Obama, Geithner, Bernanke told Key about benefits of high currency; 'Best way NZ govt can help exporters is helping them be more competitive'

Obama, Geithner, Bernanke told Key about benefits of high currency; 'Best way NZ govt can help exporters is helping them be more competitive'

Three of the most powerful men in the global economy, Barack Obama, Tim Geithner and Ben Bernanke, told Prime Minister John Key they were highly supportive of a strong exchange rate, while Key noted to them the detrimental effects their money printing policies were having on New Zealand's economy.

Meanwhile Key says the best way New Zealand's government can help the exporting sector here is by creating an environment to make local companies as competitive as possible to help them deal with the surging exchange rate.

The New Zealand dollar hit a new post-float high over 88.4 US cents on Monday after Democrats and Republicans in the US indicated they had reached a deal for raising their government's US$14.3 trillion debt ceiling and cutting its budget deficit. However ratings agencies might still decide this initial move to tackle the US government's deficit is not enough, with markets still not completely confident the deal will fix problems in the world's largest economy.

The surging New Zealand dollar has led to calls from the Labour Party in New Zealand that government should look at ways to control the exchange rate, with intervention by the Reserve Bank to try and force the currency down one option alongside new tools for the Reserve Bank to accompany monetary policy such as the ability to control loan-to-value ratios.

But Key has repeatedly come out strongly against intervention, saying the surging New Zealand dollar is primarily due to an "inherent weakness" in the US currency as the Federal Reserve prints money (quantitative easing), and as investors increasingly see US assets as riskier bets and New Zealand assets relatively safer.

“The high exchange rate obviously presents real concerns for those that are not commodity linked, have no imported component of the product that they produce. For the most part, where we face a competitive exchange rate, as we do with Australia, that’s to the benefit of those exporting companies," Key told media at his weekly post-cabinet press conference in the Beehive on Monday evening.

"But it’s not all bad news. When we have a high exchange rate it certainly takes the pressure off consumers in terms of imported items – the price of petrol – and takes some pressure off the Reserve Bank in terms of imported inflation. So for the most part it’s not an entirely negative story, but it is putting some pressure on those companies,” Key said.

Pressure off NZ$ in short-term?

What had happened in the US, where it appeared both sides have compromised on debt ceiling and deficit reduction plans, could help alleviate some upward pressure on the New Zealand dollar at least in the short-term.

“What’s been putting enormous pressure on the exchange rate has been the uncertainty in the US financial markets, and the fact that no one could rule out that the US could default, although that was seen as very, very unlikely," Key said.

"I think the reality is that it’s one thing to get a deal in the US and obviously that’s what’s happened now if we accept that that’s the likely outcome as a result of the meetings in the United States today. But we still see in the United States a very, very heavy debt burden and we’re seeing quite sluggish growth, high levels of unemployment, and that is putting a lot of pressure on the US economy," he said.

"That’s one of the reasons why New Zealand assets have been re-rated, and US assets have been re-rated negatively. That position’s not changing."

'Those who tried, failed'

What the government could do was try and help New Zealand companies become as competitive as possible, rather than intervening in currency markets.

“That means the process and the policies that we’ve followed. Making sure that we take the burden off redtape, making sure labour markets are flexible, making sure infrastructure’s there," Key said.

"If you go and have a look at the track record of countries that have intervened in their exchange rate, then they’ve been spectacularly unsuccessful. And there’s no particular reason to believe that New Zealand would be any different," Key said.

"It’s quite possible you might hit the top occasionally [with intervention], or the bottom if you’re trying to go against the trend, but for the most part it hasn’t been successful strategy for Japan or Australia or Switzerland or many other countries,” he said.

“At the moment you’re up against a massive economy that’s having substantial financial issues. So on that basis they’re re-rating the New Zealand exchange rate. Hopefully it’ll turn around.”

'I told Bernanke about QE'

Meanwhile Key said he raised the issue about the effect quantitative easing by the US Federal Reserve was having on New Zealand’s economy, by devaluing the US dollar, effectively pushing our currency up.

“He just reiterated his public comments which is that it’s [a third round] not likely at this time,” Key said.

'Tax on hot money dangerous'

Asked at the press conference whether New Zealand should look to tax 'hot' foreign money coming into the country and driving the exchange rate up as a way to disincentivise this, Key replied:

“That’s very dangerous territory for a country that’s capital strapped, that has massive net external liabilities. No OECD country borrows more of its borrowing from foreigners than New Zealand. So if you put a tax on that you have to get into the definition of what is hot money, what is legitimate investment in New Zealand."

"You run the risk that you ultimately force up interest rates, and that’s a more expensive burden on the economy. So I don’t think that’s practically going to work," Key said.

"Interestingly enough if you look in the United States, one of the big arguments that Secretary Geithner, that Ben Bernanke and Obama all made to me was that actually a high exchange rate is, they believe, something that they’re highly supportive of," he said.

"The reason for that is they believe it leads to more benefits than the opposite.”

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?

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38 Comments

 Financial terrorists

 Barack Obama, Tim Geithner Ben Bernanke, John Key, Gordon Brown,  L 

 Lloyd C. Blankfein, James Dimon and many others...

John is certainly into quoting the first three:

"One of the big arguments that Secretary Geithner, that Ben Bernanke and Obama all made to me was that actually a high exchange rate is, they believe, something that they’re highly supportive of," he said.

So what is it John? A high exchange rate was good for N.Z, then it was a concern, and now it is good for us because Geithner, Bernanke and Obama say it is.

There is nothing more inspiring than strong, clear leadership where it is badly needed.

 

"Be more competitive" The usual neoclassical economics claptrap....want to compete with workers being pain one-fifth our wages ? Want to compete with goverment that subsidise their industries ? Want to compete with economies that have no enviroment protection costs??

"It doesn't work"  Well it worked for the Chinese and Asian economies for the past three decades....until the US gave up trying to push their claptrap neoclassical economic model down their throat...that's why Bernanke is deliberately devalueing the USD....Only JK can't see it....

 

I doubt he can't see it. He'll be well onboard with it. Don't forget only recently we had English citing NZ as a low cost labour country being an advantage:

" .... We have a workforce that is better educated, just as productive and 30 per cent cheaper,"

It's time to take on the Aussies, says English

http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10718151

I have doubts about the part ""better educated" and "Just as productive"

I also have doubts about this bit:

English also cited New Zealand's "more coherent" political system as an advantage.

The difference in the quality of politicians does matter, but is Bill confusing "more coherent" with "less competent"?

 

No OECD country borrows more of its borrowing from foreigners than New Zealand" John Key said.

Patrick Gower at TV3 asked Rakon what the surging NZ$ meant for them:

http://www.3news.co.nz/NZ-tech-company-hit-hard-by-US-debt-crisis/tabid/421/articleID/220708/Default.aspx

That is a problem for exporters like Rakon.

It is a Kiwi business success story that began in the garage and makes the crystal components for products like smartphones.

And every time the dollar goes up just a cent it cost them big time.

“Every one cent appreciation in the dollar equates to $1 million lost in profit for us,” says Brent Robinson, Rakon managing director.

That obviously means lost jobs for Kiwis.

So Mr Robinson says New Zealand should act against the so-called "hot money" that comes to New Zealand looking for a safe haven.

“We need to control that money by taxing it somehow,” he says.

But Prime Minister John Key, New Zealand's most powerful former currency trader, says we must "grin and bear it".

Mr Robinson says this is false.

“I don't buy into the fact that there's nothing we can do [and that it’s] a US problem not a New Zealand problem. I think New Zealand’s a small country and we need to be proactive in this respect,” he says.

Yeap no one needs to worry about OCR going up, this xrate will kill any growth projection the Government had, but they will just point the finger to the US and say it's not our fault..grin and bear it..yet here they are (companies like Rakon) saying they need help or jobs will go...

John Key says there's nothing he can do about the high currency. He means there's nothing he wants to do about the high currency.

There's plenty he (and others) could do in the short and long terms to help our productive sector.

How on earth is he going to get the transformation he has talked about for the last two years with a currency at almost 90 cents?.

Here's 10 suggestions.

1. The government could stop sucking in foreign capital to fund its budget deficits. That means cutting spending on the likes of Working For Families, Interest Free Student Loans and 20 hours of free early childcare. It means raising taxes, either income taxes or by imposing a land tax.

2. The government could run budget surpluses and use that to build some sort of stabilisation fund to reduce the pressure of capital inflows on the currency. That is obviously after it had repaid the government's foreign debts.

3. Or the government could use those surpluses to buy back assets sold to foreign interests, which mean those dividend payments stop  acting as a drain on the national accounts.

4. The government could impose a tax on foreign borrowing by New Zealand companies, not least of which by those state owned enterprises such as Kiwibank, Transpower and the power companies. This, again, sucks in foreign capital and pushes up the currency.

5. The government could ban the sales of large assets, in particular land. The Chinese do it.

6. The government could encourage the Reserve Bank to use its macro-prudential tool kit to take the pressure off the currency.

7. These include the Core Funding Ratio, which discourages the use of 'hot' foreign money to fund lending in New Zealand. The RBNZ could increase it beyond the current target of 75% by July 2012. It increases term deposit rates here and encourages local saving.

8. The Reserve Bank could introduce a maximum loan to value ratio for property and land lending. The banks have again begun lending up to 95%  in recent months in an attempt to restart lending growth. They are also offering interest only and 30 year loans.

9. The Reserve Bank could force the banks to match their local New Zealand dollar lending with New Zealand dollar funding. This would have to be done over a long period of time, given the scale of the foreign debts held on our behalf by the banks.

10. The government could encourage local procurement by its own departments and SOEs to reduce the scale of the current account deficit which is driving our currency higher.

cheers

Bernard

Well said Bernard.

I like #9.

 

Cheers, Les.

www.nzmea.org.nz

 

5. This is a some what false comparison, the state owns "all" land in China.

Perhaps you can convince Labour to take up some of these suggestions for the coming election.

Spot on.

Basically, the last few years have proven that the 'free market' doesn't work. It ended up with more fiscal-to-fiscal transactioning - by some orders of magnitude - than there was trading in goods and services. Meaning it had overrun it's underwrite.

That's not the half of it, of course. Look to the Arab lending system (non-usury) for an idea of where we have to go next. Seems to me, we have a whole echelon who grew up collecting 200 every time they passed Go, and forgot to question where it came from; too busy putting houses on.

Things will stay out of whack, from here on, and other nations (all of them bigger than us) will trend to protectionism, either via public/voter pressure, or via farmer-type lobbying. We'd be mugs to stay flat on our backs with our legs splayed, at this point.

Basically, the last few years have proven that the 'free market' doesn't work 

What free market PDK? Where?

You mean the Globalist Socialist Corporate model of vested interest in manipulating markets?

C'mon tax payer funded bail outs show this fact!

If it was a FREE MARKET Goldman Sacks Citi GM most other banks and many other financial to big to fail corporations etc etc would have imploded.

Cui Bono?

fair comment.

 

I think you will find that "Globalist Socialist Corporate model" has a shorter phrase available, facsist.

There has been an attempt to get to a free market (I suppose) for 30 years, but once the controls and regualtions were relaxed or removed the opposite happened, it was simply dominated by vested interests. Hence the theory of a "free market" is probably an oxy-moron..

regards

Fascism Indeed it does.

Aye yes the theory of free market. Interesting, a oxymoron eh?

Then perhaps you are able to explain why theres always a black market in something somewhere?

A black market would seem to suggest theres always a market for something somewhere if there is a demand for it...regardless of law and regulations... 

So in your thesis of Peak oil we will exchange goods and services how? Under global fascist setup? Communist? Command economy? A IMF debt slave? local fuedal lords? UN fuedal lords?

Or will it be about individuals and small enterprises with goods and services going where they are needed unimpeded?

Thats assumng theres any cohesian remotely left in society...

?   

That's the way John, let's aim for parity - the higher, the better! Over the next year or so, I am hoping to spend up to 5-6 months overseas, so lets keep the train rolling!

 

The US actually needs to devalue - structural the only way they can trade themselves out of their hyper-debt situation.

Maybe NZers should look at buying income generating assets offshore while the exchange rate is in our favour.

What are they going to trade?

regards

More iPhones?

Go check out onshoring.

"buying income generating assets offshore while the exchange rate is in our favour."  or even the Cullen fund, however this may not have peaked yet.

regards

Print Alan Print

Is a tax on the hot money realy that dangerous?  Setting the tax rate at the optimum figure could be very effective at filtering out the hot money and have negligible effect on genuine long term lenders.  Lets look at it from both perspectives with say a 0.2% foreign currency transaction tax (FCTT).

For the genuine lender the loss on the capital would be 0.4% moving the cash into and out of the country.  For a deposit of say 2 years this equates to 0.2% per year.  For 5 years, 0.08% PA.  This tax would encourage lenders to lend for longer periods and roll over their investments.  The effect on the interest payments would be negligible.  At say 4% interest, the net after FCTT would be 3.992%, so the effect is insignificant.  

The net effect of this tax would be, that to attract the same level of foreign investment intetrest rates would have to be raised very marginally.  This would be more than balanced by the tax paid to the government and encouraged longer deposit terms.  As a side effect it would put domestic savers in a more favourable position and thereby encourage them. Are all these not outcomes that the Govt says that it wants?

For the hot money speculator there is a certain loss of 0.4% of the capital.  This may be  leveraged anything up to 100:1 or more, so the net affect may be significantly greater.  I have no experience in this activity but from what I read these people work on small margins and short time frames so I suspect that the 0.4% hurdle (possibly leveraged) before they start making a profit should prove a significant dissincentive, if not discourage most of it completely.

I suspect that Mr Key's reluctance has more to do with his past life as a currency trader and all the mates that he still has in the buisness.

 

 

 

Don't get much time to come here of late ....treading water while John Boyn Bolly Bib throw bricks from the boat and tell me to build a new platform.......but the water levels rising and thier getting short of bricks and so I along with many others I suspect will simply disappear within the next tide or two.

It's funny in an ironic way ...that despite the best warnings from sites like this and many others to diversify our  positions with forward thinking to expand our niche market exports as an intergral  part of our overall export capacity.....we have arrived exactly at the destination least desired in the interests of a growth economy hampered by geography.

A one trick pony selling milk solids...with a gluttonous appetite for cheap imports....reliant on selling houses to each other as a false measure of how our economy is doing...all the while knobbled by oil $ values doing the RBNZ's job for them........for now.

The interview with Rakon on TV3 should have drawn at least some response from John Boy n Co.....but there you go uh...nothing...zip...get used to it..wait n see..do nothing.....The stupidist men in the room talk up a Blue Blue Sky and wave smiling at a Red Sunset...but the color don't matter...they are still the stupidest men in the room.

P.S. where the hell did GBH get to....it's getting even harder to laugh in fear here.

Sorry self edit..link failed

John Key for all his currency experience is wrong.   He says that currency intervention has never worked, and yet it's working just fine for China.  Why will someone not call him out on this.   

Minimumnz.....the  difference there is China are allowed to participate in a so called "Free Market Economy" while operating from a rock solid "Protectionist Policy " standpoint.....

Laughable really ...China finances a converse "policy" in the U.S.

China has a massive trade surplus. I can't see how comparing NZ and China realistically works for this comparison.

It's easy to say "A" does, so we can as well.  But practically how does one put together a scheme that actually works as request, ignoring all other consequences?

Likely, very first thing to do would be to make the NZD non-tradable.

Stateless..I agree and the very thing that has John Boy  shitting like the Chihuahua that fell into the pitbull ring........is a return to protectionism.....by the U.S. and other interested parties.

There's the thing about being  everybodys friend...you just end up being the litlle dog rooting legs ..looking up,you hope they are smiling ....and maybe throw you a bone.

How much choice does NZ have? Our debt is not even a item note compared to 14.5 tillion.

In order to maintain a "modern" lifestyle - cars, fridges, tv and more - we need to trade our products overseas. Making any of this stuff here serves no practice purpose - the cost would double and we'd still need to import half the components. This is ignoring the captial cost of tooling and developing IP.

have to against the grain here........a high $NZ is good for us..I actually agree with John Key  and guess what !   He is a former currency trader.....he has got more experience with the currency and how/where it should be than all the moaners on this site.

One company  Rakon does not a country make.....remember they also import products for manufacturing!

Whilst there may be plenty on this site who dont like agriculture,because they cannot get a slice, it is by far the most lucrative source of earnings this country will ever have.

The $US dollar is still falling and will continue.....but thats not our fault or problem.

All we have to do now is bash these oil companies around the ears and get petrol down....perhaps more on this site should consider protesting the price of petrol instead of snivelling  about the $NZ.

Stop dreaming BH ........your 10  suggestions are that......... dreams.

6.....'macro-prudential tool kit '.......waaaaaat!

realist....it's not just one company....the laying off people you have come to care for...no fun...downsizing just to survive...no fun...facing eventual closure no fun...

As to the money trader.....wake up matey ...a bit like saying experienced stockbrokers should know where to invest your money.....duh!

It's a crap shoot out there.....youv'e got your money on snake eyes....good luck with that.

Stunning comments... 

c'mon Rodger, where are you...

Have to agree with Christov.......I would rather pay 5 percent more for things than losing 100 percent of my income because  the dollar screwed the business. Just stop and think what industry's acutally need a low dollar, Toursim, IT , Forestry, Exporters, .....a lot of people are employed in these fields.

John key jumps off the sky tower with no bungie , while in free fall at around the half way point,  he manages to send a quick press release via blackberry......

"so far so good"

my question is will the fat cat bounce?

 

"No OECD country borrows more of its borrowing from foreigners than New Zealand. So if you put a tax on that you have to get into the definition of what is hot money, what is legitimate investment in New Zealand."

So what are you going to do about us being one of the most indebted countries in the world John? oh that's right nothing, in fact double public debt in less than 3 years, and encourage polices that make private debt worse too, from what is already up there with Ireland and Greece's debt levels.
"You run the risk that you ultimately force up interest rates, and that’s a more expensive burden on the economy. So I don’t think that’s practically going to work," Key said.

When it all hits the fan a few years down the track, and the overseas lenders realise we haven't got a hope in hell of paying all this debt interest rates will go through the roof anyway.