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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?
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.