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Labour's Parker on monetary policy; Says RBNZ should consider NZ$, employment & growth with inflation; RBNZ to decide appropriate mix; But monetary policy needs mates too

Posted in Currencies
See video

By Alex Tarrant

Last week I sat down with Labour Party finance spokesman David Parker to ask him about the changes Labour wants to make to the Reserve Bank's mandate if it wins the 2014 election, and why he thought those changes were necessary.

Labour mooted possible changes to the Reserve Bank Act in the run-up to the 2011 election, and since then Parker's time in the party's finance role has seen him questioning whether the central bank should just primarily target price stability.

Whether you agree or disagree with the policy, if Labour wins the 2014 election, Parker is set to be the next Minister of Finance. This is his current thinking on potential policy changes he will make.

A brief summary:

1) "We just don’t think that [inflation] should be given primacy over other aspects of economic management, like the exchange rate, particularly given how the world has changed in the last decade"..."But I don’t think that the Reserve Bank Act should say that the exchange rate for New Zealand should be X or Y." 

2) There could be trade-offs between the mooted equal mandates of inflation, the level of the NZ$/exporters, employment and growth:

"And at the moment we always trade everything else for inflation targeting. If there’s ever a conflict between the objectives, the primacy given to control of inflation over other objectives – inflation trumps the other objectives.

"And we’re saying that’s wrong. We’re saying that there are times when you should give a wee bit in respect of your inflation target."

"There will be times when the importance of control of inflation trumps other matters of economic importance."

AT: Does the Reserve Bank just figure out those times itself? DP: Well, yes they do.

3) Monetary policy needs mates, especially to help narrow the current account deficit. Government can change settings influencing investment environment (ie tax settings - Labour wants a capital gains tax) and saving rates (Labour wants universal KiwiSaver)...

"But it’s notable that Australia has capital gains tax, plus [a form of] KiwiSaver, and they’ve still got...these similar problems. And I would say that what’s true of our monetary policy settings is also true of theirs."

4) Macro-prudential tools, like LVR ratios and capital ratios, should be used by the RBNZ for 'economic outcomes,' not just 'stability outcomes.'

5) Eyes enhanced role of RBNZ board in decision making processes around level of interest rate, use of macro-prudential tools. Also wants board members representing exporters and labour interests.

6) On moving from CPI target to nominal GDP target, or targeting the price of a basket of export goods:

"I’m willing to look at all those things. I don’t profess to be expert enough to say what’s the proper answer in respect to that, and I’d want to take advice on that. I’m open to those ideas."

7) Says NZ facing competitive currency devaluation abroad as major economies with very low interest rates engage in quantitative easing. But "not sure about" whether RBNZ should be cutting rates too:

"I think that Alan Bollard made a fair point at his final appearance in front of the finance and expenditure committee that lower interest rates would not necessarily flow through to a lower exchange rate, if people thought that those interest rates were unrealistically low.

"One of the problems that we have at the moment in the world, is that other interest rates are too low, rather than ours are too high.

8) AT: You’re also talking about this intervening in the currency markets every so often, just to try and scare people off...

DP: "Again, I haven’t gone quite that far. What I’ve said is that one of the criticisms that’s made [about] some of our monetary policy is, because it is so anodyne, and so predictable, we are a safe harbour for a proportion of the liquidity in the world that needs a short term place to stay."

"...the point these people are making is that one of the reasons why we have greater demand for our currency than would otherwise be the case, is that we have such predictable settings around monetary policy..."

-----------

So without any further ado, here is the transcript of our discussion on Thursday, September 27:

AT: So Labour wants to get away from just inflation targeting...

DP: Correct. Which is not to say that we think that inflation is good; [and not to say] that we don’t think that the Reserve Bank has a function in controlling inflation.

We just don’t think that it should be given primacy over other aspects of economic management, like the exchange rate, particularly given how the world has changed in the last decade.”

AT: So Labour’s going to tell the Reserve Bank it wants a set exchange rate? How do you figure that out then?

DP: We don’t say in the Reserve Bank Act that we favour a set inflation rate. We do have a policy targets agreement which sets out a range of what we want to achieve. But I don’t think that the Reserve Bank Act should say that the exchange rate for New Zealand should be X or Y.

We’re not saying that, and to say that would be to misrepresent our policy. What we’re saying is that the Reserve Bank should have broader objectives than having to give primacy to inflation targeting. I don’t personally think that’s especially controversial, despite the fact that the National Party says it is.

Now, there are plenty of other countries [that] already have broader ranges. But even if they don’t have broader ranges, there are a lot of other countries that are actually now, in effect, not pursuing inflation targeting at the expense of exchange rate.

You’ve got to, I think, have a bit of a historical perspective in this. When I was overseas, Jeffery Frankel said something to me which I think resonates. He said: ‘No one system of monetary policy is right for all countries, and no one system of monetary policy is right for any one country all of the time.'

AT: But yet you want to copy other countries’ monetary policies.

DP: In part, yes, where there’s better practice, I do. But in part what I’m saying is – the second part of that – that no one system of monetary policy is right for any one country at all times – means you have to change with the times.

In the past New Zealand has, and the world has. We had the gold standard, then that stopped running, so we had Bretton Woods, and we had post-Bretton Woods arrangements which were largely fixed exchange rates. That ran out of rope and then we moved to new systems of monetary policy which focused on control of the money supply.

That stopped working, and we moved to inflation targeting. Inflation targeting has stopped working, and so we should move on.”

AT: So there’s other aspects you want the Reserve Bank to focus on. Is that like employment – the level of employment in the economy? The level of growth?

DP: We’ve said that the Reserve Bank should keep an eye on inflation, employment levels, and the exchange rate – well, the interests of exporters. There’s different ways you can express it, but essentially yes, a broader range of indicators other than inflation, or in addition to inflation.

AT: But do you accept some of these things could conflict with one another.

DP: Well that’s the very point.

AT: If the Reserve Bank cuts interest rates to foster economic growth, to foster employment, then that could be at the detriment of inflation.

DP: We’re not going to say that they should pursue full employment. We’re not saying that.

AT: Well, just more employment.

DP: Your question actually proves my point. That there are trade-offs involved here. And at the moment we always trade everything else for inflation targeting. If there’s ever a conflict between the objectives, the primacy given to control of inflation over other objectives – inflation trumps the other objectives.

And we’re saying that’s wrong. We’re saying that there are times when you should give a wee bit in respect of your inflation target.

AT: And who decides that?

DP: The Reserve Bank

AT: But you’ve told them to have stable inflation...

DP: Yes I have

AT: And you’re telling them you want more employment

DP: I’m saying that stable inflation is not an end in itself. There will be times when the importance of control of inflation trumps other matters of economic importance.

AT: Does the Reserve Bank just figure out those times itself?

DP: Well, yes they do. At the moment, we actually take a decision in advance, and we effectively say, there’s never a circumstance in which inflation targeting should not have primacy over other aspects of the economy. That’s very nice and it’s very simple, but how unreal is that?

For a country that has had a current account deficit that spans three [decades], and every year we have a current account deficit we plug that gap through more overseas borrowing and sale of assets to overseas, resulting in what we have now, which is net international liabilities of over 70% of GDP, predicted to go to over 80% of GDP, and the reason for our credit downgrades last year.

AT: So would the government perhaps do this through the Policy Targets Agreement, saying, 'for the next year, because unemployment’s so high, we want you to focus a bit more on the employment level than inflation?' It seems like it would have to have a bit more input from government though, than just leaving it to the Reserve Bank to decide.

DP: Well, I don’t know about that. I would be happy to look more carefully at policy targets agreements in other countries. But we’ve got many, many economists at the Reserve Bank who are able, in my opinion, to properly have a more nuanced approach to management of inflation and other aspects of monetary policy that are important to the growth of the economy.

At the moment we say, through statute, that they must give primacy to inflation targeting over all other aspects of economic management. And given that we face competitive devaluation abroad, and we are losing that battle in New Zealand, and it is costing us jobs and incomes and the New Zealand balance sheet inexorably every year gets worse – I think we had one or two years following the reinsurance proceeds from Christchurch and in recession where people put away their cheque books when net international liabilities didn’t get worse.

But the long-term trend is clear, and we’re back on that track now. We’ve got to change something.

AT: So right now the Reserve Bank should be cutting interest rates in line with everyone else?

DP: I’m not sure about that. I think that Alan Bollard made a fair point at his final appearance in front of the finance and expenditure committee that lower interest rates would not necessarily flow through to a lower exchange rate, if people thought that those interest rates were unrealistically low.

One of the problems that we have at the moment in the world, is that other interest rates are too low, rather than ours are too high. But maybe they should. And that’s certainly, I think, something that should be looked at in the Reserve Bank in the context of effects on exchange rate, rather than giving primacy to merely the inflation targeting.

AT: You’re also talking about this intervening in the currency markets every so often, just to try and scare people off...

DP: Again, I haven’t gone quite that far. What I’ve said is that one of the criticisms that’s made [about] some of our monetary policy is, because it is so anodyne, and so predictable, we are a safe harbour for a proportion of the liquidity in the world that needs a short term place to stay.

AT: But that’s because we demand that liquidity. We want those overseas funds in order to...

DP: There’s two issues here. I don’t think that’s necessarily right in respect to the whole of the problem. Yes of course we want money because we’ve got a current account deficit to fund. There’s a chicken and egg argument there that I’ll come back to.

But the point these people are making is that one of the reasons why we have greater demand for our currency than would otherwise be the case, is that we have such predictable settings around monetary policy that if you want a safe place to put some of your money, if you’re taking a portfolio approach to investing, then you’ll whack more of it in New Zealand than you might otherwise do, because our settings are just so predictable.

It’s virtually a one-way bet. You’ll know that you’re not going to lose it...

AT: So even though we’re a net capital importer, you’d want less of that.

DP: Actually I want to be less of a net capital importer.

AT: So how do you do that? Is that up to the Reserve Bank, or is that up to...

DP: No, you overcome your current account deficit. That’s how you get over that.

AT: Is that up to the Reserve Bank though? It’s up to fiscal policy surely...

DP: It’s partly up to fiscal policy. We ran fantastic fiscal policy in the thousands, which is the point that I made earlier, and we still had a current account deficit.

Is it up to the Reserve Bank to fix that problem? Not alone. But do current Reserve Bank settings make it harder for our exporters? Yes they do.

And as a consequence of that, our current account deficit is worse than it would otherwise be.

AT: If the Reserve Bank settings are detrimental to exporters, that’s surely because the interest rate is too high at the moment – the OCR.

DP: I think you need to be a bit careful that you view things in a prism, other than just in the instant. And over time, there is no doubt that New Zealand’s exchange rate is higher than the fundamentals of our economy, and I think that’s evidenced by the fact that we’ve run a thirty year current account deficit.

Stand back and say, has our currency been too high? Well, we’ve come through the best terms of trade in a generation. We never had a current account surplus.

People say, ‘well Australia do the same thing.’ Stand back and ask yourself, how does it make sense that following ten years of a resources boom, Australia’s still in a current account deficit. Their currency’s overvalued relative to the fundamentals of their economy.

AT: Like us, they’re sucking in funds to go into their housing market...

DP: In part. But in part the reality is they’re not earning enough from their exports, despite record volumes of exports in Australia, and record prices for minerals, because their exchange rate is too high, relative to what other countries are doing in the world.

We’ve got China having the world’s largest trade surplus ever, successfully managing their exchange rate at a peg – low. We’ve got other countries around the world doing something similar, like Singapore, managing within a range.

The Americans – and you read the literature around quantitative easing - one of the reasons they’re doing it is to lower their exchange rate to improve the competitiveness of their export economy against Japan and China and others. And that’s narrowing at the rate of twelve percent per annum in part, because of their quantitative easing.

You’ve had Germany profiting for years off a euro held low by problems in other parts of Europe relative to the German export economy, and now Europe’s going into quantitative easing – effectively printing money.

You’ve had Switzerland, not taking real money and spending it to defend their exchange rate, but printing money in order to defend a cap. You’ve got the British having done something similar.

You’ve got countries like Brazil intervening when their currency goes too high. It’s happening all around the world, and our currency is being inflated as a consequence. We should not ignore that.

AT: So in response to that people would say countries like Singapore, China, have huge reserves, China can export a lot because of their economic settings – perhaps labour laws and stuff like that, the US is trying to ward of deflation.

DP: Well let’s do them one at a time, because the grand question’s hard for me to answer here. Ask the China one first, for example.

AT: OK, China. Huge foreign exchange reserves, they can manage their currency with a peg...

DP: Born of a current account surplus.

AT: Yes, so again it comes back to current account surpluses doesn’t it.

DP: That’s right. Born of a current account surplus because they manage their exchange rate in way that doesn’t happen in New Zealand. Now I’m not saying that we should go to the extremes of China, but I’m saying that we should be further away from the extreme where the primacy of inflation targeting trumps exchange rate.

AT: You can say Singapore has those reserves.

DP: Again. This is a chicken and egg argument. When you have a current account deficit for 30 years, of course you’ve got no reserves. Of course you’ve got no reserves. But you’ve got to do something serious about overcoming that, otherwise the country’s balance sheet gets worse every year, as it is in New Zealand.

And one of the things that you’ve got to be willing to change is giving [away] the primacy [of inflation targeting] for the people who can influence this in some way, which is the Reserve Bank, and at the moment we tell them, ‘no, don’t do that’.

AT: It’s also surely due to the settings that influence capital allocation in the economy though as well...

DP: I’ve already acknowledged that, I don’t deny that – it is influenced by that. That’s why we also favour a capital gains tax, so that there’s fair allocation of capital in society – in productive enterprise rather than speculative investment.

That’s one of the reasons why we also favour expanding KiwiSaver.

But it’s notable that Australia has capital gains tax, plus [a form of] KiwiSaver, and they’ve still got...these similar problems. And I would say that what’s true of our monetary policy settings is also true of theirs. They’re no longer working.

AT: With Frankel you talked about nominal GDP targeting. Is this something you’re seriously looking at?

DP: What he says is, even if you’re inflation targeting, he doesn’t think that the Consumer Price Index is the appropriate index to monitor, and he prefers nominal GDP.

He also thinks that for some countries that have a resource weighting – have a commodity basis of their exports – that they should be monitoring a basket of those commodities that they export, rather than nominal GDP or CPI.

I’m willing to look at all those things. I don’t profess to be expert enough to say what’s the proper answer in respect to that, and I’d want to take advice on that. I’m open to those ideas.

But I am sure that giving primacy to inflation targeting over other aspects of economic management is no longer necessary in New Zealand, and is no longer right.

AT: So we’ll see some details soon perhaps, from Labour.

DP: Well you’ve already seen some. We said we’d amend the Reserve Bank Act to extend the objectives in the way that we’ve said; We’ve said that the membership of the board should be changed so that it’s less dominated by bankers, and there are other aspects of the economy better represented, namely exporters and the interests of labour.

We think, whatever the rules are, you’ll get different outcomes if the board is of a slightly different make-up.

We’ve said that prudential tools, like loan-to-valuation ratios, or capital adequacy ratios, should be able to be used for economic outcomes, not just financial stability outcomes, which is the limitation under the current Act.

And we’ve said that the decision as to interest rates and those macro-prudential tools should be integrated and taken by the board, rather than by the Governor of the Reserve Bank. If you’re going to be using both of these tools it’s a nonsense that you’ve got separate decision makers for them. They should be integrated.

AT: So the board would tell the Governor, ‘look, there’s an asset price bubble going on in the housing market, we reckon...

DP: The Governor would effectively be the chief executive of the Reserve Bank. The board would be in receipt of all of the advice that the Reserve Bank provides to it, and the board would take decisions as is the normal decision making process, whether it’s for cabinet, for major corporations, or school boards of trustees.

AT: Now you’re having the board making more operational sorts of decisions?

DP: No, I don’t think so. No more so than is the case for the Cabinet, or for the board of any corporate body. It’s actually the normal decision making process, rather than having a Presidential model, which is effectively what we’ve got with the Governor.

Then we’ve also said that we need complimentary measures that work alongside Reserve Bank policy, including sound fiscal policy by the government, and we stood for that in the last government, and we stand for that going forward.

And we think that we need complimentary tools in the form of capital gains tax, to take the heat out of asset price bubbles.

AT: So mates for monetary policy.

DP: Yeah, we do. We agree with that. We’ve long agreed with that. The Reserve Bank said monetary policy needs mates, and we agree with that.

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55 Comments

Dear god give me

Dear god give me strength..!!!

No surprises then..Parker

No surprises then..Parker went to the feet of the Keynesians and came home stuffed with ideas on how to turn promises into votes and votes into power.
Simple really...I promise to creat employment, to drive wages higher and rid the country of poverty and I will do all this with smoke, mirrors and a wave of fresh BS.
Are you happy to have Parker 'managing' this economy!...it's bad enough with the current fools in charge.
 
 

With Australia owning up at

With Australia owning up at todays RBA meeting , will the NZD reach parity against its cousin before we do anything .

RBA cut .25.  More cuts

RBA cut .25.  More cuts coming ...

RBA wants to get the cuts in

RBA wants to get the cuts in early , to give time for the consumers' fingers to grow long enough to reach their credit cards before Christmas comes .....
 
......a little  retail therapy should off-set the mining industry's blues ......
 
And boost the flagging housing market ........
 
..... retail & houses .... yup , that's a balanced economy ...

Rba cites softening in labour

Rba cites softening in labour market,.economic downturn,lower commodity prices.
NZ currency corrects upwards ,Kerrs prediction 180 degrees out at present.
 

I  only periodically agree

I  only periodically agree with Mr Kerr but  his prediction re NZD weakening following the initial AUD/NZD fallout (the other 180 degrees ) will be correct.

Cutting through Parker's BS,

Cutting through Parker's BS, we arrive at one simple conclusion. He has instructions to come up with the sort of promises that can be sold to the peasants in the 014 electoral 'buy votes to win power' game.
Key's problem is one of education...not his own but that of the peasant masses...they have been dumbed down to such a degree that they are willing to believe the political BS about growth and employment..about higher wages and living standards.
And so it is up to Key and crew to get their collective finger out far enough to 'teach' the peasant mass the truth about govt meddling in money matters. The socialists intend to lie about how they can create employment and real growth by playing games with the value of the Kiwi$....National are facing being in opposition because they refuse to accept that the voters are dumb about matters economic and financial.
Sell a Kiwi a lifestyle based on cheap debt and you have a serf for life...sell the same fools a dream about the future and you have the socialists in power. Once those swine are back it will be a rapid decline into permanent misery designed to ensure permanent socialist fodder.

Ummm, I have a question

Ummm, I have a question Wolly. Isn't the election suppost to be a competition in 'buy votes to win power'. I mean in the absense of just asking the electorate what policy they want directly are the parties not suppost to compete to offer the most compelling policy to get the most votes from the electorate? Thats the version of Democracy I learned in civics anyway, I am interested to learn that this is less than ideal behaviour for a political party in a democratic election.
 

Correctamondo Nic The NZer.

Correctamondo Nic The NZer.

Yes the system works that way

Yes the system works that way but only because the few who vote allow it to happen.."power" is not a mandate to manipulate an economy into cycles of fake growth through cheap credit and following an election, raising the concern about inflation to justify a credit crunch..
Parker wants to be able to manipulate at will.

But wait a minute Wolly, I

But wait a minute Wolly, I was taught in civics that not only does the system work that way, but its suppost to work that way. I mean I have been going along now thinking I should be voting for the political party which has my favourite goodie bag of policy? Guess I was just brainwashed and indoctrinated in the government school system?
So maestro, how should I be picking my favourites on polling day? The party with the most policies? The party with the fewest? The most cuddly mascot?
 
 

Wolly, I agree the socialists

Wolly, I agree the socialists (labour) inflicted a hell of a lot of damage last time. However I do think David Parker is right on this issue.
NZ has been living in a fools paradise with monetary policy. By only using the official cash rate and not other macro prudential tools like core funding ratio (implementation delayed by national), we've been swamped with speculative money from offshore which has driven housing and credit bubbles. This has driven up the exchange rate and damaged our export and manufacturing sectors terribly. It has created a massively unsustainable situation, where NZ is dependent on house price growth for wealth.
Amazingly this is still going on and is highly destructive for NZ. We need better monetary policy (and fiscal policy) which focusses on productive investment and growth. I'm glad David Parker is bringing this up.

Absolutely agree. Labour and

Absolutely agree. Labour and David Parker are doing well to get to grips with this, at last. All while NACT keeps it head firmly stuck in the sand - dismal and dumb.

But rp..why has Parker not

But rp..why has Parker not said Labour will set pre election public sector spending limits applicable to all departments et al...why is he not prepared to establish a fiscal pathway the voters can judge Labour on with the govt resigning if they are broken....His entire blurb is about what he can do behind the back of Wheeler, with advice from his experts not those at the RBNZ or at Treasury...
Who are those experts rp?....are they the Keynesians he decided were the ones who knew all the answers....can we assume Krugman et al will set Parker's policies?
And has Parker or Shearer said boo about mistakes made over the 9 years under Clark, that will not be repeated under Shearer.....fat chance.

Agree with your points Wolly,

Agree with your points Wolly, Labour is still a real concern. My comments related solely to David Parker's suggestions of a re-think of NZ's monetary policy. As far as fiscal policy, public spending limits for departments etc...labour still scare me. Agree, they haven't atoned for the Clark years, so we don't know if that horrorible mess could be repeated again.

His entire blurb is about

His entire blurb is about what he can do behind the back of Wheeler, with advice from his experts not those at the RBNZ or at Treasury...
Wolly ,your reading a lot into that statement, but let's ask this , has the policy of those so called experts  at the RBNZ and Treasury shown any level of expertise ( outside bookeeping) that  has encouraged forward thinking to where we find ourselves in regard to both internal and external upward pressure on our dollar.....?
 I  more often than not share your cynicisym toward Politicians in general, and occassionaly find it easy to find fault, or be dismissive....but we need to address the ACT, and from where I stand Key and English have no intention to do so......many would agree targeting inflation as the primary objective is not always the best course to charter anymore. ...John boy is not among the many ,and you have to ask why, as in ,well it's working for somebody here..right.
 When you say fat chance of a change in Labour's meddling policies, it is speculation with the odds in your favour I might add, but nevertheless speculation.
 
I don't see any thing wrong with evaluating what Parker had to say at face value and judging that on it's merits alone , enough to conclude it's a step in the ...right...direction ..or a step away from the wrong one.

Alex - what is your

Alex - what is your response?
 
"It’s happening all around the world, and our currency is being inflated as a consequence. We should not ignore that.
 
AT: So in response to that people would say countries like Singapore, China, have huge reserves, China can export a lot because of their economic settings – perhaps labour laws and stuff like that, the US is trying to ward of deflation."
 
Does having "huge reserves" really matter when trying to reduce value? How did they get a proportion of those reserves? How would they use the reserves when trying to modify their currency' values?
 
Cheers, Les.
www.changenz.co.nz
 

Les, had a look at your

Les, had a look at your changenz site. Excellent initiative. I hope people notice it and understand the issues.

Alex - answers to my

Alex - answers to my questions:
 
"Does having "huge reserves" really matter when trying to reduce value?" No, because a central bank can print an unlimited amount of its currency and use this to buy foreign currency reserves, which would lower the exchange rate.
 
"How did they get a proportion of those reserves?" They bought some with their printed currency, see above. It cost them nothing to buy that proportion of reserves.
 
"How would they use the reserves when trying to modify their currency' values?" If their currency devalued beyond an acceptable level, they could use these reserves to support their currency by buying it back. Note, it cost them nothing to buy this particular proportion of reserves initially.
 
"Has SNB made losses of approximatley 70% of GDP in their recent intervention activity?" No, this is a fallacy, see above.
 
"Will SNB  make the oft referred to "losses"? No, because there is no reason for them to sell their acquired reserves. And, it's not as though it's costing them much in storage space to house their fx reserves, because thin air doesn't cost much to store. 
 
"Why do some say that SNB accumulating foreign reserves exposes the bank to increasing exchange rate risk and losses?" I don't know, see above. 

Hi Les, Yep, you can print as

Hi Les,
Yep, you can print as much as you like. And when your currency reaches a the point where you want it to be at, you can start buying NZ$s back.
But what if it keeps falling once you've done that? (everyone else says, stuff this, and keeps selling NZDs). And what about management of the peg/range after that -  if the currency falls below the low range band?
The point of those who say 'well they've got large foreign reserves' is that it might pay to have a chunk of reserves already, in case you're gonna need more than you buy with your freshly printed NZDs if you kick something off that's harder to stop than you thought it would be.
Bit harder for us to print USDs than NZDs...
Cheers,
Alex

Hi Alex - the question is,

Hi Alex - the question is, "the point where you want it to be at", which is where the real economy can make returns that close the current account deficit (cad). If the currency dips below the associated value of that equilibrium point, so what? We finally see the benefit of a floating currency which just adds more power to the elbow of the real economy, who wouldn't want that? Then with cad closed, given better real economy performance, the currency recovers to equilibrium point and RB only has to assist real trade associated flows with cyclic intervention to maintain a band. As for the size of the currency band, whatever is acceptable for cad variation about equilibrium. With these goals in mind, huge reserves are not required, from where we are positioned now. Cheers, Les.

  Alex - there is no danger

 
Alex - there is no danger that the floor falls out of the currency, the central bank is pushing back against the market the resists at first, then goes to play elsewhere.  They simply have no place to play the currency because they know the central bank will enforce the ceiling and as such can do it for as long as they want with only (in the worst case analysis) a notional opportunity cost but with the benefit of protecting their real economy. 
There is a cost born by the rest of the country as the central bank enforces the ceiling then those that like a higher exchange rate will suffer a lower exchange rate but they share the same medium tern benefit in the protection of their real economy.
It is a question of what matters - the Swiss have decided their real economy is worth the fight.
www.johnwalley.co.nz

Yes John, at last the

Yes John, at last the benefits of a floating currency and once the deed is done an exchange rate based on earnings, not borrowings. Cue the fiscal tightening advocats. Good on em', so long as the same advocats recognise and seek to effectively address the "huge" amount of private debt NZ carries. In particular the "huge" amount of debt associated with the agricultural sector, which has been written, not to improve proeductivity, but simply as 'Ponzi Borrowing' to support over-inflated asset values so those at the top of the pyramid can exit to ..., greener pastures I guess. 

Thanks Alex....way more

Thanks Alex....way more informative than Shearer, and although it will be shouted down by all those fed up with another version of the same thing, I liked a number of Parkers considerations...I liked his approach to , try , to be as forthright as possible with the intentions of policy regards Reserve Bank Act.
Now for all the jumpers who will be on this staement like sh#t on a stick without a better proposal of their own...tell me what is wrong with this  from Parker...?
 DP: Well you’ve already seen some. We said we’d amend the Reserve Bank Act to extend the objectives in the way that we’ve said; We’ve said that the membership of the board should be changed so that it’s less dominated by bankers, and there are other aspects of the economy better represented, namely exporters and the interests of labour.
For all those whinning about the trap both ourselves and the RBA  have walked ourselves into by targeting inflation only at the expense of the wider economy.
 
DP: I’ve already acknowledged that, I don’t deny that – it is influenced by that. That’s why we also favour a capital gains tax, so that there’s fair allocation of capital in society – in productive enterprise rather than speculative investment.
That’s one of the reasons why we also favour expanding KiwiSaver.
But it’s notable that Australia has capital gains tax, plus [a form of] KiwiSaver, and they’ve still got...these similar problems. And I would say that what’s true of our monetary policy settings is also true of theirs. They’re no longer working.
Alex , this is the one you should have run with, it's a very good interview and I'm pleasatly surprised even if I don't hold with all Parkers responses, I think the policy direction is far better than  the one we persist with.
As I'm expecting a bash over this, please prepare yourselves by at least reading it before dissmissing it, to avoid accidental / deliberate ignorance.
Cheers again Alex...a goodie I thought.

Agree with you Christov. Time

Agree with you Christov. Time for this debate in NZ. Good on David Parker for getting his head around these issues and having the guts to front the media on it

Yes, good stuff Alex. This is

Yes, good stuff Alex.
This is all rather scary. Labour have some good ideas here and are clearly stealing a march on National. National are being complete woosies on the exchange rate issue. Cries of "there's nothing we can do" sound like incompetence or worse. Worse being incompetence and corruption.
Trouble is you can be sure that Labour and the Greens will find a way to take a good idea and stuff it up in right royal fashion.
Hopefully someone sensible will put forward some good ideas. Er, someone from the Reserve Bank perhaps.  Oh no, they are all asleep. Shh don't wake the poor wee things.

"that there’s fair allocation

"that there’s fair allocation of capital in society"
Mist to be fair...I think he's linning up the Banks and their perpetuation of the property obscession....albeit veiled.

Well ultimately mist let us

Well ultimately mist let us agree they seek to discourage the practice the Banks are firmly engaged in......targeting the customer..?...prolly.

Do u really think so

Do u really think so Christov..???
Take his comments about the board of the reserve bank....  Don't u think it will get twisted into "political appointees"...
Look at the current board.... Where is it dominated by"bankers".... They would loveeee to make political appointments....i'm sure
http://www.rbnz.govt.nz/about/whoweare/0092967.html
Ok his idea is to broaden and make multitude... the agenda of the Reserve Bank...  Does anyone really think anything good would come from this.
Listen to David Parkers comments .... he does not have a single answer.
Where was he when Labour did the Free trade agreement with China.....  It was common knowledge that China was using Monetary policy to gain as much benefit as they could from , what are, structural flaws in the Global monetary system...
That free trade agreement  did not give our producers and manufacturers ANY kind of level playing field..... NZ has not really handled globalization very well.
In my view ... the ONLY result that will come from this latest idea will be ad hoc growth in the monetary and credit aggregates..... That will be their answer to everything.... employment.... exchange rate.... increase govt spending...etc.
I can only imagine what non tradeable inflation might become.....  (maybe they could control that..somehow)
What would I do.?? : ( this is off the cuff ...so don't be tooo critical )
1/Global monetary system is flawed....  It does not balance trade... I would bring back   some kind of import tariff.... I would do something that puts local manufacturers and producers on more of a level playing field.... without going down the road of protectionism.... somehow....trade needs to be balanced.
2/ Globalization has resulted in vast capital flows....  I would , somehow, buffer NZs' economy from this...  eg a tax on repatriated Capital and earnings..???  ( Banks access to unlimited credit fuels the housing mkt... farm prices...etc..etc. .... Banks are happy but we end up outbidding each other with borrowed money)
3/ GFcrisis has shown that credit growth (money growth ) has been terribly excessive over the last 30 yrs....  I would have the Reserve bank redefine "inflation targeting" and have more of a focus on credit growth.
4/ Capital formation.... I would only allow foreign direct investment if it actually created something new... with new employment. ...  ( heres a radical idea..... I would no longer allow interest payments to be tax deductible... ) I would have a bias for Capital in the form of equity .  The "financialization" of the modern economy is a problem...NZ has over $300 billion in credit.... its' like a flea on the dogs back..sucking blood.
I actually think broadening the mandate of the reserve bank to include employment and exchange rates...etc..... is a bad idea....  ( just look at what a mess the FED has made over the last 30 yrs)... ... The only sector that really gains is the Financial sector.
This money printing thing.... that they call a "race to the bottom".... is not a solution....   just as getting a new visa card to pay off the maxed out old visa card is not a solution.
My ideas might not be that great... but I reckon they are a bit more realistic than David Parkers.... Rather than leading to moderation... his road will lead to more violent extremes.....    in my view.
Cheers  Roelof
 
 
 

Roelof....just going to

Roelof....just going to digest that a bit longer, I think I like where your going.
 I'm taking a copy of your post for further digestion, would like to see what Les has to say on your ideas..
 thanks for that Roelof..
 Oh BTW ...what thoughts do you have on FTT's....and or Tobin.

Roelof , here is a sample of

Roelof , here is a sample of something Qiggley's been involved in.....
Australia-New Zealand Shadow Financial Regulatory Committee 

Statement Number 4, June 19, 2008 

Mortgage Markets After the Sub-Prime Crisis 

In this statement ANZSFRC discusses how policymakers should react to the recent disruption in 

securitisation markets.

The statement makes the following points  

1.   Despite its recent problems, ANZSFRC regards securitisation as a financial innovation 

which is now embedded in banking and capital market practices.  

2.   ANZSFRC recommends that authorities in both Australia and NZ give further 

consideration to the merits of allowing banks to issue covered bonds.  Approval could be 

subject to strict limits on the proportion of total liabilities in the form of covered bonds. 

3.   ANZSFRC believes the involvement of the public sector in securitisation is a topic worthy 

of further exploration in the context of a broader investigation of mechanisms for 

enhancing the stability and efficiency of capital markets. 

4.   ANZSFRC believes it would be desirable to evaluate the effectiveness of existing regulation 

of investment advisors before replicating it for mortgage advice

 

 

here's the link....http://www.iscr.org.nz/f364,12330/ANZSFRC_Press_Release_JUNE_2008.pdf

 

 I would like over time to see what the rest of the board has been involved in ...needless to say it will take some time.

For all the left leaners out

For all the left leaners out there I wonder whay you never go on about the Greens policy on these matters? In truth if you vote Labour and they win there will be a lot of the Green tail wagging the Labour dog syndrome. This is what NZ will vote for in 2014 and the fallout will be fun to watch as the Greens are not pro growth, sure they say they are, but they fundamentally hate the productive sector. Their solution to these issues will be to buy a Heidleburg or two.
They also state what the winners will be, just like Obama did with TARP, Solyndra anyone.
This is even before we have the most restrictive carbon taxes as well foisted upon us. Tax the polluter they say, do you not think the polluter will not pass on these costs? Economics 101 and you guys crave for this goverment in 2014. Bloody fools.
I will have a new mortgage soon as I am extending my house, being in debt (I will still have 80% equity) will be good as the inflation their policies will produce will whittle down my debt much quicker, assuming I have a job that is.
Sure, National can and should do better, but a Lab/Green govt will be a lot worse.
If I was Key, I would next time the min wage debate comes around, I would increase it to $15/hr as wanted by the dopey left and see what happens as a appitiser to the main meal of a Lab/Green government.
Wolly is right, the average voter is financially thick. Decades of ever increasing welfare has dulled the brains power to the average Jo as the govt has bailed him out with over generous welfare.
 

I would scrap the minimum

I would scrap the minimum wage entirely ..... I want to get young adults into work , and off the WINZ nipple ......
 
.... how the heck do politicians know what wage rate employers can afford ?

So I take it you are anti the

So I take it you are anti the green stance, and thus pro growth? How do you propose to do that on a finite planet. The warning signs have been there for 50 years, the rate of growth in the world population is been in decline since 1961 and could turn negative any time. First time ever in history that has happened. How to you reconcile that with your economics 101?

Wolly is right, the average

Wolly is right, the average voter is financially thick. Decades of ever increasing welfare has dulled the brains power to the average Jo as the govt has bailed him out with over generous welfare.
 Well no points for pointing out the obvious there Best Status, the average voter is thick, which is incidentally why the Nats have romped home on piss poor policy , bank toadying, unfullfilled employment promises, refusal to accept the wider export economy has suffered at the hands of bad fiscal policy......openly refused to engage in debate concerning the credibility of the Minister for Epsom ......it just goes on.
Sure , we'd had a gutsfull of the Nanny State Hellengrad and kicked it to touch, one big reason is Labor became smug, arrogant , conceited, too sure of it's grip, as a consequence  developed bad policy with little or no thought of being challenged,
I think National have arrived at exactly this point already, and hold the view there is little to be concerned about, and so continue with privatisation agendas, crony capitalism, and the politics of the complacent.
Now to Wolly..,whom, I have a great deal of respect for, but in all Wolly's observations the common thread is a lack of alternative proposals, he decides their all shit anyway and,ok that may be the case, but that says more about the type of people entering politics and their agendas, than it does the promotion of ideas for better policy.
Best Status your use of the two words (thick and average)  connected to left leaning  does you no credit on the intellegence scale.
So I conclude you remark was driven by ....fear.
P.S. before you jump on you horsie there...I am an absolute believer in Refrming Social Welfare in this Country with a view to the irradication of the Entitlement Mentality, if Labour are to unseat National , it must be done off the back of good policy and not voter bribes as used by both Majors..........I'm not holding my breath on that one. 

We are not allowed to say

We are not allowed to say Morons, Mist.....Bernard has poo poo'ed it....but Mor ...on that later.
Yes the mandate thingy, John boy's certainly  pulled a long bow with that one, but that is the Corporate way, as the milky boys will find out soon enough.

"The lack of alternative

"The lack of alternative proposals"....alternative routes to a sound economy...I doubt there are any other than those that are known already. Both parties have a history of failure. That will not change.
 
 
 

 Both parties have a history

 Both parties have a history of failure. That will not change.
 
Now, I fear and I mean Fear...you are right about that Wolly...but please , please propose an alternative that you could live with.
I say again , I'm only looking at what Parker had to say and agreeing it's a step in the right direction.
Personally I think as long as the invisible man is running that ship, they'll have their work cut out for them.
Of course that's not withstanding Key doing a Romney....and having a slip of the tongue.

Well, it's just as well Key

Well, it's just as well Key and cronies have no exposed incompetance....ooops! um , we never looked at the effect it would have on the Property Market....ooops! we never looked at the effect it would have on Small MFG Exporters....ooops! we never expected the taxpayer would have to bail out the Finance companies.....I could go on but you get the gist.
 Of course raising of the minnium wage will become inhibitive to youth employment, but by then most of them may have migrated to Australia where the minnium wage is now $15.00 or $15.30USD.

good for you mist...

good for you mist...

The is no perfect solution

The is no perfect solution Count, but we are locked into a system that is gradually centralising power. The answer to that is to decentralise it. Sure the process will start again, but it needs to be reset once in a while. As Alexander state in "A Timeless Way of Building", representation should be in the 5-10,000 range to ensure personal accountability of the leaders. Get rid of the party system, that is just a facade anyway. Break the country down into city states and have the central government there in a much reduced role, with the most important being to maintain the rule of law.
 
The current system won't give way though, it will have to be broken first.

the only thing we can be

the only thing we can be certain about with labour and the greens is that the people at the bottom will get a lot more regardless of how the economy is behaving and it will come at the expense of others.
clark did that and lasted 9years.
 

Well I guess thats arguable

Well I guess thats arguable based on your defination of "at the bottom"  and "a lot more" with WFF I think you can get assistance up to a salary of 70k.....and HC and Labour like JK and National right now have to be seen to be at the centre of the political spectrum.
The Green's are more difficult to qualify, I vote green because of the green ideal and want a green economy and not because of thier left wing ideals, and more handouts, that I am uneasy with.
Besides which we cant really give a lot more, I cant see how given the costs of existing services and the inability to pay moving forward for what we have now.  Also in effect the poor (for want of a better word) just dont have enough of a voting block to get much more, I mean look what happened to the alliance.  If Labour openly pandered to them it would mean moving to the left and effectively facing an election rout, worse than they have now...
regards

the idiot wants tradeoffs, so

the idiot wants tradeoffs, so he has to write a formulae for the RB to follow or its impossible......
Since I dont think he can add 2 and 2 together (peak oil ==s no more growth) something as complex as the above and workable would be an un-believeable achievement for him.
fat chance...
Keep going Labour you are digging your own grave very well, congrats.
regards
 
 

Ha! Ha! Ha! The lack of

Ha! Ha! Ha! The lack of understsnding on how montary system works by all those inside and outside govt means unintended consequences.One of the first things the head of the Reserve Bank needs to be doing is explaining our fait currency system works.No-one should be allowed to run for parilment unless they have a working knowledge on how our govt spends money.Educating people on basics like why budget deficits Do NOT burden our children with future debt. That TAXES do not pay for govt.spending!The govt. is not like a household.The govt.is the monopoly issuer of the currency therefore in a techinical sense not  operationally constrained by taxes it collects;it cannot go broke;there is no solvency risk. Taxes should be used to regulate aggregate;i.e.regulate spending power.Govt.deficits add to savings,surplusses subtract savings from the non-govt.sector and lead to recessions.Recent history in America and N.Z. provide strong evdience for this.We won't be able to afford pensions blah blah blah..The govt will always be able to pay for goods and services that are available at any paticular point in time.Whether those goods and services are available due prior investments in health ,etc will determine what furture we leave our children.We cannot burden them our debts but we certainly burden them by not investing in their furture.The trade deficit is unsustainable?For about as long as I can Remember the trade deficit has being going to do us in.Imports are real benefits and exports are real costs to us.The govt. should be obliged to spend when there are resources lying idle.One of the easy things they could do is CUT taxes.

Brian, I understand what u

Brian,
I understand what u are saying...  sounds like "modern monetary theory".
U say the only thing that distinguishes Govt from households is that the Govt. is the "monopoly issuer of currency"..... and the ability to tax
OK....Just imagine if u were able to counterfeit currency..... using ur logic it should be a benign thing.
Lets say the counterfeiter was a benevolent chap...   SO not only was he buying up all the assets for himself...  he was giving lots of money to his best friends and relatives.... also to ones that he thought were in need.
Is this win/win ..????     who are the winners and who are the losers..????  Is there a transfer of wealth...??? 
At what point does everybody realize that swapping assets or goods and services  for money is a losers game.????
Would the counterfeiter be able carry on... forever... his money printing... or will he get "found out"... because of all the unintended consequences of his actions.. ( after all he had  thought  that his money printing was harmless ).... not his fault that more and more wealth was owned by him and his friends..
I'm no expert... but I'm a bit dubious about the alluring promises of MMT.
 
 

For the record, I agree with

For the record, I agree with virtually everything Parker has said. It's worth adding import substituters and tourism to exporter considerations. Also in my view adding a measure to determine a correct level of exchange rate; where the default would be a current account in balance, and the government articulating reasons why it should vary by say 1-2% either side of balance, when significant productive investment is required; or conversely where the terms of trade should lead to a surplus.
Good luck to him.
And come on the Nats; get with the game. I suspect you guys know he's right as well.
Written from a mild London October day- am travelling for a fortnight; hence the delay in commenting on my favourite subject.