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Bernard Hickey points to the enormous game of musical chairs in the currency markets. He thinks the last one to print and devalue is the loser. Your view?

Posted in Opinion

By Bernard Hickey

The surge in our currency this week to a fresh five month high against the US dollar and a record high against the Euro highlights how we are losing in a race to the bottom.

Britain, Europe and the United States all this week signaled they are determined to print more money to devalue their currencies in order to protect their own economies.

US Federal Reserve Chairman Ben Bernanke committed to keeping US interest rates at zero percent until the end of 2014, a full year longer than previously indicated. There is even now talk emerging from within his own monetary policy making committee of the need for a third round of money printing later this year.

The European Central Bank is now widely expected to lend another 1 trillion euros to its banks on February 29 to calm down financial markets and bolster Europe's battered banking system. Much of that money is being recycled into European government bonds and is even being squirted out the sides into currencies like ours, in the form of buying covered bonds being issued by our banks. This is a massive injection of cash printed out of the ether and pumped into the European economy.

The Bank of England also signaled this week it will probably have to fire up its printing presses again to offset the effects of a tough austerity programme by the British government.

This northern hemisphere strategy of print and hope is fine and understandable for them. Their export sectors become more competitive and they can preserve or create jobs in exporting and in import substitution. Employment in Germany's export sector is doing remarkably well.

But it is effectively a beggar-thy-neighbour strategy.

It means that investors can borrow at near zero percent interest rates and then buy assets in higher interest rate currencies to make an easy profit.  It is fueling a surge in cash around the globe on a hunt for hard assets, such as farmland, mines and oil fields.

It creates an enormous game of musical chairs in the currency markets. It means that the last one to print and devalue is the loser.

New Zealand, along with Australia and some other commodity-driven nations such as Brazil and South Africa, should now be increasingly nervous about being the last one left standing.

Yet our Prime Minister John Key and Finance Minister Bill English seem remarkably relaxed about being the last ones standing.

Both Key and English said this week there was little they could do about what they see as an inevitable surge higher in the currency. Key even said exporters should get used to a currency over 80 USc and pointed out a high currency was great news for consumers. Again, consumers and voters are being prioritised above manufacturing exporters and their workers.

He even said one of the reasons for the rise was that investors in China and elsewhere were attracted to the higher interest rates on the assets in our currency. He could easily have been talking about the sale of New Zealand land to those able to borrow money in Europe, China and America at near zero interest rates.

New Zealand's manufacturing exporters, particularly those exporting to the US-dollar dominated Asian markets and Europe, should now be very nervous. The print and hope strategies look set to leave anyone who doesn't print and hope sprawling in the dust.

We saw the inevitable results of that with yet another collapse of a manufacturing exporter this week. Auckland's Criterion Furniture called in the receivers after a signficant decline in exports into these markets.  There are now 180 workers wondering if they will keep their jobs.

They are the ones left standing.

How long before New Zealand has to join the game? And can we afford to stand by and just let it happen to us?

Our government seems comfortable as a spectator. At some point it may have to become a player.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

88 Comments

Central Banks and individuals

Central Banks and individuals should have the strongest currency in their savings.  That would be Precious metals.  Greshams law states that the strongest currencies will be hoarded - for savings or capital preservation.

No I dont agree.....to start

No I dont agree.....to start with we have a speculative bubble (in lots of things, that distorts the value of things/assets)....lots of ppl have bought gold, yet core inflation is 2%.......
Precious metals are not good in a deflation event.....as there is a risk that they can lose value......Cash cannot, it buys more....going into the event...at the bottom, sure then precious metals make sense but then does say property....
regards

My opinion is that currencies

My opinion is that currencies are still in a bubble against commodity money.  They still have an elevated value, when you take into the commitments of governments vs their income.  
It will become more distinct if and when NZ inflates, prints, money.  This is the example that is showing up in the northern hemisphere.
 

Precious metals outperform in

Precious metals outperform in deflation and inflation.  Even the Great Depression gold $21 up to $35.  There is a far higher risk that cash will lose value.  Gold has been marching higher, in spite of claims about deflation.  Is there a point where you will realise that gold will never come back to $1500?  In fact the worse this gets, the higher gold will go.  This gold bull market will not peak untill this crisis is resolved, in a sustainable, way.  Untill that time it will keep marching higher.

steven, compared to history,

steven,
compared to history, hardly anyone owns gold these days. Not a single kiwisaver fund or managed fund in NZ has any real exposure at all... not sure why you say it is in a bubble - do a lot of people you know actually own it? 
Most governments are lying about inflation and employment stats... they just change the method of calculation... here is a few unadjusted graphs from the US...
http://www.paulcraigroberts.org/2012/02/02/the-real-economic-picture/
Actually in a big deflation event cash in the bank would be worthless - it would all disappear as all banks would collapse - at least without unbelieveably massive new money printing to keep them anything close to solvent. Although don't think this very likely just yet - I mean BH article is about countries devaluing their currencies - which tends to be inflationary - the currency is worth less and less that is - making exports cheaper to export markets and imports more expensive to the domestic market....
There is a risk anything can loose value so you just have to go with the best option at the time, 'welcome to planet Earth'. Some of its inhabitants are a bit strange, but in time you'll grow to love them...
Personally, I'm going with the precious metals... they have much much more debt to print yet...

I read everywhere about gold

I read everywhere about gold being good in a high inflation enviroment Steven, but someone in the business told be the exact opposite is the case. People turn to gold because it holds it value while cash is losing it. At the moment we have low interest rates combined with exponentially expanding money (credit) creation, which would seem a perfect scenario for gold to protect your purchasing power.

I suggest you read this

I suggest you read this explanation by an economics professor, its simple enough to understand,
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
The statement, "people turn to gold because it holds its value while cash is losing it", is like saying inflation is occuring (which reduces the value of money).
Some people believe that cash = money, and there for that central bank operations like QE or government operations like deficit spending must cause inflation over some time frame.
 

If you find some of my old

If you find some of my old posts (12 months or more ago)Nic you will find I have probably been the only one around here to raise the issue of velocity. It didn't take a fancy professor to outline that the supply side incorporated both quantity and velocity, an encyclopedia did trick:-) So yes you can have physical expansion of money yet the overall money supply shrink.
 
The quote I make above is actually incorrect, it is a low interest rate environment the gold guy mentioned. If is he correct then gold should move higher as interest rates go lower, or remain low. Investment in gold or silver will actually contribute to a contraction in the money supply. Hoarding in the issue there and that is also well explained in an encycopedia.

Hi Nic, how is your NWO

Hi Nic, how is your NWO disinformation promo campaign going then?
I noted you still ignore my questions to you. I'll post them again in this post - incase you forgot... how convenient.
1. Why does the IMF ban member countries from attaching their currency to gold? (yet is more than happy to accept repayments of debt in gold). Your previous answer on the other post is obviously wrong... anyone can work that out by thinking about it.
2. Secondly, and this is the fourth time I've asked this of you, you say it's obvious gold is just being bought out of fear - really? - what exactly is it then central banks (who are major buyers) are afraid of?
 
Hope you had a great Waitangi Day - I spent the day at the Newmount Waihi mine.... great weather... loosey traffic on the way back

Deflation is simply a

Deflation is simply a shrinking supply of money, if money is backed by gold then less units of that money to exchange for a weight of gold. So what?
This says nothing of the value of gold, only that people once again trust their paper representaion of money....this is a good thing. Deflation is the benefit we see from productivity gains...prices falling as more is produced by the same effort. Again this is a good thing.
As for the argument about "core inflation" and what it is....can of worms to say the least.
If we stick to the basics....gold being money...and that paper needs some tether to limit it's creation (inflation/QE) then we can see more clearly the relationships of price and value. As it is now we are manipulated out of our wealth by an ability of central banks to print units of exchange with no relationship to production of goods or services.
We are chasing our tails on pointless debates while missing the central point of gold being money and that people are protecting their savings with it, regardless of "price". Time is proving this point.
As far as debasing the currency goes, that is for nincompoops. With a strong currency we have options. Our assets are denominated in our strong currency so foreign purchasers will see the price go up in their currency. They are the ones getting poorer not us. Why join them?? We get inputs relatively cheaper and have the option of dropping our prices if we have to....and wages are constrained by worker purchasing power being stronger.
I earn strong dollars...yay for me....do I want to earn weak dollars? No way, I will just need more of them DUH!
 
 

Can a tiny country with a

Can a tiny country with a mere 4 million pretend that we are still in the 1980-2007 era economically?   We may as well benchmark ourselves reasonably against USA, UK, Euro etc,  print a little,  lower the OCR a little, get a bit of stimulus going.  In the face of a global disaster unfolding anyway - the risks must be small by comparison.     

I dont understand why we

I dont understand why we cannot put the OCR at <1% myself....throw in a tobin tax as well...the specualtive and damaging carry trade then vanishes.....
regards

Agreed again :-)

Agreed again :-)

punk

Isn't a 'Tobin tax' the way

Isn't a 'Tobin tax' the way forward?
We have no financial sector to (supposedly) scare off.
We'd like to stop 'hot money' doing the 'carry trade' at our cost and losses.
So simple, do as some other countries have done (Malaysia???) and 'convince' the 'hot money' to go else where, by taxing the damaging activity.
 

Yes I'm familiar with

Yes I'm familiar with fractional reserve lending and Chris Martensons video etc.
I agree the WHOLE system needs looking at and CHANGING, for the benefit of all and NOT just the '1% of the 1% of the 1%).
But a Tobin tax is a very simple first step, that if will only 'slow down the speculators' it WILL in the mean time make a HUGELY positive effect on the tax take.
 
So again I ask everyone (not just you Iain), why not introduce a Tobin tax? What are the down sides?
It seems all positive for 'tax take', for detering 'hot money' and lowering of the exchange rate.

Try Googling 'Sweden Tobin

Try Googling 'Sweden Tobin tax' to discover what thay learned about the consequences!

Not a good example Wolly. The

Not a good example Wolly. The Swedish transaction Tax applied only to Shares and Derivatives which drove the business off-shore. A better example is Australia which had Bank Transaction taxes FID on withdrawals (Federal) and BAD taxes on Deposits (State) both of which were repealed and encompassed within replaced by the introduction of 10% GST in 2001 http://www.aph.gov.au/LIBRARY/pubs/rn/2001-02/02rn07.htm

Im hard pressed to say

Im hard pressed to say no...the ppl who do seem intent on speculating at our expense.....
I'd love for our Govn to say why not.....
regards

Very well summed up AAA+ ;-)

Very well summed up AAA+ ;-)

They are in a way....ie if

They are in a way....ie if they dont print we plunge into a Great Depression sized event...printing is aimed to stop that...
regards

steven, if the US and Europe

steven, if the US and Europe do keep printing they plunge into a Great Depression event too.... it's just an extend and pretend game now...

Michael Hudson appears to

Michael Hudson appears to disagree with you. I was so pleased to hear he is working with Dennis Kucinich.
http://michael-hudson.com/2012/01/hudson-keiser-on-2012-imperialism/
http://michael-hudson.com/2011/11/systemic-deficit-strategy/
Unfortunately Max Kaiser has always been very market oriented, but he seems to have principals rather than market religion.
Iain's post highlights similar policies to what Hudson describes in the US have so far been followed in NZ (though on a much smaller scale).

Wow Nic - you have trolled

Wow Nic - you have trolled through the internet and found two whole people who disagree with me. 
Considering from our previous posts your credibility is totally washed down the toliet that really means a lot.... well you did it to yourself I suppose...
In the end printing more (and they will print more) will be like pushing on string, it will not gain traction, like I've said to you before - eventually time will tell who is right then...
Would you like me to find some links of people who disagree with government must spend up very large - get the taxpayer into much more debt policy?

great post Iain

great post Iain

I'm just simple folk - so I'm

I'm just simple folk - so I'm struggling to understand how if printing vast amounts of currency is a bad thing (as is regularly expounded upon here at interest.co.nz by both BH and all th learned comments-folk) - why then would it behoove New Zealand and its citizens to hop on the printing presses too?
 
Currently as I see it, the New Zealand dollar has appreciated significantly, meaning that the total value of overseas currency loans has depreciated to match. 
 
And as the NZD is appreciating, we are getting an influx of foreign capital desperate for any sort of positive return and accepting extremely low interest rates (in historical terms) for NZD denominated bonds.
 
Additionally a stronger kiwi dollar means vastly reduced importing costs meaning more spending power for the Kiwi consumer who has NZDs to spend. We are even likely to see staples such as locally produced milk and meat drop in price domestically - as it takes less NZD to match the overseas prices that primary exporters are receiving on the"world market".
 
I'd rather be domiciled in little old New Zealand and have NZD savings than in the US, UK or Europe and watching the value collapse - agreed? - so why are we so keen to follow suit with NZD currency depreciation?
 
Other than the squealing of exporters who are now learning that they could never hope to remain the lowest price and now will have to compete on quality and much as low price - where exactly is the down side for New Zealand and New Zealanders with a strong kiwi dollar?
 
I don't mean any macro-ecomonic twaddle either - I mean what are the tangible negative practical impacts of having a Kiwi dollar where it is now? Help us simple-folk understand ...
;-)

Hi PJK, Not sure if you got

Hi PJK,
Not sure if you got an answer to your question from anybody? But in a probably over-generalised brief way;
'Currently as I see it, the New Zealand dollar has appreciated significantly, meaning that the total value of overseas currency loans has depreciated to match' - not really true as borrowers from overseas (like banks, etc) generally hedge their forex risk, so they don't care if the exchange rate is up or down. Most of the money banks in NZ make from the foreign exchange market is by making a margin on their customers transactions rather than speculating on the direction of the kiwi $.
Not all exporters are squealing that 'we are going broke' pjk. I guess the baby who screams the loudest gets the bottle though. With high commodity prices - you can't make the arguement the exchange rate is hurting them that much as they get a higher sell price and the cost of many inputs like oil and heavy machinery is lower with a higher dollar. Also our exchange rate at present with our largest trading partner by far (Australia)  isn't historically high at all. It's the non-commodity manufacturing sector exporting to the northern hemisphere that's hurting, but part of this hurt is not only a pure high dollar story but that their economies are in recession (I mean if you take out the government manipulations). A lower dollar would be a subsidy for them - and because it would be in the exchange rate it would get around the WTO, unlike say tariffs. Generally other than potential balance of payments issues, everybody else would be worse off with a lower dollar - as most consumer goods are imported.... if commodity prices came down and our dollar didn't then we have more of an issue. But the exchange rate does tend to move with commodity prices anyway...
Yes I agree NZ is a better place to be than US, UK and Europe, why do you think so many rich Americans have been buying our land? (its not actually China)....

Bernard  the inevitable

Bernard  the inevitable collapse of the northern hemisphere currencies was writ large in the late nineties. Some had the sense to sell Stg @ 0.3268. Yep, 38% profit - Are you saying it is time to join the exodus and get out of here?

Everything was going great

Everything was going great until Soros turns up with his currency team....... Nek minute
NZ reminds me of Thailand circa early 90's....... Deficite spending and runnaway currency appreciation.

Thanks for that link Iain.

Thanks for that link Iain.

If you happen to own a

If you happen to own a currency that appreciates then your own wealth appreciates with it. Depreciating a countries currency to allow exporters to compete is a paper over the cracks way of hding the real problems. NZ should not get sucked into following down the path of these countries that are printing whilist ignoring their economies structual problems. When the printings over the real problems will still exist.
Lets fix the problems of competitiveness that devalued currencies hide, like too much goverment spending more than the tax revenue that's collected or even collectable. 
With our valuable currency we can buy the assets of those countries whoes currency is in the ditch.
There is no easy solution. I'll bet my life that what we're witnesing in the likes of the US, UK and Europe will not end well. Oh and its not capitalism we are witnessing!!!

If you happen to own a

If you happen to own a currency that appreciates then your own wealth appreciates with it. Depreciating a countries currency to allow exporters to compete is a paper over the cracks way of hding the real problems. NZ should not get sucked into following down the path of these countries that are printing whilist ignoring their economies structual problems. When the printings over the real problems will still exist.
 
This is not the problem. If major trading partners or competitors choose to depreciate their currencies, The logical position to take is to balance out your own position.
If petrol goes to $3.00, so be it. It is only an indication of inefficiencies in the local systems and governance. If you do not realign you have become the ostrich. New Zealand is much further into the mire than the Government, RB and Treasury would have us believe.  On the positive side for producers who export is they will inevitably be better off with a depreciated currency and the tax take will rise significantly, we will also no longer be borrowing $300m each week and more jobs will be saved and new ones created.
Conclusion? Draw your own.

Basil B - Correction:  NZ

Basil B - Correction:  NZ borrowed  $ 18 billion in the 13 weeks to 30 Sept 2011
More like  $ 1.4 Billion per week.
With C/A deficits since 1971 - the currency is overvalued - end of story

About time somebodyrecognised

About time somebodyrecognised this as a huge danger --- if we dont act soon the damage to our export business will be irreversible for many years -- and after all this is what our entire economy is based upon.
We can certaily stand a devaluation back to 70 US if not 65 -  and this might create the economic stimulous needed --- if we do this by printing - say 20 billion - we would also be able to pay for all the rebuild and some other significant infrastructure all of which would provide a further boost to jobs and the economy. 
The Americans have managed to do it-  admittedly with some massive QE figures -- Europe is already using this strategy - if we are not careful we will be looking at the dollar being over 95 cents and manufacturing and other export business collapsing around us with unemployment going throught he 10% mark -- with such generous welfare terms as we have this would be an absolute disaster and completely unsustainable.
one of the great values of your own currency - something the EU has learnt, is the ability to print and thus value / devalue your currency to the correct level for your stimulous needs -- withthe OCR globally set to be at record lows - its use as a finance tool is all but minimal - and printing has become the new best friend of finance ministers -- execpt here!
 
crank them up
 

Yes. Ask how the Chinese have

Yes. Ask how the Chinese have got their powerhouse going.
Answer. By keeping their exchange rate competitive. Most would say overly so, but it worked.
Now they have increasing wage rates if not better working conditions and we would not choose to live there,but.....

But how has the "Chinese

But how has the "Chinese Powerhouse" and lower exchange rate really helped their citizens? In the end China has a trade surplus because they pay very little to local workers enabling them to still make a profit while selling cheaply.
 
Does ANYONE here want to renounce their NZ citizenship and go and live in smog-filled Beijing and work in local enterprises? Thought not.
 
To my mind it is the low wages and low standards that have powered the Chinese economy - not the exchange rate.
 

That's a good point, PJK. Why

That's a good point, PJK. Why doesn't the Communist Party share some of its trillions in foreign reserves amongst the Chinese people who actually made it, particularly the rural poor? After all, isn’t that supposed to be one of the fundamental principles of communism?
 
Oh silly me I forgot. It’s communism with Chinese characteristics. Never a truer word spoken! 

Or why the usa will keep

Or why the usa will keep printingprintingprintingptinrtingpgntrngptrintpritningitprinting
http://www.marketoracle.co.uk/Article32987.html

Where's Rob Muldoon when you

Where's Rob Muldoon when you need him?  Last politician to have the courage to make hands on adjustments....

Could the person with the

Could the person with the 'most brain'  explain what would happen if we changed to a fixed ER. Even if it was just the 'Guvnor' and PM jawboning to do so for a period of time.
Would fixing fix it?
Bring back 'Piggie'

Waitangi weekend - we have no

Waitangi weekend - we have no real Leader- (team) of our nation, but a FX trader, who works for his foreign buddies - time to go PM !

Waitangi weekend  -  JK

Waitangi weekend  -  JK returns from his ceremonial duties to his basement trading room with other one-worlders making bets on the Aussie dollar, trading parcels of NZ land to the Chinese, talking the OCR down, borrowing another 1bln @ 1.5%....   -   hey being PM of NZ is just like the ML days.

I am puzzled why anyone would

I am puzzled why anyone would think that printing money somehow protects the economy. I thought that Weimar Germany and Zimbabwe shows how that plays out. After all, if a little printing of money is good, more printing is better, particularly if you are in a race to the bottom. The "bottom" is the same as the Abyss as far as I can tell.
The idea that economies are "protecting" themselves suggests some kind of careful plan. If Bernanke is anything to go by, the printing of money is what you do when you have run out of ideas. It is the mark of desperation. As we can all see, there is a lot of desperation in the world of central bankers today.  

Fix the exchange rate to the

Fix the exchange rate to the major currencies, let them print like mad, we go down as well, but without the printing. I suppose this would work for us if the govt balanced it's budget and slashed unneccessary spending. Exports boom and the tax take goes up, although import costs also rise. Poliitically difficult, too many welfare recipients to let us do this, I guess.
No easy way out of this.
 

Bernard, We need a campaign

Bernard,
We need a campaign to get the Media to debate the benefits of a lower exchange rate!

Why not debate the hazards?

Why not debate the hazards?

Many issues of national

Many issues of national interests should be discussed publicly. But our national TV programs are full of violence, crime and other stupid programs in stead. Educational and political programs are neglected.
 
Here a good  example from AU - go to the archive: http://www.sbs.com.au/insight/about
 
 
I’m wonder, why real debates here in New Zealand are so hard to get. In general criticism is considered bad. Talking progress particularly now in difficult times is essential.
 
 
How much do people in Auckland know about the suffering of Christchurch people ?
Some other issues:
                       Assets sales - how much land for foreigners ?
                     GST -  Living costs
                      Standards of living
                      Employment - NZyouth
                      Economic Vision
                      Health/ Education
                      NZ pollution
                     10 weeks - compulsory "military style" service

Incorrect snippy, those

Incorrect snippy, those aboard the great Iwi gray train, who represent about 15% of the NZ people, seem to have plenty of say.

Will i still receive a rent

Will i still receive a rent subsidy and family tax credit if the kiwi economy collapses into a pile of shite.
Oh i do hope so.

Of course you will.  As long

Of course you will. 
As long as you can provide evidence that you have made absolutely zero effort to educate yourself beyond NCEA level 1, wasted all your money on booze, TAB & nicotine to date, produced 4 or 5 kids, had 3 partners for 5 years each, and have a back problem that prevents you from engaging in physical work  -   the tickets' yours....

..........and have a back

..........and have a back problem that prevents you from engaging in physical work..........
 
Except shagging. These's still a few more kids to be had.

Will i still receive a rent

Will i still receive a rent subsidy and family tax credit if the kiwi economy collapses into a pile of shite. Oh i do hope so.
 
Of course you will. The Labour Party, with the rabid support of the socialist wowser, and its dancing prancing show pony, the Greens, will abolish private property altogether and just tax the rich pricks more. All done in the service of saving a grateful nation’s deserving beneficiaries, and of course, their party’s supporters.

Higher NZD = housing

Higher NZD = housing crash
higher NZD = not printing money as fast as other countries
higher NZD = fewer exports, less money circulating from export sales = less jobs = can't pay mortgage = cascading real estate crash
it only takes a small percentage of people not being able to pay their mortgage to take out the values of the rest of the neighborhood.  It's a long played-out process.  It's happening now.  
money printing is like pouring gas on a dry wood.  All you need is the spark, the event, that gets people to mistrust their paper money, to spend their paper, or the banks to lend it like crazy.  
Cue Austrian economics
I think it foolish to place all of your investment future on the ability of your neighbors to pay their mortgages.  It's putting all of your eggs into watching paint dry.  

even that old housing bull T.

even that old housing bull T. Alexander commented in the weekend that the strong NZ dollar doesn't help property as it discourages Poms selling up their Uk properties (if they can sell them in the first place) and moving to NZ. One pound goes a lot less further now than it used to.
Another big factor IMHO, which Alexander didn't mention, relates to the kiwi OE. Lot of kiwis in the 2000s went and worked in the UK for a few years, then brought back pounds, multiplied them by 3, and bought houses. Now, its harder to get jobs in the UK. And secondly you get much fewer NZ dollars when you bring your pounds back. Whether that phenomenon has been replaced by the Aus OE is debatable - I would argue that most kiwis stay in Aus rather than return, unlike the UK OE      

Oddly enough, nobody

Oddly enough, nobody discussed "inflation targeting" as one of the potential causes leading to the Great Depression. Why? Simple. Because it would confirm that the status quo's very basic definition of inflation is fatally wrong; it also means that the entire premise of "economy" is a joke as it is impossible to rely on any of the most "sacred" indicators in existence, and all the so-called economists are literally pilots, flying blind. Grice on just this possibility:

 

 
We know that episode didn't end too well. Yet to this day, on the long list of explanations for what put the "Great" into the 1930s Great Depression, the prior credit bubble which was allowed to develop - and was possibly even caused by the monetary authorities'  undue attention to an arbitrary variable (consumer prices) - and the false sense of security the stability of that variable created, is barely a footnote. Amid the mountains of literature on the "lessons from the 1930s" there doesn't seem to be much on the danger posed to an economy of allowing a committee of economists to tamper with the natural functioning of the market for capital by letting them decide what interest rates should be.

 
http://www.zerohedge.com/news/failure-inflation-targeting-hubris-central...
 

It would appear to be a

It would appear to be a massive overstatement to claim that any central bank is tampering with interest rates,
"there doesn't seem to be much on the danger posed to an economy of allowing a committee of economists to tamper with the natural functioning of the market for capital by letting them decide what interest rates should be."
because evidence points to them in practise following the market for 90-day bank bills,
http://www.rbnz.govt.nz/keygraphs/Fig7.html
It would be very nice to have somebody to blaim, but as is shown even the RBNZ decision to set base interest to historic lows (around 2009) was market driven. This in fact points to a market failure (to price money correctly) and probably points to insufficient central bank intervention, or to the fact they they don't have sufficient tools to actually maintain the value of money.
 
 

I think the idea is that a

I think the idea is that a period of apparent stability leads to excessive risk taking via excessive leverage. Excessive leverage then leads to instability. It seems to some extent booms and busts are a good thing in the same way forest fires can be.
So the policy of promoting stability is a very dangerous one. What happens is the first recession is fairly mild, and the second one may not be too bad, but the third one is devastating. By promoting stability you make the eventual adjustment process that much harder.

My point was its hard to

My point was its hard to accuse the RBNZ of setting the OCR at all, it looks like they do it as a reaction to the market. I think this comes down to their forecasting being not great (it's based on invalid economic theory), so their response is muted, so they just end up following the market. If they could forecast well then maybe being more influential they could combat bubbles, but this is not clear and its far from clear their monetary policy tools are sufficient.
Here is why DSGE models are not good,
http://www.youtube.com/watch?feature=player_embedded&v=0SPqMDMbRlo
The idea that stability is de-stabilising might not be a good way to put it. Steve Keen tried to produce a macro economic model which experiences a 'Minsky moment', 
http://www.debtdeflation.com/blogs/2011/05/16/a-dynamic-monetary-multi-sectoral-model-of-production/
But in this model environment you can hardly accuse the model of excessive risk taking. What this implies is that the monetary stability is not doing the de-stabilising, but warning of a big credit crunch coming. This implies that the apparant stability is being caused by the inflating debt bubble.
 
 

Quite agree about the RBNZ,

Quite agree about the RBNZ, they do what they can. Part of the problem is the need to match internal inflation to external inflation. External inflation is the rate at which your trade partners are devalueing their currency. If you devalue at a lower rate than they do then you must reduce wages each year or increase productivity faster than they do. Fail to do this and after a few years entire manufacturing industries are wiped out. We have been down this route, there must be a better way.
 

But if they are matching

But if they are matching internal inflation to external inflation then the OCR is still just essentially following the market, no?
You should not be surprised that globalization is destroying manufacturing base in NZ, thats what its always done and always does.  
 

Don't you mean the market,

Don't you mean the market, which is forward looking, already prices in its expectation of a cut or rise...? (You actually have to understand that markets are forward looking to get this Nic). By just looking at a graph it only looks to you like the RBNZ is following the market (rather than the market pricing in the change before hand). To me it looks like the market is pricing in expectation of a rise/cut, sometimes the market does get it wrong which is why it bumped up at the end - then came back down again once the OCR announcement was made, normally though the market seems to get it right. 
Central banks manipulate everything....including interest rates (like the FED buying treasuries to keep the base rate down/supressed, in the US case below inflation rates).
Of course Nic if you are still trying to spread your NWO disinformation propaganda, I see how you would obviously take a different view - that central banks aren't manipulating anything and they are our friends so there is no need to do away with them and there control and manipulation causing distortions in the free markets (which therefore are not 'free' of course).

I am with the people who

I am with the people who would like a words of one syllable explanation of exactly what Bernard means by money printing and what the pros and cons are for New Zealand.
 
Tha Aussies did some real money printing after Lehman when they basically sent everyone $500 and asked them to buy a TV with it. I dont think that is what Bernard means as he seems to want the Government to cut spending quickly rather than give money away.
 
Does it mean the Reserve Bank buying Government debt rather that having foreigners do it?
That would be a negative for the Kiwi as less foreign currency being used to fund Govt borrowing.
What would happen next? Would we get a couple of notches down grade that would push up borrowing costs and cripple the economy? Would we get a ratings up grade because a lower exchange rate would boost exports and reduce our foreign debt as well as depressing imports as internal demand collapses?
 
Where does the balnce lie?

Question, How vulnerable are

Question, How vulnerable are the big four  banks ,to either a sharp or prolonged decline in the value of the NZD or more importantly the AUD and what would be the implications in regards to ease of overseas funding, growth/decline in bank deposits,their balance sheets and share price and  interest rates. The RBA is most likely to cut rates this week , I wonder if the retail banks recriprocate.

I don't understand how we can

I don't understand how we can be better off trading with a currency of diminishing value.  If NZD$1000 brought 1/2 an ounce of Gold and your company exported wigits at NZD$1000 a pop. Then the NZD is printed up in large quanties and as a result NZD$1000 then buys 1/4 ounce of gold and your company still exports widgets at $1000 a pop, are you better off? Your employees are getting a medium of exchange that will buy less, you need more NZD to pay for your imported products that go into making your widgets. Even if all the raw material for your widgets were sourced internally you'd still be faced with internal inflation from increase cost of imports in other segments of the economy. Your employees will demand higher wages, your next car will cost much more than the last one.
When valued againts gold or any other tangible asset NZD incorporated  loses value as whole, when the currency depreciates. In the short term it may seem advisedable to race the depreciation of ones currency to the bottom, so too speak, in an effort to help exporters, but in reality we are really saying to exporters, ÿou have to acceptless for your products. This will not end in  greater profits, due to imported inflation. 
One school of thought, is that all the print of  USD  causes the deflations of their value, the Chinese will allow their own currency to inflate slowly. As a result  Chinese companies will slowly start selling more products to there fellow citizens instead of exporting these products. They will beable to acheive this due to the increasing wealth of all Chinese as their currency is raising in value, and as a result  will increase its buying power and also reduce the cost of raw materials to the Chinese. This is already happening in practise, I know of Chinese companies who's sales have gone from mostly exported to mostly sold locally, in one case the  a company that makes fashion wear thats is sold online, the company is the largest online fashion company in China, has experienced this exact change in customers, I know this for a fact as my daughter is currently working there.
Read about the Weimar Republic, the experts at the time in Germany, thought their inflation problems were due to external forces like paying reperations to the Allies, or thats what the publc was told. So now we're being talked into printing money because every one else is. Its just plain crazy. But I'm sure it'll happen, so buy tangible assets like Farmland, or Foresty but not in NZ it is way too expensive!!! Thtas what I'm doing and getting a nice return on my investment, plus the possibilty of increase capital gains in the future as the emerging countries increasing wealth and growing populations increase food demand. This is the sort of investment I'm talking about
http://bit.ly/wE4wVl

Hi Bernard, You say "The

Hi Bernard,
You say
"The surge in our currency this week to a fresh five month high against the US dollar and a record high against the Euro highlights how we are losing in a race to the bottom."
Hmmm
Are we winning or loosing the race?

In the interests of having a

In the interests of having a serious debate about this topic it should be understood that at least one of the suppositions is very simplistic, according to economic theory
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
Even from this basic understanding of the pricing equation you can immediately see the absolute bankruptcy of doing QE to re-capitalise financial institutions, if there is any QE it must be used to fund government spending. In those circumstances, yes you might make the export sector more competitive by causing inflation and raising employment. If the QE is simply used to recapitalise the financial system you could just as easily be using QE to lead the economy away from an equilibrium as towards one because its certainly not in equilibrium now.
This is necessary to understand because the idea of the dollar devaluation is to raise incomes (and other prices in NZ dollars) which allows the NZ economy to de-leverage its domestic debts internally and to so become more competitive. If you devalue the NZ dollar but don't make the NZ economy more competitive then you simply raise the burden of external debt on the NZ economy, potentially making it less competitive.  
Note the currency markets are typically a very poor indicator of the real value of the NZ dollar as they are focused on the very short term.
 

Note the currency markets are

Note the currency markets are typically a very poor indicator of the real value of the NZ dollar as they are focused on the very short term.
 
Nic which mechanism would better reveal the 'real value' of the NZ dollar against another currency?

I don't think there is one,

I don't think there is one, at least looking forward in time. If there was then currency speculation wouldn't be called speculation. Looking back in time you might be able to work out what the appropriate value was, looking at things like the CPI for example, but even this would involve a  non-trivial set of assumptions (which the CPI makes).
But none of this makes currency markets a good indicator of what the future holds.
 

I don't think there is one,

I don't think there is one, at least looking forward in time. If there was then currency speculation wouldn't be called speculation.
 
I think you are grasping with semantics and preconceived dogma as to what a currency pair pricing mechanism actually is.
 
It is a relative value system simultaneously involving two currencies. One will always be the USD and the other, in our case the NZD, the derivative. The later is percieved to be the more volatile illiquid conterpart in such an arrangement.
 
But speculation as in horse race betting it is not. There is no future value only spot adjusted for arbitraged future interest rate differential expectations.  
 

No, I just meant the current

No, I just meant the current price is a poor indicator of the future price (relative to US$).
 

Hi Nic, Thanx for the

Hi Nic,
Thanx for the post.
This is exactly what i said about a year ago and have been saying ever since.
I did not use MV = Py i used supply and demand but if you look at it they are the same.
Money x velocity (MV) is demand and Price x quantity (Py) is supply.
My argument has always been that no matter who increases the money supply we will import and import and import. People will borrow and borrow and borrw until they are up to their eyeballs in debt. Then the money supply eases off (recession) while people pay off debt and imports slow down. While people are paying off debt, any extra money will just drift into the hands of speculators.
I do believe that the above is still a little simplistic but hopefully helps explain what is happening.
If we take it to the next level then we have to give more thought to globalisation and its effects.
The New Zealand dollar can be printed and printed until the cows come home and people can borrow and borrow this money till the cows come home. With imports you will NEVER have more money than goods and so you can never ballance supply and demand.
To get supply and demand in ballance we have to have a global currency to match global supply and that is what this is all about. Heading towards a global currency.
Last November i predicted, on this site, that Europe will end up the United States Of Europe by the end of this year. I believe this is also part of the same global currency move. Lets see if i am right.
Further everyone should have their eyes on Putin in Russia as this is all about Russian oil supplies. China gets oil and natural gas from Russia.
When Russia dropped communism some people became billionaires from Russian oil. Later they were about to start selling out to the American oil companies. Putin was furious as he did not want American in control of Russian oil so he stopped it. He has been a marked man ever since.
If America gets control of Russian oil just think how that will affect both Russia and China.
Think also about the Middle East. If you were a big oil company what would you rather do
a) spend tens of millions searching for oil and then when you find it it might be hard to extract and cost further millions
OR
b) have America start a war, take over the country and give you the contract to extract the oil.
We are still experiencing the expansion of the global corporate empire. It is far from dead.
 

I don't agree with some of

I don't agree with some of your conclusions, there were pleanty of speculators before the interest rates were adjusted. Probably more actually and it was easier for them to make a profit in an inflationary economic environment.
 

I think the idea is that a

I think the idea is that a period of apparent stability leads to excessive risk taking via excessive leverage. Excessive leverage then leads to instability. It seems to some extent booms and busts are a good thing in the same way forest fires can be.
So the policy of promoting stability is a very dangerous one. What happens is the first recession is fairly mild , and the second one may not be too bad, but the third one is devastating. By promoting stability you make the eventual adjustment process that much harder.
Darn that was meant to be a reply to Nic above.

Oh dear Von mises? Lets look

Oh dear Von mises?
Lets look at who is taking the risk but who is taking the pain.  The banksters are taking the risks with our money and we take the pain when they blow it up.   So what you are saying is every few years I should be happy to bend over and take it up the .....   while the banskters laugh....
There is probably no need for serious busts IMHO....adequate regulation enforced with jail time would mean the banksters stake it up the .....    while I laugh.
I much prefer the latter myself....
regards

Personally I think there is

Personally I think there is some truth in the argument but that it's easy to push these insights too far. Academics seem to delight in empire building by creating a deeply flawed intellectual edifice on the basis of a valid insight which applies in certain cases.
The idea is that if the crises were not postponed then they would be less severe and the banks would not need to be saved at all costs. Seems a valid part of the pussle to me.

While I dont disagree with

While I dont disagree with this position, especially as it will help exporters,Isnt this strategy somewhat contradictory to "housing is in the crapper" pitch. Surely printing equals an increase in inflation, which means those not owning a house now are going to be in even more difficulty in securing one?

FYI from a reader via

FYI from a reader via email:
Bernard
 
All advanced countries getting richer (Singapore, Sweden, Germany etc) have two things in common.
 
They all have high savings rates (greater than 13% of GDP). NZ is -2%. 
 
They all have manufacturing as a % of GDP over 25% (so exports exclude imports).
 
(In the 1960's when NZ was the 3rd richest economy is the world NZ's manufacturing as % of GDP was 30% - now 13%).
 
NX needs a world class tax free super plan to create the investment into plant which creates exports which creates wealth.
 
30 years ago when Canada created their Tax free super plan 90% had to be invested in Canada for the first 10 years.
 
Canada boomed as a result.
 
When we created the Cullen fund NZ invested 90% went offshore.
 
I would be greatful if  you would discuss these issues in one of your articles.
 
cheers

Australians are asking

Australians are asking similar questions
http://www.macrobusiness.com.au/2012/02/how-to-save-us-from-the-australian-dollar/
"This policy of a weaker US dollar is explicitly aimed at benefitting the US and aiding its economy at the expense of other nations.
At the expense of nations such as Australia that is, our businesses and our long-term economic future."
"We need to engage our political and policy making with the risks of the current strategy of benign neglect with regard to the Aussie dollar’s strength and we need to support our industry."

Isn't the first fallacy here

Isn't the first fallacy here the idea that there is a 'fix', that it's simply a matter of printing or simply a matter of doing another thing.
Personally I can't see how a non reserve currency like the NZD can do it without causing a major domestic problem due to the private debts we hold.
We need a carefully thought out program over probably a decade to address the structural imbalances in NZ, and let the other countries devalue their way to prosperity.
It is not like there aren't other countries out there facing the same issue we are with respect to currency appreciation. We should aim to increase trade with these nations, not the cheats running the presses. At the end of the day these printing nations are the ones that won't be able to pay us.