What NZ should or could do is somewhat irrelevant to a degree...
Because in NZ our fearless leaders are doing nothing, and by doing so the country is heading for a massive hole.
Brilliant, I am so psyched about the leadership of the country. When did NZ last have real leaders, because its frankly bloody pathetic!
When did NZ last have real leaders ? ............ Put that question to Iain Parker , he's the resident expert on political history ........... If he goes back far enough , should find a name or two to satisfy your question ............. Meebee if he has records into the 1800's ........... Perhaps then ............
When was the last time NZ (or damn near any leader in any country putside ones like Hitler) ever 'reconised' a fearless leader when they have been in power and not in retrospect?
Is this really the time we need a rabble raising , desk thumping politian at the helm, or one that quietly digs up free trade acreements, quietly chooses his timing?
First of all there is absolutely no reason for a Government to borrow money. The only reason that a Government would need currency other than it's own to spend is when it wants to buy things for itself in currencies other than it's own. Reasons that other countries need to spend in other currencies is if their government is getting adventurous and would like to buy weapons or build infrastructure. Neither of these two scenarios should (or need) apply to us.
When the government issues a promissory note it's doing so on behalf of it's taxpayers, it doesn't need to do this as it can simply issue currency, it's own zero coupon promissory note, simply by buying it's own treasury debt.
If a Government could satisfy itself by spending only in it's own currency then there would be no need for it to issue debt.
Debt it has already issued can be bought by the reserve bank and this will drive it's currency down.
The Government therefore has an infinite capacity to drive down it's own currency, simply by printing money.
Bill English talks about the Aussie RB “losing” money on their currency interventions. If he really believes that a RB loses money when all it “costs” is the cost of printing the stuff in the first place then he's either “in” on the “banker’s conspiracy” as Iain would have us all think, or maybe he just simply doesn't get it.
Remember the statement (along the lines), “even if people “get” it they will be so interested in making money out of our scam they won't object, and those that do get it can easily be discredited”.
Sure the RB can sell it's own currency, buying another, and the paper they buy can still go down in value and there's the belief that currency intervention is impossible. Not only that when you have sold more of your own currency there's more of it around outside the country meaning that someone can swoop in and buy our assets more easily (bad) or our goods (good). That's why capital controls need to be in place at the same time.
Surely the writing is on the wall. The US$ is one day no longer be the world's reserve currency, this is a conversation that should have taken place in 1971 when Nixon took the world from the Gold standard. Our Government should be buying US$, and converting it to gold, no matter what the price. Like China does, our government should be buying the entire gold production of the country.
It's a simple question. Why does a government need to borrow when it's debt can be interest free fiat cash sitting in the pockets of the people it has been borrowed from. A fiat note is a zero coupon bond.
John A Lee - also wrote The Shiner. Worth a read.
Generalities are nice, but this article would be more useful if it gave some indication of -
- what 'appropriate' exchange rate the RB should aim for and why
- how many NZ dollars would have to be sold to get there and over what period
- whether those dollars should be acquired through taxation or printing
Excellent questions , Mark . Your answers , John Walley ?
" Selling New Zealand dollars to foreigners expands our foreign currency reserves and we should make money if successful " ......
.......... Now I'll ignore the blithering idiocy of " expands our foreign currency reserves " ............. But focus on the even stupider bit , " and we should make money if successful " ........... If we're clever than Australia , Japan , or Switzerland , whom have blown a bundle of their tax-payers munny , on currency intervention , and achieved nothing tangible in return ? You want us to join the gambling tables of the professional FX traders , John ?
Pop into Rudd's office and get a much needed lecture on " TINA " and " TARA " , John !
There is no doubt that one of the legacy's of the GFC will be a much wider , and healthy debate about the appropriateness of what were assumed to be optimal policy frameworks for all economies , including NZ's . Likewise there is no doubt that an outcome of those discussions will be an expanded policy toolbox , certainly relative to the conventional policies that dictated during the 'great moderation' .
It would be a mistake , however , to get caught in the moment in demanding that the Government / RBNZ do 'something' to address the drag the currency is providing to our fragile recovery . It would also be a mistake to assume they are doing 'nothing' . In recent weeks , eg , the Govt looked at an Export Industry that was built on subsidies , with dubious economic viability and decided to support it with further subsidies . As an economic decision the choice to support the Hobbit was a questionable one , but as a political decision there was a huge utility value .
Neither has the RBNZ been dormant . What looked like a steady cadence of rate hikes through 2010 and into 2011 is now evolving into a prolonged period on hold . People also tend to forget that process of optimising monetary policy is a dynamic one , taking into consideration all of the issues that people have raised in this thread . Go to their website and trawl through research papers and bulletin articles to see what i mean . The currency has not been ignored .
None of which is particularly satisfying , but neither is the economic reality we face .
In 2009 the global policy space engaged in an unprecedented exercise of co-ordination in working to stabilise a financial system that had tipped itself into administration , whilst pulling hard on monetary and fiscal levers in order to limit the damage to the real economy and promote a recovery . As it turned out that policy framework actually provided a significant tailwind which meant we all came into 2010 in better shape than what looked like would be the case in early 2009 .
The policy peloton , however , was also always going to fracture once it faced back into the wind , especially in the absence of a 'self sustaining' global recovery . And that is what we now have to deal with. The desired handover from public sector to private sector activity has not occured in a timeframe we all wanted as the impact of the balance sheet recession in many developed economies continues to weigh heavily . That bit is obvious to every New Zealander .
What we had hoped , of course , was that the terms of trade impulse from Asia would mean that our aspirational goal of looking more like Australia would now come to pass . Instead it increasingly looks like the best that we will get is that Asia proves to be the thing that stops us looking more like the US and UK . In other words , we muddle through .
Which also means that we remain sensitive to things that add to the headwinds we might be facing , including a currency stretching the bands of tolerance in respect to assessing its value 'relative to fundamentals' . In a world that is demonstrating a greater tolerance for capital controls as part of that expanded policy debate it would be easy to slip into a 'me too' mode .
Unfortunately those are also periods in which policy mistakes get made . NZ is not an emerging , managed economy so reimposing capital controls would impose distortions and costs that people could ultimately come to regret . Brazil's actions , eg , which are likely to be repeated in Korea once it is clear of its G20 hosting obligations , have provided a marginal benefit in terms of relieving pressure on the exchange rate but at the very real cost of a series of failed bond auctions . I'm not sure that Bill English or the NZ public are ready for the reality of a global financial system that says 'ok , go fund yourself' . Or put it this way , do we really believe that a 'helping hand' to the export sector can currently be accomodated by a heavily indebted household sector asked to wear higher mortgage rates as the offset ? It accelerates our rebalancing for sure , but without the guarantee of an aggregate lift in activity .
Likewise , NZ is not Singapore in terms of the construct of our respective economies and the reasons why a managed float works there are also the reasons why it would not work here . There is plenty of economic history that shows that a mix of a managed exchange rate , an open capital a/c and a monetary policy framework oriented to domestic objectives is regarded as the 'impossible trinity' . The failures have been quite spectacular .
So the way I look at it is that we should absolutely protest the ccy pain , as Bollard did yesterday , with the objective of trying to influence the atmospherics around the exchange rate . We also have to accept , however , that if we want to remain integrated within the global economy - with continued access to trade markets and capital - then there is a degree of waiting for the two big engines , the US and China , to get themselves sorted .
That doesn't mean we don't have an active policy debate , but set that discussion against a test of what has worked and not worked for this economy over a period of years , rather than what's needed in the next few weeks or months . I suspect people would find that what has failed NZ is not an inappropriate monetary policy framework or exchange rate policy , but rather the fact that we lost the will to continue reforming our economy . That was a function of having gone too hard in the late 80's but is also the path we need to find a way to get back on .
Which all means that Goff and Cunliffe would be of much greater service to the NZ if they stopped for a moment to ask why it is that Blanchard had disappeared from the list of those in the running for Chief Economist of the ECB , and then refocus on the more meaningful advice that is out there in differentiating their vision for the economy from National's more restricted , and ironically , IMF mandated template.
Let's face it , in 2011 the Government is slated to start taking the punch away from the fiscal table , China will be further down the path in exiting from their crisis era policy stimulus and the US will be still be plodding . That is when we will need thought leadership that reaches beyond the 'circle the wagons' mentality that dominates these postings .
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