By Bernard Hickey
Thinking of buying a flat screen television this weekend?
Planning an overseas holiday?
Wondering if you should employ more people for your export business?
Thinking of producing something that competes with imports?
Wait for a bit because our currency is set to become a lot more powerful for importers and disastrous for exporters, and those who compete with importers.
The New Zealand dollar seems set to rise towards US$1 if the current trends continue. That seems an outrageous thing to say, but consider the evidence presented this week.
The US Federal Reserve announced an essentially unlimted plan for money printing on Friday morning. It pledged to print US$40 billion a month and buy US mortgage bonds until unemployment was reduced to an unspecified level. This money printing, on top of more than US$2 trillion worth of money printing between 2008 and 2012, has already devalued the US dollar substantially and looks set to push it lower still against those currencies that aren't printing money.
Immediately after the announcement the New Zealand dollar rose to a six month high of over 83 USc, despite commodity prices being 11% below where they were 6 months ago. It has also risen to almost 79 Australian cents in the last week as signs emerge of a slowing Australian economy. Economists are now expecting the Reserve Bank of Australia will cut its interest rates through 2013, while our interest rates remain on hold until late 2013, when they are expected to start rising.
This would put even more upwards pressure on our overall currency measure known as the Trade Weighted Index (TWI), which is also near a 1 year high.
All this is happening as the world's other big central banks are also stimulating and devaluing in an unlimited fashion.
This month the European Central Bank unveiled its own programme of unlimited bond buying. This is the 'Big Bazooka' that many had been hoping for to save the Euro-zone and try to stimulate the Euro-zone economy. This too is devaluing the Euro vs the New Zealand dollar, which has strengthened 64% vs the Euro since March 2009.
No wonder new BMWs, Audis and Mercedes seem so cheap right now compared to Holdens and Fords.
Even the Bank of Japan, which has been printing and stimulating with 0% interest rates for almost 20 years, is considering fresh money printing to try to drag its yen lower. The Swiss National Bank has been printing francs in unlimited fashion for months to cap a rise in its currency against the euro. The People's Bank of China is also on the verge of its own fresh stimulus.
Think about this for a moment. The rest of the world is printing, stimulating and cutting interest rates to protect their own economies. They are all engaging in beggar-thy-neighbour competitive devaluations to stay alive.
Yet we are standing aside from this giant game of musical chairs and scratching our chins, wondering why the world is so unfair. We point to the skies and say there is nothing we can do about this bad economic weather.
All this chin-scratching and finger waving in the air is having very real world consequences. In recent weeks we have seen hundreds of job losses at Tiwai Point, Spring Creek, Huntly, Kawerau and at a fish processing plant in Tauranga. The Reserve Bank's own Monetary Policy Report noted a slump in manufacturing, particularly the import-competing type in the last year.
Just imagine how much of an export sector we will have left with a currency at US$1. Just imagine how cheap the iPhones will be. Just imagine how much we can borrow to buy those iPhones with our strong currency.
Meanwhile outgoing Reserve Bank Governor Alan Bollard reiterated in his valedictory news conference and parliamentary appearance that there was nothing New Zealand could do about these acts of economic gods.
When has New Zealand believed it was so helpless on the world stage? This inability to fight for our own economic corner shows a lack of strategic nous, an incredible naievety and a stunning lack of confidence in ourselves.
This unwillingness to fight our own corner is a national act of stupidity we will reget in years to come.
But at least the iPhones will be cheap, eh?
56 Comments
No Bernard, you are barking up the wrong tree.
The Central Bank (RBNZ) is much smarter than you think.
If the Kiwi Dollar keep rising, more and more foreign capital will be attracted into our fair shores and then into our fairer properties (actually pretty lousy properties, but that is not that point).
Our exports than gets sicker and sicker and our external debt gets bigger and bigger.
All this is predictable. We only cannot predict that point of implosion when this whole bubble of excessive debt and high property prices collapses. Then there will be massive default, bankruptcies, unemployment, but most importantly, our NZ Dollar will be massively devalued and our banks will default on their overseas borrowings.......We are taking the foreigners for suckers !!!
How's that for a strategy ?? Great huh ??
I thought he just swapped treasuries for mortgage bonds and would continue to do so in order to get the Banks confident to lend. Am I wrong? But what about the borrowers? If they are not borrowing all the will or desire for the Banks to lend will lead to naught. I would prefer Steve keen's debt jubilee with all it's accompanying regulations. But back to the point if the Government started printing to spend on building infrastructure that would achieve both goals - lowering the exchange rate and helping the economy. The ridiculous idea that somehow if the Government stops spending at the same time private industry does then the biblical loaves and fishes will occur is stark raving
The preview of economic consequences depends on your view of what the most important issues are that need to be decided (in terms of economics). Let me list my top ten. 1. The Deficit 2. The Deficit 3. The Deficit 4. The Deficit 5. The Deficit 6-10. Everything Else
http://www.mauldineconomics.com/images/uploads/pdf/mwo091512.pdf
Gibber - don't sully utopia with details - we haven't even decided upon an asset class that the RBNZ would find suitable to monetise and available in large enough publicly traded quantities to undertake this nonsense in a tiny rounding error, derivative currency such as our own.
Maybe you and I could toss a few ideas about amongst this motley selection ? - you must keep in mind the ability of the punters to repay the debt so the taxpayer doesn't get lumbered with the end cost of default - a tough call when one considers NZers are one of the most indebted nations in the world on a per-capita basis - we make the Greeks look positively frugal.
The cost of keeping this mob on the payroll presents a serious liquidity problem when multiplied many times throughout the country:
The draft report contains several other revelations on council pay packets - 123 staff at council or council-controlled organisations are on $200,000 or more, and 1165 staff members are on $100,000 or above.
Stephen,
thanks for the reply.
I'm wondering just how Bernard proposes the money printing operation is meant to operate. And whether it would be unfair and inequitable, like Bernanke's, which seems to benefit the banks first and no-one else second. Or might be more along the lines of the Australian Government which gave $ to everybody who had put a tax return in over a particular tax year (and regardless of whether they were still alive or not).
Bernard keeps banging on about printing.
But he doesn't do any meaningful analysis of who would LOSE when printing happened. (There is *some* opinion given as to some of the winners.) But who would LOSE, and HOW BADLY, and FOR HOW LONG, would be dependent on HOW the new $s were allocated.
Just wondering at the detail.
Right you are - we need jobs and wage increases to go with them to be able to liquify our liabilities before we create more - witness the US - even money in the hand is not valuable for long - we cannot survive as domestic beneficiaries of local funny money - we do need to exchange it for needed foreign goods without towing wheel barrows around and we are not a world force in the military sense which enables others to force such exchange.
None of it might matter if this guy's view on TPP pans out as expected:
A secret trade agreement is designed to prolong trade secrets, not free trade. It has the capacity to operate above national laws, and use flimsy excuses to snuff out local competition. The Slog investigates the Trans-Pacific Partnership.
I don't get it. As I recall back in the Muldoon/Lange era didn't we just announce a devaluation? Granted, we are now a floating currency but does that somehow prevent us from inventing some clever way of manipulating to counter the manipulation of our dollar? How do China manage to peg theirs - can't we do that? Surely there must be alternatives to his notion of "printing"? I read some discussion somewhere of this idea that he US might announce that at some future date they'd go from a greenback to a redback - to flush out expenditure of the piles of USD notes out there stored under matresses etc from ill got gains - a "stimulatory" mechanism which the government doesn't need to "print" for. Granted we are not dealing with that same problem, but the point is - "printing" (as the world is doing) is 'doing the unthinkable' (so 'unthinkable' that "helicopter" got his name in jest initially) so what are our "clever" ideas to do the unthinkable? In war the greatest strategic advantage is the element of surprise.
"Greenback to Redback (I can here the Republican screams from here)", is why you quietly pay cash for gold and silver and keep it yourself. That will happen sometime in the next decade Im sure. NB Much of the US currency is abroad, in effect a call on the USA economy so it will make sense to change to wipe that debt out if for no other reason.
Printing is only un-thinkable for the right wingers who believe in voodoo economics. Otherwise its classic keynesian economics to print or Govn stimulate at the zero bound trap to stop a depression happening, which if it doesnt petrify you, it should.
In war the biggest strategic advantage is sufficient superior enough technology.
regards
So what do you think of the merits or otherwise of Peters' members Bill, Stephen?
And why oh why hasn't interest.co.nz done an article on this - summarising the BERL report as well? Or have I missed it?
Links to Bill amendment text and the BERL report here;
http://nzfirst.org.nz/news/all-new-zealanders-will-win-our-reserve-bank-overhaul
... and just because Bernanke has decided to punish, and in many cases, most likely, destroy, that class of ciitzen who can least afford to recover from it, elderly savers, why should NZ follow suit?
And the same goes for middle class. The West is eating its middle classes, which will leave only chaos ...
Matt, adding to your comments:
- No need to print money to lower the dollar we just need to remove the artificial demand drivers
- Require local government / RMA to provide known staged greenfield land for urbanisation through to the planning horizon. This will help stop the price of land being bid up. We are creating fake wealth in NZ by allowing this to happen.
- Give the Reserve Bank the power to control the 12 month net inward migration rate. Migration is the biggest driver of property price fluctuations in NZ. The market is so small it cant absorb much population grow.
- The above would drop rents & therefore inflation & allow some downside in the OCR.
- With a managed inward migration rate house prices wouldnt be bid up so far & we wouldnt run such a large current account decifit to borrow money to pay for the increased land value.
(as an aside - developer contributions should also be discarded as they are too complex and deliver efficiently - better to allow road controlling authorities the right to toll the roading to pay for transport upgrades.)
If all immigration was stopped dead
AND
emmigration continued
THEN
I bet you would see rents drop.
However, as the parliamentarians are so deeply wed to property, I very much doubt we will get to see that hypothesis tested.
PS. A price war on rents is a A GOOD thing from the renters perspective.
It's going - out of hands !
Before individual Kiwis go into bankruptcy by the masses, we are forced to print a little bit money.
Who is going to pay for the many upcoming court cases -
megalomaniac and unethical behaviour and mismanagement by the government - costing billions?
With you all the way ostrich. Re: Yen - they hardly ran printing presses to finance imports as a job substitution exercise. Japan has only witnessed trade deficits since Fukishima give or take the odd month - it was a closed loop of post office savings offsetting collective government debt.- equally many are constantly short borrowed Yen lending to countries like NZ - keeps it bid - those infamous housewives keeping the whole world afloat - lol.
ostrich,
There is a common misconception, encouraged I think by Japanese authorities, that they are now in a current account deficit. In fact they still have a massive surplus of over US$100 billion per annum. So there is US$8 billion a month naturally pushing their currency higher, meaning that if they wish to keep their surplus high, they need to do massive printing, and foreign asset buying (rather than consuming foreign products, which is what the world should really want them to start doing).
All the rest of your post I agreed with.
An film clip of Ben Bernanke as a child , has emerged ......
www.youtube.com/watch?v=szwclmmKwLg
..... how it all began .
This is an economic war of survivial with the world leaders re-arraging the deck chairs.
The "last saviour" China is imploding.
Europe Bankrupt
US Bankrupt.
The world is in an austerity spiral of death.
Hell yes; print print print, if you think it will delay the inevtiable by a few years... but I would rather see people worring about policies that will help when the collapse comes...
What do we do when we cannot afford healthcare OR state pensions?
What can NZ Plc. barter with? and with who (e.g. Russia)? when "money" is "fluid"...
How can we produce "stuff" locally for local markets?
Like some certain countries; what protectionist measures can we build into our "free trade" deals to ensure its not free at all (e.g. SOX complaince)?
..
I used to laugh at this....
The Day the Dollar Diedhttp://www.youtube.com/watch?v=2N8gJSMoOJc
Inflation, inflation, inflation
http://www.zerohedge.com/news/inflation-expectations-suggest-5-inflatio…
The inflation rate is pretty neglible and is likely to increase little for the foreseeable future. It just isn't consistent with economic fundamentals. Weak growth figures, persisent unemployment rate, troubles in Europe and China... There just isn't sufficient real money flowing into the economy. Bank reserves have nothing to do with the money supply except for influincing the interest rates on debt issuance. All QE is doing is forcing to seek more profitable investment avenues, by suppressing Treasury bond yields and one of those is commodities which feeds into the rising cost of fuel. Not to mention the uncertainty related to the troubles in the Middle East, not a coincidence I find.
The US, UK, Europe etc are following the only real path open to them in deleveraging, now that their interest rates are more or less at zero, any austerity they might reasonably apply has hit its natural limits, (and in any case is a death spiral if followed too aggressively). So they are, rightly in my view, printing aggressively, where the only real question is whether their process of doing so is optimal for them. (Am not convinced that it is; but acknowledge Bernanke and King etc are not fools) This printing as we know is part of the reason for the NZD being very high, artificially, and very damagingly so in my opinion.
What then should NZ do about it?
Regardless of the cause and effect, our main economic problems seem to be very high private debt, caused by or the cause of a very high current account deficit, in turn leading to very negative net investment, with massive servicing costs. All of this is compounded by a too high exchange rate. That in turn hurts domestic manufacturers, exporters, tourism etc, and also compounds the current account problem- as well as causing lower profits, and under and unemployment.
We don't wish to increase private debt- bacause its already too high, and will likely only increase asset bubbles, and increase consumption and debt further. We do not really have a consumption problem, allowing for some real pockets of poverty. I would rather more of the consumption was pointed at NZ sourced goods and services.
Can we manage printing in a way that helps solve the currency issue, (which would have the opposite positive effects on current account etc noted above), without increasing consumption on foreign goods and services, or increasing national debt?
In my view the best process is to print and buy foreign assets to counter the overvaluation of the exchange rate. (Rather similar to the Swiss, who are aggressively doing this, even though they remain with a very high current account surplus, which they seem addicted to). In our case the most convenient foreign assets, are the debt the government and SOEs owe to foreigners- SOE's among them. Repay as much of that as it takes to achieve a tolerable mix of currency competitiveness (measured by a balanced current account), inflation, employment and GDP. A similar step would be to ensure the main NZ commercial banks were funded sufficiently in $NZ, such that they didn't embark on further debt and exchange rate spirals as last week's ANZ $1.2 billion Euro funding.
Many of you above don't seem to agree with Bernard, but I don't see too many real solutions to our issues in the posts; rather some denial that we even have any. Am very happy to consider and debate other real alternatives.
The idea is interesting, given so much of our per annum generated wealth is sent overseas by foreign owned companies I like the idea of the companies becoming NZ owned. What I dont like is they would be NZ Govn owned even if SOE's, prvate NZ owned, yes.
While I think its appropriate that some services are provided via Govt I odnt see that many others have to be....or should be.
Now if you could sort that wee issue, you would have my vote.
regards
steven,
While we have this perpetual current account deficit cycle, then I'm no fan of asset sales, (as they will almost certainly merely accentuate the cycle). If tye cycle is fixed, whether with my proposed solution above, or something similar), then am personally more open to the idea that some such assets be privatised. In agreeing with your sentiment, in the meantime it is best they be governed and run commercially (as to be fair, a number may well be already).
In any case, glad you like the general exchange rate solution.
Of course Bernard we can use our strong currency to buy capital equipment at an effective discount, which should increase our productivity.
Who says all imports are consumption items?
But you wouldn't think of that in your bizarre lust to print money. Please cite an example from history where printing money has solved anything?
robby,
Presumably capital equipment is mostly sold in say USD; as is presumably the dairy products we sell overseas. We would still need as a country to sell exactly the same kilograms of milk powder to buy the same capital equipment, regardless of the exchange rate. What a lower exchange rate would do, is make it easier for exporters, and import substituters, to afford to buy capital equipment; as opposed to importers (or foreign manufacturers) who find it easier now.
Aren't you assuming that we can substitute imports (foreign manufacturers product) with locally manufactured product? I don't think this would ever be the case for things like Boeing aircraft, GE Turbines, specialised heavy equipment etc ...
Even if in the long run we did want to start competing in these product areas we would have to import the capital equipment from which to do so in the first place. Would it not be easier to do this with the NZD at 0.85 v the USD than 0.65?
robby,
Of course you are right that there are many things we will never sensibly make ourselves, and so we need to be a trading nation. The Boeing aircraft at say US$100 million will still be US$100 million regardless of our exchange rate, and so as a country we will need to sell the same amount of products overseas to eventually pay for it. At present our suppliers are indirectly loaning us the money (at an extra $15 billion a year) to buy their products. If most of this was indeed for a short term boost to competitive capital equipment, then it would make some sense. There is clear evidence that nearly all of it is to fund private (and government) consumption, or at best non productive asset build up. All of this is rational behaviour on our part as individual consumers, because the exchange rate gives us the price and investment signals to do so. Our export industry is going backwards (so I don't think is really buying this capital equipment you talk of. Even the planes are for consumption), because our other operating costs are too high by international standards, and they are too high through an artificially high exchange rate.
I don't believe the fix would be as painful as all that; and would be easily the least painful of possible deleveraging possibilities. Say $5 billion of lower consumption of foreign goods; $5 billion of extra local production and supply; $5 billion of lower investment transfers per annum. All brought about somewhat magically with a lower exchange rate; in turn brought about by controlled and well directed money printing or capital controls.
"The Boeing aircraft at say US$100 million will still be US$100 million regardless of our exchange rate, and so as a country we will need to sell the same amount of products overseas to eventually pay for it."
Agreed. Otherwise it's a free lunch.
"There is clear evidence that nearly all of it is to fund private (and government) consumption, or at best non productive asset build up"
So shouldn't we do something on the consumption tax / rent seeking policy side first, rather than the exchange rate side? This seems to be where governments are far too timid to act because they would not be popular.
Isn't the effect of currency devaluation effectively to diminish the wage costs relative to competitiors, as you say 'real' goods are traded for other 'real goods'?
"Our export industry is going backwards (so I don't think is really buying this capital equipment you talk of. Even the planes are for consumption"
I think you have to be weary of such a statement, because how do you know? Bernards own feature series a while back highlighted a number of businesses that were using imported capital equipment to build other high value capital equipment for export. Automated fruit sorters (for example). (Planes also export high value time critical goods don't forget)
Seems like printing money would harm those doing the right thing by investing to increase productivity. Isn't higher productivity (output per worker per unit time) the only thing that will increase workers income in the long run?
robby,
We are closer than might seem obvious. In my opinion there is nothing quite as simple as the reduction in exchange rate to manage the cost reduction. Apart from unpopularity, the consumption taxes would have some negative effect of actually encouraging more consumption of overseas sourced, and so potentially non taxed, goods and services. Labour is touting a capital gains tax as part of the solution, and maybe they are right, although I think it may be avoided by many. Your fruit picking example would presumably have the fruit exporter receiving now $1.20 per fruit exported where they received $1 before, so they would still be able to afford the equipment, and still be ahead. And if the planes are exporting (which includes bringing foreign tourists here), they also will be net ahead. Even domestic tourism replacing overseas outbound tourism is a win, and will need the planes.
Your main premise, that higher productivity per worker is the only way to increase workers income in the long run, I 100% agree with. Capital equipment will help that; but the biggest help would be more sales per worker. I suspect many workers are underworked frankly because there is not quite enough demand for their services, so through no fault of theirs, they are idle a reasonable amount of the time. That's without adding in the unemployed joining the workforce. The exchange rate would significantly help that; and encourage workers into export, and import substitution businesses, rather than import ones.
So the call today has gone out for New Zealand to start printing money.
But money printing for us may not have the desired effect. Confidence in a 'little' New Zealand dollar would not take long to disappear. New Zealand does not have the firepower to make a long-standing difference in huge money-markets. After all, New Zealand needs capital to rebuild Christchurch and to fund our deficit. Attracting that capital with higher interest rates is crucial. Right now we are stuck between a rock and a hard place
Those private interests, who lent money to us over the past ten years of profligacy, would not be happy campers if suddenly our dollar, and their investments, suddenly dropped through the floor in value.
Not happy indeed. This is mainly why the Government is holding back on money printing. Allowing private interests their day in the sun. Namely, a chance to grab assets of value before they disappear.
Maori aren't 'getting it' yet either. Water, air, these all mean nothing for ownership when we are already owned by those whom we borrowed from. If Maori want to grab ownership, using some reinterpretation of the Treaty, then good luck, there are far greater forces at play of which they have no control.
Money printing is not the answer, it sucks the wealth from savers, mainly the elderly.
Then again, once the tipping point is reached, we may not have a choice. Make sure you are protected.
Smitho7 - one way or another, all the 'savings', all the 'investments, and all the 'asset ownership' is a collective expectation to 'buy'.
Ask 'buy what?', and the answer is: 'bits of the planet'.
We are approaching the maximum ability of the planet to supply - past that point in some things, near it in others. The expectation, then, becomes a game of musical chairs. Even without printing, that bidding-war (for essentials, forget the discretionary) will 'devalue' the 'money'.
The problem is that the current debt, at current collectively-held understanding of 'value', is unrepayable. It requires every individual mortgage-holder to do something goods/services-wise, for x years ahead. Any interest charged (and there will be less and less as time goes on) just requires extra trading in g&s. The planet can't supply the resources for that, so the debt will simply be resouled in one of two ways;
1 - the banker types and the already-in-the-game, will mop up the assets defaulted on. Even then, if they buy at fire-sale rates, they're still in trouble in a system which is in trouble. given that houses, say, need tenants to have an income.....which leads us back to the planet...
2. - a general debt-forgiveness, which aligns the need to trade-to-repay, with the remaining underwrite. Naturally, that hammers 'savers', but that's just unrealistic expectation - that inlimited extractive-based growth were possible - meeting supply constraint. Hello real world.
Always with shortages, there is conflict over ownership - personally, community-wise and globally. Rich vs poor, USA vs China, watch it happen. We'd actually be better getting the nation onlt a sustainable footing, and to hell with the $ implications (addressing the real world, rather than an artificial construct). We won't, though.
The elderly are not savers but saved. The very same lot that enjoyed the benefits of a mortgage with inflation negating most of the burden while pillaging the planet for their retirements fund(s), and now they whine about the outcomes they caused.
Money printing is the only answer left. Its being done to stop is plunging into a Greater Depression. If that happens the Govn wont have the money to keep the health services and pension payouts the elderly expect going.
Its the far lesser of 2 evils.
regards
Currencies in turmoil – losing value.
There are solutions for the NZ$.
To protect the nation from inflation (devaluation of NZ$), to stabilise our currency and to make it friendlier for exporters :
http://www.youtube.com/watch?v=eJuyL84cdWQ – go to 5:00min
Getting into a contest of who could print more is just a game of dumb - and dumber.
A Financial Transactions Tax would bring a little reality ( not total reality mind) to the weird situation where most of the transations are speculative trading. Set at the right level a FTT would not raise revenue but would put a spike in the trade.
Our exchange rate needs to reflect fundamentals which it certainly does not at the moment.
Our exchange rate on fundamental needs to be at 55 -60 cents.
printing then gives the goverment the choice with what to do with it-- thats a fail
cutting interest gives wide spread direct injection to the whole country- however dispite all economic theory we will repay debt not spend the mind set has changed world wide. Banks are chasing real returns in the world not leanding for houses, but the geometric progression of morgage repayment will catch there attention soon.
There's a lot of inconsistency on the whole notion of "lower the dollar". Some say the dollar is inflated because of speculation, but then somehow think that we could realistically somehow intervene in the global currency markets in any meaningful way.
The idea of a financial transaction tax is another often-advocated idea, but good luck convincing London and European banks that they should pay us a cut of a transaction involving NZD that doesn't really involve NZ in anyway - there's this thing called 'jurisdiction'...
This all ignores the fact that we're relatively weak against the AUD, and the USD/EUR have been going through economic crisises that have affected their currencies. Japan has found itself in a similar position - domestic investors abandoning the risk and low returns in Europe and the US and buying the Yen (as a safer currency) have pushed the Yen to massive highs.
And let's not forget the impact on our basic costs of living that a lower NZD would have. It would devestate those struggling to stay afloat.
Worst of all, the media continues to give credibility to the idea that the dollar can be lowered, and even more irresponsibly, that it's somehow a good idea.
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