By Bernard Hickey
It’s official. We now know that John Key and Alan Bollard secretly love our high dollar.
It helps them do two things: get elected and keep inflation under control in that order.
Reserve Bank Governor Alan Bollard has just given the biggest nod and a wink to currency traders to allow the currency to stay up at these export-crushing levels.
This morning he left the Official Cash Rate at 2.5% and commented that if the dollar stays high he won’t need to increase the OCR much in the short term.
Bollard made no comment about currency intervention and most expect him to stay on the sidelines.
He was effectively saying to currency traders: thanks for pushing the New Zealand dollar up because it helps me deal with this inflation problem that's building.
This is part of a theme now developing globally of what experts call ‘financial repression’.
This is where central banks artificially hold short term interest rates (and in some cases long term interest rates) low or near zero. This helps heavily indebted consumers and businesses dig themselves out from under the debt by allowing inflation to eat away at the real value of the debt.
Central bankers and governments essentially punish savers in the future for the sins of the borrowers in the past.
The added complication for New Zealand is that because our financial repression is not as heavy as that being practiced in America, China, Japan and Europe, we are also seeing our currency rise as investors look currencies with returns higher than 0%.
A rising currency is fantastic news for consumers, who of course outnumber producers and exporters as voters. It’s great in the short term for the Reserve Bank because it helps it meet its inflation target.
The longer term problem is that all this financial repression with free movements of capital simply punishes savers, producers and exporters at the expense of borrowers, spenders and importers.
This does nothing to accelerate the transformation we need into an export-led high wage economy that will keep our children here.
But it’s great for those who want to fill the petrol tank tomorrow or get re-elected on November 26.
It’s the sort of short term thinking with a lack of long term strategy that has put New Zealand in the vulnerable and hollowed out state it is now in.
Short term focus
The Reserve Bank governor can’t really be blamed for this. He is simply operating within a short term and inflation-focused framework given to him by politicians and ultimately voters.
The problem is this inflation-targeting regime with a free floating currency and free movements of capital has gutted the export sector of the economy and loaded our kids with crippling debts. There was a glimmer of hope in late 2008 that our economy might transform itself when the currency dropped below 50 cents.
But what hope now it’s headed for 90 cents?
Bollard and Key continue to sleep walk towards their short term targets and pretend that squeezing more milk out of the land will make us rich. It won't. Dairying produces hardly any high paid jobs and, surprise, surprise, not everyone wants to work on dairy farms.
Meanwhile, yet more high value exporters give up on long term investments and higher paid jobs for the long term. And New Zealand’s people make long term decisions to take their skills elsewhere.
When are we going to have an open debate about changing these targets from short term to long term?
When are we going to make life harder for consumers and borrowers and send signals that we actually want more savers, investors, producers, exporters and highly paid workers?
No chart with that title exists.
52 Comments
The nail gets hit on the head. The question is, what mayhem will Key get up to once he wins by a landslide in November? He will use the election results as a mandate for massive tax cuts and massive privatisation.
I reckon New Zealand will never be the same again after this election.
Obama will be calling us "mini-me".
CB (not to be confused with Ma Baker's boy)
Don't worry too much - the generators are in physical proximity to us kiwis, and one way or another, will return to ownership.
Those folk will attempt the monopoly/squeeze trip, but the global fiscal system is out of time for that stuff now.' We just vote for whoever promises nationalisation, or we do a charges revolt (I suspect it'd be quite popular!) and their asset is suddenly returning diddly-squat.
It's a pity so many folk have been dumbed-down, but years of lowest-common-denominator TV and incessant advertising, have reduced a quantum mass to cannon-fodder. It won't last when they erally feel the pinch - they'll turn ugly, betcha bottom dollar.
So to speak :)
Strewth Bernard, what are you saying:
"Dairying produces hardly any high paid jobs and, surprise, surprise, not everyone wants to work on dairy farms."
As for:
"He is simply operating within a short term and inflation-focused framework given to him by politicians and ultimately voters."
I don't think it's voters, it's politicians. Sure voters like some of the side-effects, but most will think no further than these, which in not unreasonable. Plus look at the way the other dipsticks in MSM report thing. Therefore it's left to our leaders to explain what is required.
Sorry, did I say leaders, I meant politicians.
So we are stuffed - there are no leaders. Seen any evidence of leadership?
Have a great day.
Cheers, Les.
Bollox Bernard - everyone knows the cause of the exchange rate problem is the US economic weakness not NZD strength, otherwise the Kiwi would be at 1:1 with AUD too and its not
Bollard can do naf all about it given our tiny economy - unless you are advocating going back to a fixed exchange rate ?
I essentially agree with BH, although there is nothing new in the observation that politics in Western countries is short-termist. Hell, let another government do all the hard work some time in the future, not me, and not now.
This is the case in NZ and any other Western-style democracy, look at the EU where governments have deliberately overspent since Euro introduction, the US which abuses its status as a reserve currency printer, and so on.
What si the conclusion? Old Bollard cannot intervene in the currency markets anyways, NZ being a minnow there with its resources. There is no economic answer to the question, obly a political one.
In short, we have to question our traditional system of democracy. The only Western country I know that is managing with a reasonble long-term horizon is Switzerland, where political and business "elites" are constantly checked and balanced by popular referenda.
Another idea might be to re-think our old system of one person one vote. Is it any longer suitable, or does it tempt politicians into growing a large hand-out dependent underclass as a reliable voting pool? Would it be worth thinking of weighing votes by factors such as tax paid, or educational achievement?
If we do not re-think our current democratic mechanisms, we will stumble from crisis to crisis until we finally hit the wall, and all bets are off anyways. Better to change as long as we can do it in a rational and controlled manner.
"Oh dear JK and BE need to get re-elected so just shut down any fancy ideas until after November. " ""'
As I commented yesterday and at various other times. The high exchange rate (read TWI if you want to partly exclude the US fiasco)
Key would not easily get re-elected with petrol over $2.50.
What happens after the election?
Tourist industry sapped by World Cup drag.
Re-insurance monies all here and converted to NZD
The $300m per week borrowing splurge all in NZD and a drag on government interest costs
NZD kills off more non-farm exporters
Dairy prices down due to US/Europe production catch up
Key Government now has anothre three years so it can balance the books ruthlessly-you bet.
Is there more?
Yip - Goff gets in by a whisker with a Green coalition forcing him to ban Destiny Church, shut down mining and all offshore exploration, new taxes on petrol and dairy farming to bail out Kiwirail and Kiwibank, and the firefighters,PPTA,EPMU and maritime workers unions receive a 15 % payrise backdated to 1 May 2011
Speaking of short-term focus, Bernard, have a look at the NZD/USD cross for the past 11 or 12 years. You'll see a decade-long trend of increasing NZD, interrupted briefly in 2008 and 2009 when we had a global knee-jerk currency flight to USD during the height of the US financial crisis. The "high" NZ dollar is a symptom of long-term structural changes and trends in the NZ and US economies. I suspect that the cross rate cannot be corrected over any meaningful timeframe by NZ Reserve Bank intervention in currency markets. Mr Bollard doesn't have deep enough pockets!
This news hasn't helped the markets either
Greek bail-out was a one-off, says German finance minister Wolfgang Schaeuble
http://www.telegraph.co.uk/finance/financialcrisis/8666789/Greek-bail-o…
Validity of my sentence below applies almost on all political and economic issues.
Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.
Twenty years ago i walked into a coffee bar,in Queen street the smell of coffee and cigaretts was intoxicating.Their was one fat girl sitting in the bar that looked a bit forlorn and ignored.The funny thing was I walked into the same bar in its latest incarnation the other day.Their wasn't the smell of tobacco..but their were many fat girls,And a couple of thin ones smoking outside.I concluded that the anti smoking legistlation,had increased the size of the girls .This wasn't what it was supposed to do! Then musing on this..I checked the latest diabetes statistics.The thought that hit me " like a diamond in the brain" (shades of Apocolypse now) was ..That "You can choose your addictions...but you cannot escape them".Like the reformed, sex addict, can join a church and then get off, by preaching against fornication.That way, he's still in the game,but his addiction has been chosen..Thus are the way of things in "moving the deckchair land".The only things that still matter when all is said and done is..Sex.. Gunpowder..and Gold.Because we havent got a lot of this Trinity, we will just do what we are good at..going through the motions,doing what we have too,,but not really getting that much done.Where did the shine go?
In reality most claim "addiction" as an excuse for an unwillingness to exercise self-control, self-discipline and willpower.
"I'm an addict" is the loser's way of saying "I'm too self-indulgent to quit doing the self-destructive but pleasurable things I enjoy".
"Won't" becomes "can't" even though it's still simply "won't".
Currency intervention rarely works and can cost enormous amounts of money. Just as the Swiss how it's going for them right now.
If you want to manage exchange rates you'll need more than an interest rate tool.
Given their constraints they did about all they can do.
Agree that a high NZ$ helps Key and Bollard achieve their targets.
Agree with your analysis.
All we need is for someone to propose a viable solution, given that NZ's weight in the global economy is feather-light. (What did Gareth Morgan once say? A pimple on the world's backside.)
Until then, we'll all happily borrow € in Europe at 3.3%, get 4.25% for a 180 day term deposit and take the 20% currency margin advantage in the last 4 months on top.....
"This is part of a theme now developing globally of what experts call ‘financial repression’.
This is where central banks artificially hold short term interest rates (and in some cases long term interest rates) low or near zero. This helps heavily indebted consumers and businesses dig themselves out from under the debt by allowing inflation to eat away at the real value of the debt."
For once, Bernard, I agree with you. But this has been going on for centuries - have you only just figured it out?
"When are we going to make life harder for consumers and borrowers and send signals that we actually want more savers, investors, producers, exporters and highly paid workers?'''
Here's the thing - for every saver, you need a borrower, and for every producer, you need a consumer - it's what makes the world go round. Actually, thanks to fractional reserve banking you need quite a few borrowers for every saver, and thanks to automated production lines you need quite a few consumers for every producer ;)
When consumers consume less, we have recessions and depressions. If governments didn't borrow / print money, we wouldn't have big motorways or hospitals. If local governments didn't borrow money we wouldn't have any parks, gardens, kids playgrounds or stadiums. If the private sector didn't borrow money we wouldn't have any shopping malls and there would be a severe housing crisis.
Who would want to live there?
Debt needs to be kept under control, but it has it's use. Think about it. Every airport you've ever been in, every plane you've flown on, every building you've been in, every road you've driven on - all originally funded by debt.
Debt is money creation, and it won't go away. There's a lot of politics and talk of 'debt ceilings' as governments try to 'appear' responsible, but it will continue. We used to talk of debt in millions, then billions, now trillions,.... next quadrillions.... ...think I'm wrong?.... wanna bet a quadrillion on it?!!
philthy, you forgot to add the UK, Germany, Spain, France and Italy to the list. Most countries in Europe have been bankrupt before, some many times over.
People talk of countries going bankrupt as if it's the end of the money game - it isn't, it's all part of the money game.
The UK was bailed out in 1945 by the US to the tune of $4.34 billion, double the size of the British economy at the time. They made their final repayment on that loan in 2006.
Irelands €85 billion bailout will look similarly small in decades to come.
France became insolvent eight times between 1500 and 1800, and Spain declared bankruptcy no less than seven times during the 19th century alone!
Life goes on, people keep earning and spending, and as Bernard noted above - inflation keeps eating away at the real value of the debt - this is why governments never outlaw inflation and in fact purposely aim for it.
Property is an inflation proof asset - long term - and you can borrow lots of money against it. Money in the bank is not inflation proof. Shares can do brilliantly or terribly depending on which company you buy, and they are hard to raise money against. No amount of tinkering with tax laws or interest rates is ever going to change those facts.
Murray: You make some really good points. Not all debt creation is 'evil'. It depends what the debt is going to be used for. If it's put into something useful, and the return is greater than the value of the debt, then it's worthwhile. I think the issue was for the USA, and Europe and NZ and Aus for the last 10 years is that too much of the debt went into housing and not enough into creation of new industries or infrastructure that would have had a lasting impact on the economy.
Debt needs to be kept under control, but it has it's use. Think about it. Every airport you've ever been in, every plane you've flown on, every building you've been in, every road you've driven on - all originally funded by debt.
Ah no thats not accurate Murray.
All the things you have mentioned were all invented and dreamed up under a gold/silver standard.
Many of the wars of last century were however funded by fiat but metals were always in the picture, after all you only have to examine what Boorman shipped to the swiss bankers -Gold and plenty of it. The western bankers citi, chase manhatten, city of london wall st firms etc who financed all sides had no problem with looted gold/silver...
The BIS comes to mind that is what the BIS was primarily set up for war booty...but you will have to research that story yourself and its a deep deep rabbit hole...deeper than most surface dwellars are prepared to go....
It's only the garbarge of about the past 30 years thats been funded buy fiat debt and thats proabably why the quality of things like housing etc appliances etc is in general is garbage...and why you are surrounded by throw away garbage...open your eyes and look at your street...garbage everywhere...
In the pre fiat days loans were not easy to get with out some thing tangible to offer.
So what ever you were going to be doing you made sure it would last...
Was it perfect no way...you still had the JP Morgans...
Real money is not easy credit.....aka as fiat!
I agree, moving away from the gold standard changed things, but if anything it results in even more inflation as there is no limit to how much money can be created.
I'm not sure it's all garbage - it's actually been 40 years since 1971 and there's been a hell of a lot of development and infrastructure since. Most of the best quality buildings, airports, planes, roads etc have been built during that time....
That's right Murry, the 40th anniversary of the loss of the international gold standard August 15th 1971 and the world has carried on it's merry way. Debt increasing at double the rate of economic growth.
US total credit market debt at the time was 140%GDP, even with the very high inflation rates that followed the debt to GDP continued to increase.Now at 375% GDP or x2.65 from 1971.
Murry "there is no limit to how much money can be created."
Do you think 1000% of debt to GDP in 40 years looks likely? At 5% interest that would require fully half of the economy just to pay the interest!
Trouble is the whole interrelated global economy is in a compounding debt trap, widespread bankruptsies and the whole banking and savings (pensions) system collapses or slow down the rate of debt growth and the GDP collapses. There is no painless way out. That's why the PTB are trying every thing they can think of to A/ keep the existing debt on the books and B/ keep debt increasing by Governments doing the borrowing. In NZ we currently have private debt growing at about 1.5% GDP and Government debt growth at about 7%GDP. Well above the nominal GDP growth and still, aside from some exports, the private sector is stuck in a rut. We have become addicted to double digit, unsustainable, debt growth.
Well if you take the USA most of its infrastructure is old and had it.
The US hasnt had much if any of the debt you're posting about above put back into any US infrastructure, sure the US may have built Denver airport,
The US, rail, energy grid water supply etc etc, have been woefully neglected.
A few flash Trump towers in debt + interest down Manhatten does not make functioning utilities. Hell one of the bridges collapsed over there not many years ago... check out the California energy model a complete farce - think Enron!
Many other things have been neglected....
The profits of debt have gone to the usual suspects not back into society as you would like to believe. Those same suspects enjoy tax bailouts as well...huh?
Cui Bono?
Fair points, Sepherial. They do however have the best military and space programs on the planet, not that they are benefits that get enjoyed by the man on the street.
But then the whole inflationary fiat based money system doesn't benefit the man on the street either. Inflation from debasing currencies is a big factor in enslaving Joe Public to a life of poverty. Another big factor though is simply human nature. If we did away with monetary systems and went back to bartering, the same people would end up with bare cupboards and the same people would end up with more food than they could possibly eat...
Fair enough Murray. I think the whole thing is utterly fascinating. We've somehow ended up with a monetary system that, as you say, allows and even encourages exponential economic growth but also carries with it the seeds of it's own destruction. Those seeds are sprouting as we speak.
Yes Murry I agree with your sentiment here. I have no one all encompassing answer
Barter is no good it works up to a point but then you run into the "coincedence of wants" Hence the need for units of exchange...
NZ socety has lost more than it has gained imo in the past 20-25 years.
Sure many have gadjets and nicknacks made by slaves overseas, some have landed million dollar positions with perks but has our overall quality of life of the majority and the quality of those we vote for the quality of our surroundings increased or decreased ?
Id have to go with the latter in retrospect.
...
My suspicions are that the Gold standard was dropped, purely and simply because the Vietnam war, would have caused the economic trauma being experienced by America today.
.They were broke after that fiasco.Like no gold no war? The Romans had that problem,and usualy invaded a country with producing gold mines. Apparently war is now very good for business, another conflict, and the unemployment rate in the states would drop back to about 8%.If all conflict ceased, the millitary Industrial complex would shed mega jobs.Which begs the question, Is the present economic model dependent on conflict to keep it going? and, is it, the sicker the economy gets, the more danger of conflict starting for it to repair itself?
Large standing armies cost alot to run = Rome
War has always been good for business.
Yes imo the current model needs never ending war - the war on drugs- the war on terror- the war on libya - the war on green house scam - The war over here the war over there - the war on you!
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. Eisenhower.
Consider most of those in the City London the share holders known as the Crown made there modern wealth as we know it from slavery, drug trafficking, armaments dealing...
Look around you and start connecting the dots of people events places motives, it starts to form a pattern then it becomes obvious...
Gez I didn't even really notice the "Tradable & Non-tradable Activity" graph up the top.
Not a great record from this government, so much for rebalancing the economy, the export sector has performed badly under their control, while the non tradable sector keeps going up.
We've just gone back to our old bad habits of borrowing from overseas to buy houses again.
That can only last so long, we know what happened to Ireland, Greece, Portugal etc when they tried that game.
Digging to become rich.
Are you unemployed, on benefit, struggling with paying the bills, but young and adventurous ?
I’m off with shovel and pick to a secret location on the West Coast tomorrow – setting up a new business called NZGoldduck Ltd.
Meeting: Hokitika Gorge Sandfly Flat 1pm
http://www.findgoldnz.com/stories.html
..and then I invest my “Goldmoney”, like the government does – HA - in companies to make things right here in New Zealand, supporting the NZworkforce in the billions and not foreign countries.
With an explosive gold price, PM does the NZgovernment buy gold now – in order to deal with - balancing and rebuilding our economy ?
Nothing will change the short term focus until we change our political system. The politicians rely on popularity to get elected, not managing our economy properly. See www.abetternewzealand.co.nz for details.
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