By Bernard Hickey
Reserve Bank Governor Alan Bollard has said in a speech that agricultural export prices are likely to remain strong for some time and the bank expected these higher terms of trade to be reflected in the exchange rate.
The Reserve Bank would focus on medium term inflation, rather than on the terms of trade, Bollard said.
Bollard's comments essentially mean he sees the currency's rise acting as an automatic stabiliser for the economy, helping the Reserve Bank deal with the inflationary effects of an historic improvement in the terms of trade. The higher currency softens the expansionary effects of higher export prices and reduces the impact of higher commodity prices in US dollar terms. It helps reduce inflationary pressures.
However, allowing a higher currency also makes it more difficult for exporters to expand rapidly and could encourage more imports, thus worsening our trade balance and making it more difficult to turn around New Zealand's structural deficit.
The comments, seen as a green light for a rise in the currency, saw the New Zealand dollar rise in late morning trade to over 78 USc. Bollard's comments came after a call from Barclays Capital's Peter Redward for Reserve Bank intervention to bring the New Zealand dollar lower. See more here in Redward's full opinion piece.
Speaking to a farming group, the Grasshoppers, in Ashburton last night, Bollard said the Bank expected the higher terms of trade to continue to be reflected in the exchange rate, as it is currently.
The exchange rate would deliver the benefits of the rising terms of trade to the community at large – through higher wealth and cheaper imports, he said.
Global commodity prices had experienced the largest boom in more than 100 years, Bollard said.
While hard commodities had seen the biggest surge, agricultural commodity markets had also seen a fundamental change. Another surge in prices has since seen food prices surpass the 2008 record level, boosted by supply disruptions, particularly in grain markets, he said.
"Analysis by the Bank indicates New Zealand’s agricultural export prices are likely to remain elevated for some time. Although in the near-term, prices could fall slightly as supply becomes less weather-disrupted, demand is underpinned by urban and wealth growth in developing countries, especially China," Bollard said.
The Bank’s analysis can be found here. Given this outlook, monetary policy will remain focused on any medium-term inflationary pressures that arise, rather than the terms of trade shift in itself," Bollard said in a news release issued after the speech, which is linked to this research paper.
If households and firms use the income boost from higher commodity prices and exchange rates to bring forward consumption and investment, or increase borrowing, then pressure on resources in New Zealand would lead to more inflationary pressure. Monetary policy would need to counteract any rise in inflation expectations," he said.
"One thing we do know is that the projection will remain uncertain. History shows it is fiendishly difficult to predict the future path of commodity prices."
'High currency has been a headwind, but export sector getting better'
Finance Minister Bill English said a high New Zealand dollar had been a headwind for the economic recovery "right from the start".
"And that’s been driven to a large extent by policy in the US, the UK and Europe," Enlglish told journalists in Parliament this morning.
"We’ve been fortunate to have at the same time, and related to the high currency, very high commodity prices, which are higher than they’ve ever been. So we can see the export sector is making progress, it’s going to become profitable as it gets its debt levels right," English said.
"Of course that could happen faster if the currency was lower,” he said.
“It’s not just [high] commodity prices [helping] of course. We’ve got a very competitive exchange rate with Australia at the moment, which is a big help to manufacturers and people selling services into Australia," English said.
"So the export picture is pretty strong, despite the fact that we have a high currency against the US and the Euro. We do have a very competitive currency against Australia, so New Zealand companies are benefiting from that.
“It’s up to the Reserve Bank to decide how they do their business. All I’m saying is that despite the fact of the high currency and the headwind that means for our recovery, exporters are still doing pretty well for two reasons; Commodity prices are high, and the currency against Australia is very competitive,” he said.
'Structural shift in terms of trade'
Here is the executive summary from the RBNZ research paper upon which Bollard based his speech:
We conclude demand is underpinning commodity prices, creating a structural shift in the terms of trade of commodity exporters like New Zealand. Against this backdrop, idiosyncratic events such as weather-related crop failures and changes to government policies have pushed prices to historical highs. Supply responses will be relatively slow, implying prices are likely to stay high over the short to medium term, if a little lower than current levels.
New Zealand’s agricultural export prices are likely to remain at elevated levels for some time. Demand is underpinned by urbanisation and wealth growth in developing countries, especially China. However, there is potential for near term price falls as supply becomes less weather disrupted.
The appropriate monetary policy response will focus on the inflationary pressure that arises, not the terms of trade shift in itself. Higher terms of trade will contribute to appreciation of the exchange rate, facilitating the necessary adjustment in the real exchange rate via the nominal exchange rate rather than via rising inflation.
Medium term inflation remains the Bank’s focus. The Bank needs to be cautious that a terms of trade increase does not lead to increases in inflation expectations. For example, households and firms might use the income boost from higher commodity prices and exchange rates to bring forward consumption and investment, or increase borrowing. Consequent pressure on resources within New Zealand would lead to more inflationary pressure and monetary policy would counteract any rise in inflation expectations.
Here are other selected sections from the study.
Growth in food demand is fastest in the early stages of a country’s development. As countries become wealthier, consumer preferences switch from merely more food, to higher nutrient food. So in the initial stages of development a country may consume higher quantities of rice, but as wealth continues to grow, other grains, such as wheat, become more popular, and then dairy and meat become larger parts of the national diet. Eventually food demand becomes dictated more by population growth than income growth.
Worldwide, a surge in demand for meat and dairy can have large multiplier effects on the demand for grain and water, given that it takes, on average, 3kg of grain and as much as 16,000 litres of water to produce 1kg of meat (this assumes most meat will be produced in feedlots). Hence, when current grain prices are elevated the cost of producing meat and dairy rises. This represents a windfall gain to producers like New Zealand where grain inputs are relatively low.
The demand curve for a number of agricultural markets has seen a structural shift – higher and more inelastic – with emerging market demand and policy changes eroding world inventory levels at a rapid rate. The Dutch agricultural financing cooperative, Rabobank, formed this view after observing downward sloping forward curves in almost all agricultural markets at some point during 2010. Rabobank said this reflected the markets’ needs for delivery of increased near-term supplies and the encouragement of increased production next season.
Moreover, the Australian forecasting agency ABARES agrees. Its view encapsulates strong economic growth, and hence commodity demand, to continue in developing economies, particularly in China and India. Its projection is for export earnings for Australian minerals and energy commodities to rise in real terms over the next five years.
Policy response
For a central bank, the question of whether or not to respond to terms of trade shifts with monetary policy depends on whether it causes changes in the behavior of households and firms, or inflation expectations. Nevertheless, monetary policy should remain focused on the medium term objective of price stability.
We see current high commodity prices explained by two key factors. Underlying demand represents a structural shift, raising New Zealand’s terms of trade to a permanently higher level. Similarly, supply constraints caused by the rise of biofuels and the reduction in production subsidies add to this permanent effect. At the same time, weather events have pushed prices above what can be explained by this structural shift, though are expected to be short-lived. In themselves, neither of these elicit a monetary policy response other than maintaining a flexible exchange rate regime, allowing the economy to adjust appropriately to the former, while looking through the inflationary effects of the latter.
The potential for prices rises to be persistent, but not permanent, exists but this is not our central view. For example, governments may decide the costs of subsidizing biofuels are too high and withdraw this support, flooding grain markets. At present we view this as very unlikely.
In maintaining a focus on medium term inflation policy makers will need to be cautious that terms of trade increases do not lead to increases in inflation expectations. Should households and firms decide that the income boost from higher commodity prices and exchange rates enables them to bring forward consumption and investment, or increase borrowing, it is possible an internal demand shock will arise. Consequent pressure on resources within New Zealand would lead to more inflationary pressure. Monetary policy would then act to contain any rise in inflation expectations.
Other central bankers with similar issues see exchange rate flexibility as the best mechanism for coping with a structural adjustment in the terms of trade. The Reserve Bank of Australia sees the high terms of trade that commodity prices have delivered as a long-run phenomenon, pointing to the expected longevity of China and India’s growth. They view the events as a structural change in the economy, and that the structural change is overall healthy for the economy. Further they see the high exchange rate as delivering the benefits of the rising terms of trade to the community at large – through higher wealth and cheaper imports.
“There is going to be a non-trivial degree of structural change in the economy as a result of the large change in relative prices. This is already occurring, but if relative prices stay anywhere near their current configuration surely there will be a good deal more such change in the future. Because we can't confidently forecast where relative prices will settle, we cannot know how much such change is ‘optimal’. Therefore we can't be sure that some of it will not need to be reversed at some point. But the optimal amount of change is unlikely to be none at all. So we should not look to prevent change; we should look to make it cost as little as possible. In general, that means preserving flexibility and supporting adaptation. “ Glenn Stevens, Governor, Reserve Bank of Australia, February 2011
Recent Bank of Canada statements support the view that underlying demand has delivered a structural change in commodity prices. Further, the Bank of Canada warns
“From a policy perspective, it matters whether prices are being primarily driven by demand, supply or speculation. In general, supply shocks and speculative overshoots tend to be short lived and can be looked through. Demand shocks are different.
Policy-makers determined to take corrective action should proceed with caution. Without a clear diagnosis it is difficult to talk about remedies and policy fixes with any confidence.
Canada has learned through long experience that the role of the exchange rate is crucial. For commodity exporters, improvements in the terms of trade tend to put upward pressure on the exchange rate. When such movements in the nominal exchange rate are limited, wages and a range of other prices respond. This is a more disruptive form of adjustment that can have profound implications for employment, financial stability and competitiveness—the very objectives exchange rate management seeks to protect.” Mark Carney, Governor, Bank of Canada, March 2011
Overall, the consensus seems to be that monetary policy should maintain its focus on medium term targets. Current demand conditions suggest that some upward movement is structural and monetary policy can do little. However, there are also factors at play pushing prices higher than the structural change would suggest. Nevertheless, these are likely to be rather short-lived and outside the medium-term objective of monetary policy.
Here is JP Morgan's Helen Kevans' reaction
Our long-held view is that the boost to national income from the higher terms of trade will take more time than usual to filter down into the broader economy. This owes to the fact that farmers have become more inclined to pay down debt, such that it won’t be until this deleveraging ends that the income boost translates to higher spending and new investment. But the focus on balance sheet repair will not continue indefinitely.
The sheer size of the income boost, and its positive impact on farm revenues and cash flows, should mean that at least some of the income injection will filter through to the broader economy. This we suspect will start to occur in coming quarters amid early signs the rural property market has started to stabilize.
(Updated with Bill English comments, interactive chart below; More detail; Currency reaction, link to call for currency intervention; Details from research paper; charts from research paper; reaction from JP Morgan economist Helen Kevans)
Trade prices, goods
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57 Comments
Bollard is esentially saying here that he wants to allow the currency to rise as an automatic stabiliser to help him control inflation.
When is this country going to take control of its destiny and at least try to export its way to freedom?
The currency is rising because of higher commodity prices and a huge influx of foreign capital. This is because of the Christchurch earthquake reinsurance flows and close to NZ$20 billion worth of borrowing by the government.
So exporters get punished again, importers are encouraged and out structural current account deficit is no closer to being solved.
Just madness
cheers
Bernard
I sorta think he is saying this represents the most basic relationship between supply and demand.
You can't really have high export prices and volumes for your agricultural and other commodity goods without increased exchange rates.
It may work on a spreadsheet where you plot in the "in-market" local currency price of a good and convert it back to NZD at an optimum exchange rate and the current exchange rate, and think we are getting ripped off. It doesn't really work like that. It's likely that is local market prices and demand were low the NZD would also be lower.
Check out the ANZ Commodity index: even when converted into NZD they are doing decently well.
And besides - BH - you HATE inflation - rising FX rates curbs rising inflation. But maybe thats the point - you'd rather have high interest rates so no touches that EVIL debt? :)
Bernard : We are exporting plenty , as it is . The problem for NZ Inc. is not a lack of earnings . The issue is what we do with them .
............. Now I'm not one to complain , as you well know , but Geez Louise the government of this country strips alot out of the productive sector , to gift to welfare recipients or to prop up public service institutions .
And when in excess of 50 % of the populence is receiving some hand-out or pay-back from the central bureaucracy , then you know that things have gotten a long ways out of kilter .
We are living beyond our means ... Pure & Simple !
Gummy,
We're still running a structural current account deficit of around 5% of GDP?
How are we supposed to export our way out of it (and stop importing so much) when the RBNZ allows the currency to rise?
http://www.interest.co.nz/charts/economy/balance-payments
cheers
Bernard
GBH....I see our export returns as being very one, or at least narrow dimensional....case point Fonterra...a true monopoly in disguise....are now weilding enough grunt to influence the thinking of the Finance Minister along with his toady the Gov of RBNZ.....(please don't anybody tell me he thinks independently...as there is no evidece of this but plenty to the contrary)
My point is a few exporters in what are largely monopolistic positions are being laid out as the EXPORT collective when they are not....their interests are being served at a wider cost.
It would be foolish if anyone did not think currency hedge was not a large part of the inner sanctums planning.
My concern is playing in the market directly and trying to force down the $ just leads to burned fingers.....maybe all the way to our armpits. I think we need tweaks so I'd like to see a tobin tax to start with...ive yet to see a decent non-ideological argument against it....
I wnder just how sharp the knife edge is we are on and what the drop is either side, Im sure we have a blindfold on........
The drop consists of a meltdown and panic in our housing sector as PIs panic and offload...even making Pi'ing a loss making exercise in terms of no capital gain or actual losses and neg geared (or even increasing that) might be enough to make enough PIs move out....and that could become a death spiral...we can see where that result could lead from Ireland's example. Those left will be the first time buyers on huge mortgages who just want their own home now stuck in neg equity.....look how many US houses are such....and could be this year...
regards
The RBNZ made a profit because there was a structural depreciation in the NZD (thanks to the carry trade ceasing over night and a flight to the USD). I don't advocate the RBNZ gambling to make FX profits.
We should be clear what you are advocating.
I thought you were advocating an intervention where the RBNZ buys foreign currency in an attempt to flood the market with NZ dollars and decreasing their relative value and lowering the exchange rate.
FX trading to make a profit is not - and should never be - something a reserve bank should do. Very dangerous suggestion, although i presume it was flippant.
Profit making is not the purpose. Tis a handy side effect though ;)
I believe the RBNZ should be be intervening by selling over valued NZ dollar to buy foreign assets.
I also believe the RBNZ shouldn't be sterilising all of it. If it takes some money printing to get us going then so be it.
cheers
Bernard
I understand that you have to courteous whenever you interview prominent figures, but I for one would love to see you (or someone else in the media) ask Bollard/politicians some of the tougher questions.
"When is this country going to take control of its destiny and at least try to export its way to freedom?"
This is exactly what someone should be asking him!
"I understand that you have to courteous whenever you interview prominent figures"...said whom...where is it written that you can't call a spade a fool or ask questions that go the heart of an idiot policy....bugger the prominent figures pluto...those fools got us into this shite in the first place.
Bollard has lost control if he ever had any. The ratings liar agencies have said they look at the trade account numbers to determine the rating...this move by Bollard to mask the inflation being caused by that idiot Bernanke, will only serve to bring on a spending binge on imports and so the trade deficit will turn deeply red....then along comes the downgrade.
To make matters worse he has waved the green flag to a rising kiwi$ when we expect hoards of Poms and Brits to come here for a splurge...a rising Kiwi$ will kill that urge.
Yet just a week or so back he slashed the ocr to pork the market and down went the Kiwi$.
I just think it is proven to be ineffective. Nearly anywhere and everywhere a country has tried to manipulate its currency it has failed. In order for it to be successful it must be pegged to something else or not allowed to float (which comes at significant other costs such as inflation or unemployment). A country has to throw its entire reserves at manipulating the exchange rate and try to bluff the market that it has the guts, balls and money to keep going. the moment the market doesn't believe the government there will be a crushing change in the rates.
Seems to have worked just fine for Singapore and China and a bunch of others.
Why the paranoia about being beaten up by hedge funds. That hasn't happened since Soros in the early 1990s. That's nearly 20 years ago.
RBNZ did it successfully in 2007. It should do it again.
Even the IMF says capital controls are necessary
cheers
Bernard
A giant and emphatic disagreement here ( / gross factual inaccuracy): the RBNZ intervention was NOT successful. Yes they intervened. But it had F.A. impact on the exchange rate. It was laughed at and mocked the world around. The RBNZ should count its pleasings that the carry trade temporarily ended and everyone bought US assets staring about June 2008.
The automatic stabiliser argument is in logical, if trade conditions truly are reflected in the exchange rate the argument goes at times of good prices a higher exchange blunts returns, at times of poor prices a lower exchange rate lifts returns to compensate. Nice, logical and wrong.
Problem is the exchange rate no longer relates to trade - currency speculation is now hundreds of times our trade flows - and for differentiated products export prices are set in the export market and exchange simply mediates the return in NZ dollars.
On this basis the returns on efforts in export markets are unpredictable. Is it any surprise that investment in the development of export markets and export products is at a standstill and that more generally our economy is misallocating resources from the standpoint of a sustainable export lead recovery.
The ongoing "its not our problem" from the RBNZ is getting less and less tenable.
Indeed John. Those interested in knowing what drives NZD dynamics (= interest rate differentials) would do well to read this:
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2010sep73_3cassinowallis.pdf
"Another channel through which commodity prices may affect the exchange rate is that, as export prices rise, there is an expectation that the local economy will grow more strongly, forcing the central bank to tighten monetary policy and raise interest rates, increasing demand for the local currency as investors aim to take advantage of the higher returns."
So there's an easy answer to that = don't use OCR to control inflation. Drop the OCR and use the various obvious ratios to throttle anticipated inflation. (And savers pls don't whine, specifying, varying and reducing the proportion of foreign funds banks could use would see you with cake and eating it.)
Cheers, Les
FIRE economy 1 versus Production/Consumption economy 0.
The Finance, Insurance and Real Estate economy is apparently more important Bernard. I know it makes no sense to me either.
It seems the RBNZ feel we need an asset bubble somewhere to transmit more debt to the good people of New Zealand. Now where will it be? Houses, probably not. Wine, definitely not. Forestry? Stock Market?
The stock market has been unfashionable for a long time now, maybe that's where it will show up, especially with the dotty government bribe people to save in a silly scheme called Kiwisaver. Don't get me started, but I'm hoping Bill English will have the good sense to stop subsiding Kiwisaver. Otherwise I think the stock market will be the next NZ bubble.
Asset bubbles and inflation here we come!
Jimbo
I was against the March 10 rate cut because it encourages people to take on more debt and discourages savings. It increases our foreign debt and eventually makes us poorer.
That's exactly what happened in the second half of March. Near record high new mortgage issuance.
I want a lower currency, but not if we have to cut rates to do it.
By the way, I don't have a problem with higher petrol prices...I'm a cyclist.
cheers
Bernard
How the herald interprets Bollard:
"Reserve Bank Governor Alan Bollard said accelerating inflation may force an interest rate hike if persistently high local commodity prices feed into consumer spending and borrowing habits."
Does he really expect the imported inflation will not feed into every nook and cranny of this ponzi scheme economy.....he knows bloody well it will...this is your April wake up call.....
Yes....if you only have $100 wolly and your food bill goes from $70 to $80, then there is $10 less spent elsewhere...simple......or you buy less food, ie non-essentials in your basket get dropped. Anything dropped will have to be discounted to sell ie suffer deflation...
NET result...zilch %...which right now looking at core inflation is pretty much what is happening....
It will be interesting to see the net results on rents as well....ie as NZ as a whole and not as specific in high demand areas...will they prove resilient? I dont think they should....
regards
The RBNZ should buy a tonne of gold each day the NZD is above 75cents US..
This has a number of effects:
1 It puts a gradual pressure on the currency when it is high
2 It builds up an emergency gold fund for the future
3 It has an inflationary effect to counter the deflationary effect of a high currency
4 It allows the RBNZ to run slightly higher interest rates, so gently encouraging saving over borrowing.
5 It reduces the pressure to blow borrowed money into the economy by creating asset bubbles.
Essentially it allows the RBNZ to increase the money supply when needed without the need for asset price bubbles as the transmission mechanism.
This country needs residents with equity to invest in viable businesses, not money borrowed from overseas. Its called savings.
This from Bollard's speech:
There is little evidence to support the theory that financial speculation on commodity markets has been a major cause of the increase in prices.
Sorry but this guy is out of touch with reality. I posted this link yesterday from the Bank of Japan, which completely debunks Bollard's thesis:
While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with otherasset markets, including major equity markets. Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.
https://www.boj.or.jp/en/research/wps_rev/rev_2011/data/rev11e02.pdf Bollard goes on to say: Analysis by the bank indicates New Zealand’s agricultural export prices are likely to remain elevated for some time. Jeez. He (and commodity bulls like casual observer) should dread the day when he wakes up to find that a light bulb has lit up in Bernanke's head."Jeez. He (and commodity bulls like casual observer) should dread the day when he wakes up to find that a light bulb has lit up in Bernanke's head."
Please explain what you mean.....it isnt clear.....apart from the light bulb would fry what little brians Bernanke obviously has....which might be good, or might not......
regards
1) Bernanke tighening? LOL...I can hear the blades spinning up...here comes QE3....
<grin>
2) You assume the BoJ is right, just how have they been right in the last 2 going on 3 decades? just look at the state of japan, its close to a basket case...
In isolation....I dont agree that commodities will tank as a direct consequence of tighening, which frankly I dont see for 2 maybe 5 years anyway....now if he was to tighen and a recession indeed a depression resulted then yes commodities will tank, if the example of the GD is anything to go by, ditto 2008.
Ignoring what the fed does, I expect us to enter a recesion/depression this or at worst next year at which point, agri commodities will fall. Gold, I think gold is a bubble, but I think ppl will (illogically maybe) stick with it...so I have no confidence on where it will go and Ive yet to read anything that strikes me as knowledgable on the subject...
Actually, thanks I might go read the BoJ if only for a laugh....
regards
Hehe I wouldn't say the RBNZ have covered themselves in glory with their growth forecasts ;-) Bernanke will have to stop printing money sooner or later even if he doesn't want to. The price of not doing so (hyperinflation + USD destruction) is simply too high, and in any case all his wall street buddies will be able to position themselves appropriately beforehand...
A few musings playing devil's advocate to Bernard...
A higher currency could be a good thing though...
One problem with the calls for more savings at the moment is that interest rates are so dire. The RBNZ is going to have to raise interest rates pretty quickly once inflation from the Chch rebuild starts showing through at the end of the year...so that’s a positive on the ‘savings’ front.
The worry is that New Zealand will be flooded with foreign debt again, due to higher interest rates, that will be invested into housing and not the productive sector. Well, why not use some of the tools the RBNZ is looking at to not allow this to happen – something like the LVR for rental/investment properties can only be 60% or 70%, say.
Those who want to still invest in rental properties will have to save more for a deposit = lower ‘other’ consumption (reduced inflation pressures from this particular group).
reduced property speculation = reduced demand for foreign capital from the banks = reduced pressure on the exchange rate because there’s not as many NZ dollars being bought to pump into property.
...If govt wants capital pumped into the productive sector, then it has to create disincentives for that capital to be pumped into other parts of the economy.
A higher exchange rate will mean reduced inflation pressures from imports – fuel, tech gear and the like. The problem here is that people would revert to putting purchases of big-screen tellies on the credit card. There has to be a solution there too, something like not allowing banks to automatically increase credit limits...
(Govt could also roll out the financial literacy project to schools it was planning on doing until the Min of Ed had its spending curtailed).
Then there is the statement that a higher exchange rate would hurt the export-led recovery.
If this RBNZ comment is anything to go by, then strength in commodity export returns will remain for a while, despite the high exchange rate.
You can’t have it all – a low exchange rate and high demand for NZ$s cos our exports are so popular. Once debt is paid down to a reasonable level then benefits will start to flow through more as profits are reinvested (in striving for greater productivity, which is good), and wages rise.
Futher to that above, if commodities do tank (which they could do), then the theory of a floating exchange rate holds the NZ$ will drop and compensate.
As we've seen, this might not happen due to the speculative nature of the NZ$, which brings John Wally's comments in - how can we stop the NZ$ being used so much for speculation above trade, but still allow for the exchange rate mechanism to help compensate for a drop in export prices?
I don’t think the dollar is the problem anymore, it’s still below most other countries, whats the point in it being much lower?
The way this government is borrowing, I think it will be lower soon anyway.
Why is it the RBNZ’s problem anyway?, it’s the fault of successive governments that have encouraged selling off all our assets, so now we own basically nothing and everything almost everything in terms of profits of major companies basically becomes imports.
Because the profits go straight offshore for virtually all banks, almost all insurance companies, half the supermarkets, most of the big media companies, and almost all manufacturing.
Blaming the trade imbalance on the dollar is a big Red Herring.
FYI reaction from Helen Kevans added
"Our long-held view is that the boost to national income from the higher terms of trade will take more time than usual to filter down into the broader economy. This owes to the fact that farmers have become more inclined to pay down debt, such that it won’t be until this deleveraging ends that the income boost translates to higher spending and new investment.
But the focus on balance sheet repair will not continue indefinitely. The sheer size of the income boost, and its positive impact on farm revenues and cash flows, should mean that at least some of the income injection will filter through to the broader economy. This we suspect will start to occur in coming quarters amid early signs the rural property market has started to stabilize."
As someone who works for an exporting company, these constant dollar rises hurt us bigtime. I also share Bernards frustration at the direction NZ seems to be taking, or rather not taking. Bill English has maintained the mantra of exporting more and borrowing / speculating on houses less, yet his policies have so far been the complete opposite. Lowering interest rates, encouraging a strong dollar, ignoring CGT/ land tax, borrowing hand over fist, stupid socialist policies and bailouts. Fair enough, but I don't want to ever hear him talk about an "export led recovery" ever again, it's a complete crock.
The Govt is borrowing for public expenditure. Private people are borrowing to buy property. Public debt and private debt are two very different animals.
And asking for more tax to be slapped onto oneself sounds 'strange" to say the least (unless you work for the Govt of course).
Guess what, alex 13! That Public Debt is actually...your debt, that you have forgotten that you have! You and I still have to pay it off, or our children do. It's not going away, even with that magic 'inflation' trick; as that only works as long as wages rise in tandem. And if there's one thing that recent, and current, history shows us; it's that wages NEVER rise as fast as costs ( as measured by that 'reliable' indicator - the CPI), and hence our, your, future debt..... continues to grow.
You (and I) are responsible for taking care of our private debt. You (and I) have control of how much you (or I) want to borrow, how much you (or I) spend and how much of your (or my) debt you (or I) pay off and when you (or I) do so.
Neither of us has control of what the Govt does with the public money or with the public debt. This is why I say: reduce the tax(es) to the lowest possible (and flat) rate, limit public expenditure to what is absolutely necessary and thus minimize the amount of money that is going to be (and is being) wasted.
Of course we have control! Its called 'elections'. And if you decide to impliment your choices as outlined, then "Go for it!' and get that faction into power. The Government, and its debt, is by definition 'us'? And that's why the May Budegt is going to be interesting...Will Key & Co have the gumption to 'do what is necessary'? That includes geting the wealth of this country out of property , and not letting it back in, and into' manufacturing'? As most will agree; unless we start earning a living as a country, others will do it here instead; and current resident Kiwis will have to live elsewhere.
Hmmm IMHO....no they wont get the wealthy out of property ....though it depends on the defination of wealthy....Personally I dont think the truely or really wealthy are any where near property except for their home...they go for hedge funds with 20 and 30% per annum profits. The "want to be rich", farmers, lawyers etc and small business owners who use rentals as tax dodges or "saving" schemes are the one the Govn will protect, no land tax here etc....these are National's voting base so wont be touched....that leaves the swing voter who Im guessing are mostly PAYE....and taxes have to go up....cant cut spending so the only Q is, when....and who which I guess is Labour but that leaves us until 2014.....by then National will have overseen us becoming a basket case so huge tax increases will be needed to fix the issues...which will kill whats left of our economy....the fix has simply been left until too late...but as they say hindsight is 20/20.....So rest easy Natioanl will very probably win a second term, but will get wiped out in the third.
In terms of into manufacturing, I just dont see it...there is huge risk and little gain, so if money deserts property it will I suspect go abroad....nothing else here makes sense....
regards
When PI's go bankrupt then the investor expects the bank to cover it, meaning the bank(s) may go bankrupt....given the leverage of banks these days its quite possible to go insolvent, which most of the US banks are....What happens then is the Govn is forced to step in and protect deposits or there is a bank run and all the banks go bust....at that point NZ's economy collapses and you cant get anything but especially, food....so what happens then ppl like me who have been prudent and careful get wacked with PI debt via the Govn....
So I cant control your personal debt and right now thats at a mind boggling value, something like 160% of gdp and most of it has been wasted on houses.
I can control Govn expenditure, its known as the vote. The rest of your comments are well libertarian.......nuff said.
regards
Totally agree and Im kind surprised at the comment if you think Im not painfully aware of that......First time buyers of their "dream home" are the ones I feel really sorry for in all this...for me the Labour Govn (but National would have been no better) have let down these ppl badly.
About all I can say for National is whether by design or accident they are walking the knife edge (falling off of which would cause great loss) very well....I go for the latter myself...but still.
Now I see a depression ahead where anything up to 70% of a house's value could be wiped out....that in effect will destroy the 25s to 40s....in effect a complete generation...."X" I think it is. All down to the BBs and the pollies of the same age bracket porking the system while being blind to its risks and leaving huge debt instead of dealing with it...(and that debt isnt all out yet, we have decades of healthcare bills the BBs will expect X and even Y to meet).
regards
Bernard - as someone involved in the FX markets, believe me that the RBNZ brings a pop gun to the market when it intervenes. Certainly if it's well timed when the market is long and stretched they can make a small short term impact, but generally all it would mean is FX speculation that risks tax payers dollars.
The RBNZ'S knows this and frankly rightfully seems comfortable with where the currency is anyway.
A lower currency has other consequences and at a time when one of the biggest currency manipulators China is getting the inevitable inflation consequences (and we're typically 10 times more vulnerable to that) it's not a rime to be campaigning to exposure us to this sort of risk when exporters by and large are having extremely good times. Your timing with this is very odd.
I tend to agree, Bollards moves are pretty insignificant unless he really makes some big ones.
To me the answer was to slash the rates dramatically back in 2006-7. That would have unwound the carry trade pretty quickly and despite the low rates would have dried up the funding avaliable to the housing market. Only risk would have been a collapsed dollar makin immigration more attractive.
Hi
Cant see that this has much to do with economics to be honest as so ridiculous its not real - loss of revenue from CH, falling tax receipts, increased unemployment, massive debt, lowere activity and GDP hardly points to wanting stronger currency - Looks purely like a political move to me.
Higher $ will in the short term limit the pain from increased costs of food , whiteware, commodities and oil and so cushion these costs away from the electorate over the next few months thus ensuring a second term for JK !
Care to bet that the week after the election we see ministers and RBNZ talking down the dollar as hard as they can including interventions? Likewise we can expect a raft of new and hgue cuts immediately after the election as they seek desperately to limit the borrowing in the hope that the eventual rebuild will stenghten the economy.
Not sure how valid this is given that virtually no rebuild or benifit had occurred after first quake and by own adnission this time around the process will take longer to sort all claims and ultimately we can only rebuild so fast given the shortage of skilled tradesman and the amount of red tape in consents.
Pure Folly on an incredible scale -
Even with the high dollar ..exporters are doing well and the consumer here is sheltered from high inflation.
Dairy farmers in line for $8 +.....lamb prices at huge levels, the world needs food.
Timber set to go through the roof...not just CH....already talk of shortage of timber for Japan.
No, the dollar is a good place ...get over it....Bollard negligible effect on the $NZ.
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