Roger J Kerr explains why politicians should not be trusted with setting the NZ dollar currency value. Your view?

 By Roger J Kerr

The debate raging in New Zealand currently about the impact of the high NZ dollar value has on the economy has moved from Wall Street to Main Street (as the Americans say), as even Green members of Parliament believe they have all the answers on exchange rate policy.

The worry is that the Green Party’s economic policies generally resemble the Polish Shipyard model, which collapsed twenty years ago as it did not work.

To be fair, many countries do partially manage or control their exchange rates as part of their overall economic policies. However, that is no guarantee that a different regime of a “managed” or “dirty” float from the current free-float is the right answer for New Zealand.

The debate for us is whether politicians or Government bureaucrats sitting in Wellington can do a superior job of setting the exchange rate value every day than the free markets.

The free-market regime has worked pretty well since we floated in 1985, in particular, the exchange rate adjustment is the automatic shock absorber the economy critically needs when our export commodity prices collapse.

In early 2009 when world trade stopped briefly as bank financing disappeared, the Kiwi dollar plunged from 0.8000 to 0.5000, following the collapse of our commodity prices. In this manner, end NZ dollar prices and incomes received by our exporters are generally maintained at a stable level when there is turmoil in the world.

Do you think our RBNZ Governor or Minister of Finance would have had the foresight and balls to devalue the currency 37.5% in a few weeks when that occurred?

The markets do it automatically, just as the markets have bid the NZD higher in recent times as they see our economy and currency as a secure safe haven in a tumultuous world.

We cannot have it both ways; the currency adjusting down on lower commodity prices and then not moving up on relatively superior economic performance (partially due to rising agriculture commodity prices).

The problem with exchange rates (and it is what makes currency markets so fascinating to be involved with) is that at whatever level there are, there will always be someone who is unhappy and someone who is happy.

As the PM points out, the high NZ dollar keeps petrol prices down, imported consumer products falling in price and opportunities for manufacturers to import new machinery at lower NZ dollar capital cost.

Provided exporters operate appropriate currency hedging policies the extreme impacts can be evened-out for our productive sector.

The recent job losses that the masses are up in arms about are partially due to inappropriate or inadequate foreign exchange hedging policies by a small number of exporting companies (as I have stated a few times before). Those advocating intervention to drive the NZ dollar down to some artificial lower level are really wanting all real wages in the economy to be driven down (Economics 101 teaches you this).

The free-float regime will cause disruption and job losses from time to time in some sectors/companies who do not manage their financial affairs very well. The argument has to be centred on changing a few Boards of Directors on their risk management policies, not pushing everyone’s real wages lower.

Remarkably, the left of centre political parties are demanding the latter choice.

As expected, the Reserve Bank of Australia have produced a massive U-turn in monetary policy management and cut their official rates week.

The AUD has nose-dived from $1.0450 to $1.0150 against the USD in a few days as the reality of a slowing China/resources sector finally sunk home to the “behind-the-8-ball” mandarins at the RBA. Governor Glenn Stevens is providing one of his six-monthly testimonies to the Australian Government this week; I hope he can defend his rapid change of view on the Aussie economy.

Anecdotal evidence from the retail space in Australia is that consumers have just stopped buying larger ticket items altogether as they observe cash flow from the mining sector reversing engines. Even the Australians living in the big eastern seaboard cities know what drives their economy and thus the security of their jobs.

The AUD/USD rate can fall a lot further yet (the commodity correlation chart below suggests 0.9700) and the NZD/USD will follow as it always does.

The dominant determinant of the NZ dollar currency value is what goes on in Australia.

Can someone please send this commentary onto the leaders of the Green Party?


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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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Great article
Anyone else nervous about Labour/Greens government in 2014?

Yes about Labour. Parker is still spouting 'growth'. Just been around the world with eyes wide shut, then.
The Greens probably know the game is up, but that there are ways to get where you have to, while maintaining esprit-de-corps (and votes).
The ones right out of the game, are those who blindly thought it all could go on forever. Who have no ability to change, or think. Act, Nats, most of Labour. Casting wider,, all the 'expert panel on child poverty' (add Hayne/Gluckman to that), the Productivity Commission, all banks, most parasites (investors, you're with that lot).
Kerr appears to classify as a parasite - I presume he does nothing 'real' yet expects to buy 'real' stuff.  And the correlation is?
Real wages will reduce in purchasing power, it had to happen about now. 7 billion people - more than ever - chasing more per-head than ever. Either through QU, or bidding in increasing - permanent -  scarcity..  Why is it that we, as a society, hang on the every word of economic types? It's as if we transferred our need to 'believe', from hoodoo religion to this kind of nonsense.

I think Mr Kerr should deem to elabourate on which theorem of Economics 101 indicates that a lower exchange rate means lower wages (for those of us who skipped it). It appears to me that this would depend on the import/export balance of the NZ economy.
Obviously if NZ is more dependent on importing stuff from overseas then in the short term real wages would fall from a devaluation, however even in this case it might encourage some manufacture back to NZ which could just as easily raise wages internally.
In the other case then real wages for exporters go up in the short term, and there is every reason to believe this flows into other areas of the economy.

How is it going to raise wages internally?
I would not say going to (as in will work in every single case), but certainly could depending on other economic state (a state which I believe we are in now however). If you increase the price of goods produced externally in general, then you create opportunity to manufacture those goods internally. So by wage increases I basically mean create additional employment, not I guess what you would call wage increases, but since the national income needs to support the whole country this would look like a national wage increase of the aggregate.
Any internal business owner will have to compete with cheapily sourced overseas imports that are already competing on price, and will be lucky to make breakeven against imports.
Any internal producers are already in competition against this, and I think its pretty clear that over-valuation could, should and has lead to the sending of the manufacturing base overseas in many, many sectors. Obviously when you have the NZ dollar higher than it needs to be, this actually pushes manufacture overseas, because its cheaper to import everything with a higher NZ doller.
Local service industries will take a hiding, as low wages all round...
Obviously that depends on what happens when the NZ doller value falls. Thats why I believe that Economics 101 was rather sparse on this point, and Roger was just using this to bully the point, but like I said I didn't ever learn this fact. Stephen L down the page appears to agree with me on this in fact.

Very good Roger.  And the problems with NZ manufacturing are more about poor productivity and high fixed costs, both largely caused by regulatory imposts (eg. RMA, OSH, Welfare and Labour Law & etc). JoKey and gang just foolishly opted for the socialist status quo in their first term when they could have turned things around: now I fear we are stuffed as the weirdo left come storming back.
  Regards, Ergophobia     

And the problems with NZ manufacturing are more about poor productivity
That is an assumption that is what can be described as twaddle.The emperical evidence following the 61 banking crisies ( since 1980 and across 35 countries) [ Bordo and Eichengreen] show that productivity growth decreases by -1.4% on average.
This suggests (with a remarkable high correlation eg BOE) that the finance sector is a causal mechanism due to limiting finance to the productive sector ( and into property ,sovereign debt etc) the almost obvious exhibition of Hysteresis in both productivity and employment are results of the inabilty of the finance sector to correctly apportion risk or even understand it due to the limitations of their predictive capabilities (temporal inhibited) eg Lo
Many corporations did a terrible job in assessing and managing their risk exposures, with some of the most sophisticated companies reporting tens of billions of dollars in losses in a single quarter. How do you lose $40 billion in a quarter and then argue that you’ve properly assessed your risk exposure? I don’t think it’s credible to say it was just bad luck. If troubled companies want to explain away 2008 as a ‘black swan,’ then someone should take responsibility for creating the oil slick that seems to have tarred the entire flock. The current crisis is a major wake-up call that we need to change corporate governance to be more risk sensitive
As a way to increase risk sensitivity, Lo believed quants were needed in management positions and at the board of director level where they would be a part of the decision-making process. He explained that the absence of quants from top management was due to the fact that their specialty did not exist when those in top management began their careers. In other words, there was a generational gap that needed to be filled. In his mind, the lack of quants in the decision-making process made no sense:
“Can you imagine a board of directors of a hospital not having a few doctors or a technology firm not having a few technology experts? It doesn’t make sense, and it’s got to change


In early 2009 when world trade stopped briefly as bank financing disappeared, the Kiwi dollar plunged from 0.8000 to 0.5000, following the collapse of our commodity prices. In this manner, end NZ dollar prices and incomes received by our exporters are generally maintained at a stable level when there is turmoil in the world.
Good example why we should cut the rates of investment advisors.The RBNZ cut rates in
Sept 2008 0.5%
Oct  2008  1.0%
Dec 2008 1.5%
Jan 2009  1.5%
The fractal geometry  is quite apparant in fast -slow systems,ie there is two part response between call money(  the fast response)  and  the delayed trajectory for locked in money eg 90 days.
The currency did respond to the RBNZ it was just a game of two halves.

Why can't we see this higher NZ dollar as a good thing. It means that we have more buying power to buy overseas companies and land. The only problem is these companies may have laws preventing them  being sold to offshore countries. 
Also it means cheaper petrol and cheaper imprts for creating exports. It does reduce the cost of producing milk for exporting, as transportation is cheaper. 
Sure it is bad for some, but it is good for others. If the NZ dollar was at 40 cents, there woul dbe people complaining about fuel being too expensive, and food prices would rise a lot as a result

I reckon in 2014 NZ will elect the Green Tail to wag the Labour dog. Too many people rely on benefits and I reckon these un productives will come out to vote along with the usual pansie waists in Ponsonby & Herne Bay.
This gives me more confidence in going to get a $200K loan to build extensions on my house. Norman/Parker will inflate this debt away a lot quicker than normal.
I do not have confidence that in 2014 my $150K in savings will be worth around the same hence my decision to build the extension.
Bernies 30% reduction in housing is looking like a load of bollocks even more after Red Norm opened his Aussie Gob.

Here is the reason why politicians and the power to print money have to be kept apart...far apart.
"There isn’t a major western democracy that isn’t grappling with welfare spending. There is simply no longer the money to fund the kind of entitlements that became commonplace during the boom. It seems to have come as a great surprise to Osborne and to David Cameron that hard-pressed working people – the very people whose votes they are trying to attract – loathe with a vengeance people who milk the welfare system. Osborne asked how is it possible to justify the incomes of those out of work rising faster than of those in work; or giving flats to young people who have never worked when working people twice their age are forced to live with their parents; or those in work having to consider the financial costs of having a child while those out of work have a cash incentive to reproduce."
Govt must reduce the welfare spend. They have to put the screws on borrowing. They ought to reduce tax theft as well. Failure on these fronts will lead to a 'piigs' outcome sooner or later.
015 could well be the year this economy starts the long hard slog out of the socialist bog and away from the banking credit drug dependency.

Just another Ponzi scheme Wally. In the end it will lead to a default on debt we simply do not have the assets or production to repay, and never should have borrowed in the first place.
William K. Black

There is legal organized crime and illegal organized crime.

When legal organized crime does not work...illegal organized crime is turned to.

Unfortunately the entire system is a fraud.

There is no way that it can supply what the sales pitch demands it can.

All that the system can do is inflate to maximum potential and implode...Professors of economics would point this out if they were not ignoramuses or liars.

Fortunately when people turn to illegal organized crime when legal organized crime fails.

...and then are caught...It all allows all the legal criminals off the hook...Because they can blame the illegal criminals or the effects as the cause of the problem which the legal criminals are the cause of and continue to ignorantly prepetuate

The people that are caught or the losers allow the people that are not caught to believe and claim they are winners.
Posted Yesterday, 11:07 PM

Sadly, tragically, Mr. Hypertiger comes out with some unassailable truth all too regularly.

"The people that are caught or the losers allow the people that are not caught to believe and claim they are winners..."

And not only that, but they have the resources to recruit the media into a vast propaganda campaign to overwhelm any factual critiques. And so these 'winners' get to claim over and over and over again how 'successful' they are/have been. And eventually they even get to re-write history.

It's the ability to re-write history that allows the system to persist as a fraud. It isn't that all human economic systems are necessarily essentially fraudulent. I call this the Octavian Syndrome. Ultimately the private citizen has to hope that the dictator or figurehead of the political cartel is not a Caligula and only an Octavian.

The difference between my view of the Cosmos - and Hypertiger's - is only in the idea of whether or not there is an infinite number of productive and differentiating re-configurations of geometric shape and geometries-in-motion (physics). If there is an infinite number, then systems inflate in cyclical patterns yes but without always reverting back to the base set; that is, they move on to a different wave function or pattern.

But these concepts are entirely outside of the mindsets of those who are present-era political thinkers, and to that extent, Hypertiger is quite right inside of one particular historical phase. (Notice I did not say 'narrative.')

Calvin J. Bear


In early 2009 when world trade stopped briefly as bank financing disappeared, the Kiwi dollar plunged from 0.8000 to 0.5000, following the collapse of our commodity prices.
Our current account deficit in 2009 was its lowest (or best) in decades, in 2009, at 2% of GDP. No concidence. The key variable was the international bank financing disappearing. Long may it disapppear, by that score. We are now heading back to a disastrous 5-6% of GDP deficit.
The free-market regime has worked pretty well since we floated in 1985
Our current account has been very bad all that time, and is the reason we are so indebted; or have sold off whatever we can to pay for it.
As the PM points out, the high NZ dollar keeps petrol prices down, imported consumer products falling in price and opportunities for manufacturers to import new machinery at lower NZ dollar capital cost.
To borrow $200 million a week, or sell assets of the same value, is a very expensive way to have cheap petrol. The supposedly cheaper capital equipment is either a deliberate canard, or you really should go to to economics 201. 
To compete with exporters in export markets; or more importantly as import substituters, and where the international price of the goods is in USD, then the NZD price for productive inputs is irrelevant. In fact I suspect that importers are loading extra margins just because they can while the exchange rate is so high. Check the price of a BMW or Audi in NZ vs say the UK or US. So we are paying over the odds in USD terms.
I understand you spruiking your exchange services in hedging; but a currency cannot be successfully hedged over time if it is persistently and forever overvalued. Separately import substituters and tourism( where I think the main pain, and conversely the main opportunity, lie) do not intuitively deal in foreign exchange, so do not hedge.
Labour and the Greens, and even NZ First appear to want to start having us paying our way; so that we can start to build some wealth as a nation over time. The populist Nats seem to be having none of it. A shame

Spot on Stephen!
Surprising how Kerr (and Key) seem unconcerned with our apalling current account deficits or the indisputable fact that the free floating currency regime has failed to react as advertised.
We may as well be in the Euro Zone.
Unfortunately our wages will have to adjust lower in real terms, just as they will in all the deficit countries (US, OZ, UK). Propping them up with borrowed money just pushes the adjustment down the road and makes things worse in the end. Look at where the job losses are occuring - export and manufacturing - the sectors your economy lives and dies by. BTW, where did this insane notion that you can base an economy on non tradeable "services" come from?

But, Roger, to what extent is the automatic stabilizer of a free floating exchange rate maladjusted by the volume of currency trading in the NZD?  If most foreign exchange transactions are purchases for re-sale only, not for the purchase or sale of goods & services (i.e., not for import or export of products or services), how sure can we be that the exchange rate adequately reflects the 'true value' of the NZ economy?

High dollar -> current account deficit -> selling NZ -> interest/rent slavery.

As Stephen L notes, this is all about the currenct account deficit and why the currency is not adjusting to take account of this extreme position. 
Floating exchange rates were supposed to deal with this issue. Why has that relationship broken down? 
What is the relationship between the current account deficit, domestic credit and the housing market?
Whilst the Green's proposal has got a lot of holes in it, the important point is that they, and Labour, are trying to work out a way to rebalance the economy. The government, on the other hand, has a very superficial perspective, is unwilling to actually answer the difficult questions and has nothing to really offer other than trite and patronising remarks. 

It is really a sad state of affairs if someone simple like me, with no formal economic education can recognise that a current account deficit is basically the botton line of real profit or loss,
Your intuitive understanding tells us that there is areal problem almost surely.The observation that when the TWI is high the balance of payments decreases is evident.
The problem now is that the government has lost the confidence of the market( voters) to provide trust when situations arise (eg Dotcom) and there is little innovative policy or solutions available due to being locked in failed idelogical idealism.

How do you run a compedative export buisness in an environment where the currency has swung between less than US$0.50 to more than US$0.87 to the NZ$ inside less than 3 years in a world where other countries manifestly manipulate their currencies?  In all but a handful of highly clever companies the margins simply do not permit this.  Yes I know we have currency hedging, but this only delays reality.  The only way that some of our companies can survive, is to close up shop in NZ and shift, at least their production, off shore. 
I agree that printing money is not the answer; among other things it will reward the borrow and speculate leaches who helped get us into this mess and punish the virtuous savers who, in the correct envirionment, could be providing the capital for real sustainable growth.  There are bunch of things that we can do that will address our addiction to living off borrowed money or selling our assets, raising our productivity and reducing the high internal cost of running our country.  There are also measures that will address the currency skewing affects of the carry trade. 
We simply cannot sit round saying everything is OK.  Clearly it is not and it is so bad that we have turned into a Pacific version of Ireland, where most of our young citizens have either left or are strongly thinking about it.

I well remember Roger Douglas assuring us that the floating exchange rate and an independant Reserve Bank where the answer to our CA deficts and internal inflation - a natural balancer.
Clearly the concept has been found wanting - after almost thirty years we now have among the very worst net international investment positions in the developed world. What we are doing now is is just continuing down that path to ruin - selling assets and borrowing to pay the interest bill
Listening to John Key & co, there isn't a problem. Good on the Greens and others for at least raising the issues

Yes I agree that they deserve credit for having the guts to raise the issue. Any body can safely sit to one side, look the other way and say every thing is fine.  Safe, a total abrigation of responsibility and we all quietly slide down the tube together.

It all really boils down to :
The "Vergulde Draeck" Omen
The "Gilt Dragon" Omen
The Foreign Exchange "parity condition" that will announce then end of the US Dollar