Record high NZ$ not a bad thing-Key

Currencies

PM John Key says record high NZ$ doesn't help exporters, but is making NZ more competitive and making New Zealanders wealthier

18th Feb 13, 5:01pm by Bernard Hickey

By Bernard Hickey

Prime Minister John Key has commented that a New Zealand dollar at a record high may be hurting exporters, but it also makes New Zealanders wealthier and can make New Zealand more competitive.

Key was commenting at his regular post-cabinet news conference after finance ministers from the G20 warned against currency wars at the weekend.

Key also downplayed the need or effectiveness of the sort of local-first government procurement policies announced over the weekend by Australian Prime Minister Julia Gillard.

Key was asked about the risk of currency wars costing New Zealand jobs.

"It's quite clear that some countries have been either beneficiaries of actively looking to devalue their currency. Part of the process of printing money has in the case of some countries been a mechanism to try to seek a devaluation. As we've said in the past, there's very little New Zealand can do about that," Key said.

"I think it makes sense for the G20 ministers to affirm that everybody embarking on a programme of trying to devalue their currency doesn't make sense," he said.

"While there is impact on exporters and that is unquestionably correct for exporters in US dolllars, New Zealand consumers are much wealtheir as a result of a higher exchange rate. NZ consumers are paying less for virtually all imported goods as a result of the high exchange rate," he said.

"The Reserve Bank has a lot less pressure on the system because there is very low levels of imported inflation. A lot of New Zealand businesses are now importing equipment that's now being paid for at much lower prices. New Zealand is much more competitive as a place because of a higher exchange rate.

"We weren't fabulously successful at 40 US cents in the dollar. Yes there's some pressure there. The government has said on numerous occasions that a slightly lower New Zealand/US exchange rate would be beneficial, but I think we should be careful what we wish for."

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66 Comments

by Stephen Hulme | 18th Feb 13, 5:12pm 1361160750

Prime Minister John Key has commented that a New Zealand dollar at a record high may be hurting exporters, but it also makes New Zealanders wealthier and can make New Zealand more competitive.

Hard to disagree with the latter if we all agree it's a fiat currency driven economy.

Equally, one cannot dismiss the sentiment expressed here:

Westpac economist Dominick Stephens says the growing gulf between house prices and rents shows financial factors, not housing supply, are driving prices.

According to the "house price-to-rent ratio", it takes about 30 years of rent to buy a median house, and that figure is rising.

Stephens says that where there are clear housing shortages, both rents and prices should shoot skywards. This is happening in Christchurch and Auckland, but elsewhere, rents are falling far behind, indicating that speculation or other factors are at play.

"Our finger is pointed firmly at low interest rates."

by meh | 18th Feb 13, 5:57pm 1361163475

"Hard to disagree with the latter if we all agree it's a fiat currency driven economy"

Also hard to disagree if we all agree that it's a consumption driven economy. Question is: is consumption at the levels required sustainable long term?

Also, why isn't the high dollar being reflected in supermarket and petrol prices?

by Stephen Hulme | 18th Feb 13, 6:28pm 1361165302

Question is: is consumption at the levels required sustainable long term?

This outfit hopes so:

Wellington-based Colonial Motor Company made an after-tax trading profit of $5.7 million for the half year to the end of December, down 3 per cent on the same period a year ago.

CMC owns motor vehicle dealerships throughout the country. It has 12 dealerships whose primary focus is Ford, and seven of the dealerships also have the Mazda franchise. CMC also has dealerships selling trucks and tractors.

The profit slipped slightly despite revenues of $298 million, up from $269 million in the previous half year.

The company declared a fully imputed dividend of 9 cents a share, to be paid on April 15. Read Article

The profit to sales ratio @ ~1.91% seems meagre unless all the profit is made by Ford New Zealand?

by Alex13 | 18th Feb 13, 5:14pm 1361160867

At last a sensible voice cutting through the chorus of whiners who do not know what they wish for. And the stronger the NZ$ is the better...

by Chairman Moa | 18th Feb 13, 5:28pm 1361161682

We went to Europe/USA in 2007 when NZD worth 'bugger all" against the GBP, EUR and USD. Then for our budget we had to stay in some dodgy hotels, had lots of McDonald and 3 EURs French wines..

We returned to Europe/USA back in Jan this year and for the same money we stayed at some decent hotels and ate at good restaurants (instead of McD) and consumed $12 bottle of french wines, which had way less anti freeze contents..

There goes, one of many positives for the high NZD.. but I'm sure the neg factors are coming

by Stephen L | 18th Feb 13, 10:46pm 1361180793

It is funny that Key and others talk of printing as the free lunch. Yet it seems to me that you have perhaps enjoyed one of the free lunches (and good luck to you; why not?) unless you think that New Zealand is selling more stuff or getting relatively higher prices for them now than they were.

We are continuing as a country to mortgage the house to go on holiday, and buy flash cars- the free lunch now, at least for those in work or with considerable savings, topped up perhaps with the taxpayer funded pension which now goes a lot further in the piazzas of Rome.

One suspects future generations, assuming they don't do a runner, will have to pay the bill.

Taken to the extreme, the current path will have us as a retirement village (with an unfundable pension system), and some dairy farms, that will be owned by foreigners. Am not certain who will pay for the pensioners. Or we will have 8-10 million people to come and help pay it all off. Is there a third alternative? Maybe the Monte Carlo of the South Pacific- but note that the foreigners there have a lot of the power, and nearly all the wealth. I would be interested in Key expanding on his vision of how it will play out.

Or we could take a couple of less populist decisions now.

A choice for us all.

by Chairman Moa | 19th Feb 13, 11:44am 1361227489

Will you be one of those who complained about high petrol price (and everything else that depends on fuel price; fruits, vegetables etc..)?

by steven | 19th Feb 13, 12:14pm 1361229297

Petrol price? in what way? sure if the NZD exchange drops oil/petrol will climb and possibly a lot. The problem is of course relaitive, ie what is more imprtant overall to the critical/important bits of the economy. Im pretty interested in finding thet out. From where I sit our exporters are important so the rate needs to drop to keep them in business which provides jobs and income for NZ. The minus side is we pay more in fual costs as then do exporters as their costs increase....so yes sure they may not be any NET better off.

regards

by Gummy Bear Hero | 18th Feb 13, 8:06pm 1361171202

" I think it makes sense for the G20 ministers to affirm that everybody embarking on a programme of trying to devalue their currency doesn't make much sense " .....

.... he doesn't sound like an idiot to me .... Do you disagree with that statement , above ?

And who would do you think is an improvement on Jolly Kid ..... Russel " Helicopter " Norman , or David " Tax 'em hard " Shearer ....... Hmmmmmmm ?

by Kate | 18th Feb 13, 8:44pm 1361173478

Well I disagree with the statement - the point is not everyone is embarking on a devaluation - meaning it makes all the sense in the world to be in to win. Personally, I think Winston Peters would have managed the economy better than anyone else as the RB Act would have been amended YEARS ago and our RBGs would have had years of thinking without the benefit/protection of inflation-only targeting.

by robby217 | 18th Feb 13, 11:49pm 1361184564

Oh you do jest, the notion of a politician "managing the economy" as if his hand is on the tiller is also a fallacy.

by Gummy Bear Hero | 19th Feb 13, 12:19am 1361186371

Winston Peters once said that he wanted to re-introduce tarriffs on imported products , he wanted to build a fortress economy , to protect New Zealand from the vagarities of the world's economies , to keep jobs within our borders ......

...... as if he could do that , and none of our trading partners would retaliate against us ....

by Happy123 | 19th Feb 13, 10:37am 1361223435

Hi Kate, please check your text before posting, you've put "I think Winston Peters would have managed the economy better than anyone else"

Clearly you didn't mean to put Winstons name in there.

by Stephen Hulme | 19th Feb 13, 11:09am 1361225365

I hope Kate meant what she said - I voted for Winston for the same reason.

by Kate | 19th Feb 13, 11:24am 1361226285

Of course I meant Winston. And here's another $5.5m reasons to vote for him again;

http://www.stuff.co.nz/national/politics/8314679/Treaty-cases-earn-top-dollar-for-top-team

I was working in govt when he was the Treasurer (1996-1998). Simple rules if you were managing a Vote - reduce expenditure by 1% per annum. No allowances for inflation, no allowances for salary increases - you just had to find what new money you needed from somewhere else in your budget. Consulting firms absolutely loathed him, as those jobs-for-the-boys were the first tap to be turned off. Our overpaid public servants actually started writing their own reports .. quite an innovation, eh?!

Just think - had he remained in a position of power - we'd also have settled all outstanding historic Treaty claims; the Waitangi Tribunal would have been disestablished years ago - and reference to these bureaucratically derived 'Treaty principles' would be gone from all our national legislation.

by steven | 19th Feb 13, 12:21pm 1361229713

WP is a complete baffon and champion pork barreller god help us if that twit became PM. I think you are wrong on "not everyone is embarking on a devaluation" the important thing is every country of note is.....I mean we dont really care about Chad, or the Cook Islands etc...the key players are the UK, EU, Japan, china and the US and they are either actively and obviously at it or doing so indirectly/covertly.

Sure the RB needs re-directing but that should be a policy thing that a Govn sets and then the RB follows....and it cant be self-contradictory either...ie give the RB 5 "utlost priorities"...our Govn has to be clear and then stay away.

Inflation targetting was a simple way and worked quite well, however once past peak oil its obsolete. The problem is updating the RB's remit for a post peak oil world, fat chance a poop head like Winston is up to that.

regards

by Ralph | 19th Feb 13, 10:56am 1361224598

The unproven assumption in your argument being that others ARE making real gains through devaluations. It is hard to find real (not nominal) gains through devalaution of currency about, even through the practice is wide and increasing.

Arguing for currency debasement leads back to the Zimbabwe experiment.

Also, the analogy that this is similar to cheating at card doesn't really work here. Firstly the foundation of cheating is secrecy and in this case currency debasement is out in the open. Secondly poker with money isn't a trade system it is (at best) a speculative venture so the models are very different.

by Stephen Hulme | 19th Feb 13, 11:25am 1361226321

The unproven assumption in your argument being that others ARE making real gains through devaluations.

Ralph what you say is at best economical with the truth. The US owes $trillions to foreign nations which is being be serviced and redeemed with printed and thus devalued USD.

by Ralph | 19th Feb 13, 11:29am 1361226560

It's one thing to point at the debase of USD dollar denominated debt, but what is the wider economic cost of the resulting currency debasement - you're looking at gross gain and not net gain.

Also, the USD has the reserve currency so they will always be best off. Anyone else making gains, real or imagined?

by steven | 19th Feb 13, 12:31pm 1361230307

Maybe the gains are only short term, and while in effect when we all want to do it ends up in a race to the bottom, its still being done.

The Q is which is worse, to do it, or not....I havent yet seen a thing that answers that well enough to be trusted.

regards

by notaneconomist | 18th Feb 13, 10:39pm 1361180343

A bit of light reading.

http://www.rbnz.govt.nz/research/bulletin/2007_2011/2009dec72_4hunt.pdf

http://www.rbnz.govt.nz/research/bulletin/2012_2016/2012mar75_1reddell…

by Stephen L | 19th Feb 13, 9:06am 1361217986

But in game theory, Gummy, if some do it and others do not, then there are clear winners and losers. Key thinks we are one of the winners. I rather think he has us on the losing team in the medium term.

The G7 are like the mafia bosses in the USA of 60 years ago, and the rest of the G20 their foot soldiers.

"Who says we are criminal? Where's the evidence? Those dead bodies there were just an unfortunate accident. We give protection, and we only take a small cut."

Against overwhelming evidence: "We are not actively devaluing our currencies". The Japanese expected a ferocious serve, and they were let totally off the hook.

Real message:

"We, the G20, are going to carry on doing exactly what we want to do. And for the foreseeable furture, that will include a lot of printing, and devaluations"

As it happens I'm mostly glad for the world economy that they are doing so (although I suspect they will overshoot by a long way); but for Key so loudly and aggressively to say that he wants the NZD as high as it can go, seems suicidally reckless on NZ's behalf.

by Ralph | 19th Feb 13, 11:00am 1361224810

What if the "game" is called slash your wrists to poverty?

by steven | 19th Feb 13, 12:44pm 1361231088

Well if the other choices are drink 5 litres of paracetamol mixed with whiskey, or put my head in the toilet and flush?

ie "poverty" as we see it from here ie bye bye consumerism is cast in stone...the only Q is the path to it and what we are left with.

It could be quite a bit, or nothing, our choice to make, the latter it seems is our current choice.

regards

by dobrydan | 18th Feb 13, 8:04pm 1361171044

New Zealand consumers are much wealtheir as a result of a higher exchange rate. NZ consumers are paying less for virtually all imported goods as a result of the high exchange rate," he said.

Excellent view John.. especially the growing number of unemployed and those struggling to meet the financial debt of owning their home...Yes, I'm glad IPADS and mobile phones are cheaper than ever...a basic necessity of any family. Meanwhile child poverty grows but still a cheap holiday to Paris (due to a high NZ$) should keep moral high..

I must have missed something because I've never seen so many New Zealander's on the bones of their arse.

To quote Edmund Blackadder: "have you ever visited planet earth, sir?"

by Grant A | 18th Feb 13, 10:32pm 1361179922

I appreciate the sentiment dobrydan, but understand this, for those struggling, if we didn;t have a high dollar supressing tradable inflation, mortgage rates would either be, or about to be, higher for the struggling mortgage holder. He/she is getting the benefit of cheaper living costs and lower mortgage rates than otherwise when they most need it, and if the NZD takes a tumble it won't be long before his/her situation deteriorates. Key is rightfully pointing out the other side of the equation that many don't fully appreciate - its not opinion, it fact

by notaneconomist | 18th Feb 13, 10:53pm 1361181216

I agree Grant......this is the side that few are looking at.

Maybe some basic maths needs to be taught with a few educational pointers on liquidity etc.

Exporters are in the worse position. However the lower interest rates are an offset to where the dollar is trading. I'm also thinking these low interest rates might be here for a while given what is happening in the US.

by steven | 19th Feb 13, 12:53pm 1361231606

Would you care to show the proof, evidence or even your logic that rates would be higher? otherwise its speculation on your part and nothing more.

Now you claim tradable inflation is being supressed when we see no pay increases that "allow" inflation to occur...ie Im sure manufacturers would indeed like to incraese prices but the buyers simply cant afford it.

I do agree its a case of swings ad roundabouts but Ive yet to see much if anything that says our present course of a high NZD is the best, Im really doubtful. "fact" no it depends on the dgeree, I mean if we were to collapse to 0.4 from 0.83 then yes, but if we are trading at 0.72? ie maybe there is a sweet point or balance point...for instance as the exporters go pop jobs are lost, that certianly seems to be a fact.

regards

by Ralph | 19th Feb 13, 1:15pm 1361232908

There are quite rational reasons to link interest rates and exchange rates.

The (Irving) Fisher effect states a change in a countries inflation rate will result in proportional change to a countries interest rate. Equation and assumptions here:

http://en.wikipedia.org/wiki/International_Fisher_effect

The theory and observation of internal interest rate parity also links inflation and exchange rates across a spot market. Equation and assumptions here:

http://en.wikipedia.org/wiki/Interest_rate_parity#Uncovered_interest_rate_parity

by steven | 19th Feb 13, 2:04pm 1361235891

um, but,

"the currency of the country with the higher nominal interest rate (Id say that was new zealand) is expected to depreciate against the currency of the country with the lower nominal interest rate (USA) , as higher nominal interest rates reflect an expectation of inflation.

Yet NZ's currency is appreciating against the US dollar, not depreciating. Of course neither have inflation to speak of, the opposite of whats happening it seems. or maybe there is no expectation of inflation, so the carry trade buggers it all up.

So on the face of it Im not sure your links say what you think they say, in fact the opposite.

another intersting piece,

http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

Also we can throw in things like the carry trade, in fisher's time a non-existant thing....I think the problem is determining the NET effect when there are so many things going on.

regards

by Ralph | 19th Feb 13, 3:02pm 1361239366

Well quite. It's never as simple as economists say it is. Only suggesting it is not irrational or opinion alone that links interest rates and exchange rates.

by Ralph | 19th Feb 13, 11:08am 1361225286

Meanwhile child poverty grows..

According to the solutions on poverty report from the Office of the Childrens Commissioner this is not correct.

by Matt in Auck | 18th Feb 13, 11:03pm 1361181794

Basically this is another really dumb comment from Key, despite what his number 1 fanboy GBH says!

He disingeniously rolls out the "oh it wasn't great when the NZ dollar was 40 US cents". Thats a really extreme comparison John, and quite frankly lame, I don't think anyone would advocate that (costs of things like fuel would obviously skyrocket to ridiculous levels and not help exporters who naturally are affected by fuel prices).

Yes of course there are some nice benefits from the strong NZ and AUs dollars. I'm travelling to Europe in April and the dollars go so far! But beyond my own selfish enjoyment, I know this is ugly for both Nz and Aus....

I'm no Labour fanboy, but me I'd rather have them anyday than Mr Do Nothing Knob Key.

by robby217 | 18th Feb 13, 11:54pm 1361184897

Well its not really extreme because none of the interventionists have articulated what the 'correct' currency level is?

by Gummy Bear Hero | 19th Feb 13, 12:37am 1361187437

With " fanboys " like me he'd never have gotten voted in ( I last cast a vote for National as a party and in an electorate vote , in 2005 ! ) ......

....... but I reckon NZ is darned lucky to have a " do nothing " government ....... the alternative being more meddling & bungling from Labour , as per 1999 - 2008 .....

Give us all a break from that ...... the less the government pokes it's oar in , and decides which direction to steer the ship , the better !

by robby217 | 18th Feb 13, 11:49pm 1361184584

So hows Venuzuela getting on?

by Gummy Bear Hero | 19th Feb 13, 12:28am 1361186900

Their stockmarket topped the world last year , with a remarkable 300 % gain ......

....... all the while that el Presidente Chavez was on death's door ......

They may get another 300 % this year too , if Hugo knocks a little harder ....

by moa man | 19th Feb 13, 6:51am 1361209871

Be great if Hugo could vibrate a little bit faster , rather than just knock.

Rakon deals in high frequencies. NZX:RAK

Perhaps they could encapsulate him into a crystal and get the share price above its all time low of 26 cents. That would be nice for share investors.

by Miggle | 19th Feb 13, 3:03am 1361196209

Smart countries like Singapore and Switzerland do a lot to keep their currency in check. They know the value of keeping the export sector alive. After all one does have to pay for all those nice things we like to have.....

by Ralph | 19th Feb 13, 11:13am 1361225638

An article from CNBC about how the Singaporean cnetral bank is caught inbetween increasing inflation rates (3.9%) and a looming recession (-0.7% second quarter):

http://www.cnbc.com/id/49267567/Singaporersquos_Central_Bank_Caught_Between_a_Rock_and_a_Hard_Place

Whatever they have been doing the results are not so sparkling as one might think.

by Grant A | 19th Feb 13, 6:49am 1361209773

Miggle - so what you're asking is for the RBNZ to blow out its balance sheet to $170bln the same comparatively as the Swiss and suffer the equivalent tens of billions of P&L swings each year. If you understand truly those risks, and our omparitive situation, I think not

by Stephen L | 19th Feb 13, 9:36am 1361219768

I would be interested in the Swiss maths in due course, when this cycle is over.

My understanding is they have printed vast sums of Swiss Francs (so largely free to them) to buy up foreign currencies and assets (A good number of them have found their way to NZ, it seems).

They actually have one of the world's largest current account surpluses (so their intervention is actually fighting the natural impact of that position). Given our massive deficit, we would not need anything like the same proportional printing.

In any case, they have printed I believe over US$600 billion; and bought that value in foreign assets, including equities and currencies. The equities right now will be doing well, but that aside, even if they lost say 10% in Swiss Franc terms, they really have made $540 billion, and kept their exporters/traders and tourism in work. They have a massive buffer, if perchance things ever really worked against them. We have no buffer at all in terms of foreign reserves- hence selling power stations and the like.

by John | 19th Feb 13, 12:31pm 1361230305

Agree, What is the downside to printing money and buying foreign assets or paying off some debt.?

by Ralph | 19th Feb 13, 3:17pm 1361240276

Cor John, big question.

The effect on the domestic economy is generally inflationary. Specifically how much inflation depends on the circumstances in which you do it. If we in a huge deflationary cycle the net effect might be to cancel out the delfation and stabilise prices. If we in a inflationary cycle (whether price or wage) then it might be like tossing petrol on a fire and destabilise prices.

It is further complicated by the difference between prices of things made locally (say food for example) and imported things. If the exchange rate drops because then everything we import will increase in price, including big things like petrol. It is commonly held the effects of price inflation are worse on the poor because they don't have a lot of spare cash to pay more for food and petrol.

It is further complicated by which currency your debts are held in. If you (or your bank/lender) borrowed in USD and not NZD then the falling NZD will increase your interest payments and thereby shrink your net income (more goes to interest payments).

So the potential downside could be increased costs of living across the board and hitting the poor particularly hard. If you are an exporter of course that might be countered by increased sales so you can increase your wages. If you are an importer that's not likely.

by xingmowang | 19th Feb 13, 8:51am 1361217066

Can RBNZ/Treasury do something to dampen down NZD exchange rate against USD?

If yes, how?

by Ralph | 19th Feb 13, 3:30pm 1361241026

Sure.

They could print money like maniacs so foreign buyers don't value it so highly. Japan is doing this now.

They could fix/peg our exchange rate to the USD so it doesn't float anymore. Hong Kong is doing this.

They could fix our exchange rate to a basket of currencies, USD, EUR, YEN and GBP.

They could directly intervene into the market and buy vast quantities of foreigh exchange in their own right.

They could enter into a monetary union with Australia.

The question isn't whether something could be done. The question is what could be done that would have a positive net effect, that is to say the downsides or risks don't outweigh the positive gains. I think National seem to favour the status quo. The Greens seem to favour printing like idiots, which is becoming a fashionable idea. I don't know what Labour are up to. But there's choice out there for sure!

by Stephen L | 19th Feb 13, 5:02pm 1361246523

Ralph,

Great that you at least recognise there is plenty that can be done. Many deniers, including Key himself, don't seem to get that far.

Some emotional words like print like "maniacs or idiots" somewhat show your hand, without any evidence.

The current account deficit is heading towards 6%. Unemployment is at 7%. The fiscal deficit is staill I think $10 billion or so (and certainly no tax increases from exporters/import substituters/tourism on the horizon). Inflation is at 0.9%, below the range that is deemed acceptable. The exchange rate is at its highest level ever on this site's TWI chart.

Yet interest rates are low; so taking them further down has other unintended but obvious consequences.

A recent study showed that the fiscal mulitiplier effects on a domestic economy with a freely floating exchange rate and no controls, was nil. In other words our $10 billion fiscal deficit is a free gift to foreigners, with zero benefit to us, in our current settings.

By definition you are saying the the rest of the world are idiots or maniacs; and that NZ's National party stand nearly alone in the world as best practice non idiots.

What effect would not borrowing say 2-3 billion a year from foreigners have.

Seems to me it would help fix most of the above, and worst case, if it didn't, we've at least savde ourselves 2-3 billion. By all means try a billion at a time to see the inflation effects.

by Ralph | 19th Feb 13, 5:13pm 1361247181

To be fair on me (which I usually am) my emotion is reserved for one particular road, currency printing. I have two main reasons for that emotion.

First is a response to people like the greens who position printing as a free lunch solution without ever talking about potential pitfalls, hidden costs or balance of any kind. That seems intellectually lazy and slightly deceptive in a political context which i don't like.

Second, I struggle to find instances where the road creates meaningful wealth and plenty of instances where there are unintended consequences. I fear a slippery slide that is hard to arrest.

That is not to say I am any kind of arch conservative in fiscal or monetary policy, pragmatism has it's time in the sun.

by Grant A | 19th Feb 13, 9:06am 1361217975

Yes, Xingmowang, act irresponsibly, blow out the debt, start printing money etc and takes some very big risks. The facts are that despite lower interest rate differentials with other countries and other normal correlated factors that aren't working currently, NZ is one of the .few countries currently considered doing the right things and is a safe haven for investment. The RBNZ intensively studies ways to influence the exchange rate outside of being irresponsible, but other than very short term efforts at particularly opportune times, it's influence is very small.

But the redeeming feature is the reason that we have a high currency focusing attention, we're no where near in the poor state of those economies being forced into money printing, zero interest rates, and currency wars - in short they're stuffed and their outlook is poor over the next 5 years. Yes many NZD/USD based NZ exporters are doing it tough, but it's part of the cycle, and no exchange rate works for all - they will adapt, most will survive, but it's no fun fr them and you do have to feel for them, but there is no exchange rate solution obvious to the people who know.

by kin | 19th Feb 13, 9:23am 1361219015

Yes, Grant A. This is part and parcel of life in the new globalised world. It's just part of the "Cycle"

So is our unemployment rate at 7% and rising, our youth unemployment rate at more than 25% part and parcel of the "part of the cycle" too.

Oh by the way, the Major economies print money for free and lend it to their banks at 0%(almost) and we gratefully borrow it from their banks and pay a premium for the same free money in order to pay it back to them when we import their stuff...

Meanwhile our very own business making the stuff we buy closes down because we are borrowing money from other people to buy other people's stuff.....that's part of the cycle too I guess....

Wonder how this will end....when we no longer can repay all those free money made valuable by our borrowings?, when our unemployment rate reaches 27% ? when all our jobs gets replaced by foreign production ?, when our youth unemployment reaches 60% ?, and even finally when our agricultural product (THAT by the way is NOT a measurement of "Developed Economies") cannot compete overseas ????

I suppose this is all part of the cycle.....it's not good to temper with nature.

Where have I seen this before ?? Oh I remember, it's a country called GREECE !!!

by notaneconomist | 19th Feb 13, 10:41am 1361223719

Kin - maojor economies are printing to avoid a liquidity crisis. Greece has issues because of the bank debts that they had to take on. Their banks had a liquidity crisis.

If NZ devalues at this point in time the more appropriate question to ask would be....Will this cause a liquidity crisis in NZ?

If NZ was to have a liquidity crisis.....we will have far worse complications than what we are experiencing.

Everyone exporting or who has exposure to exporting has to change their game plan.

by kin | 19th Feb 13, 2:55pm 1361238949

Pardon my ignorance,

You said "major economies are printing to avoid a liquidity crisis"

Yet you said "If NZ devalues.......Will this cause a lidiquidity crisis" ??

Which is which ??

BTW everybody knows that Major Developed countries are printing to devalue their currencies, not to avoid or even control a liquidity crisis. You do not need to print money to save an economy or your banking system from a liquidity crisis.

The sole purpose of money printing under the guise of "liquidity injection" is to devalue inorder to boost exports in the hope that it will stimulate the economic activity of the country......

by Grant A | 19th Feb 13, 10:51am 1361224301

Kin - if what youre suggesting is that printing money is a solution, and yes I agree that there is no mmediate cost because the central bank generally pays the interest it earns on the bonds back to Treasury (assuming its Govt bonds they buy), then I ask you to think about one question " why is there no poverty in the world ?" Any central bank can fund its Govt with unlimited amounts of cash at no cost forever ?

by kin | 19th Feb 13, 3:02pm 1361239337

Grant A.

I never proposed that money printing is a solution to an economic problem causes by structural difficulities (which all developed economies are afflicted.

My posting is mere to highlight Key's silliness that the high NZ exchange rate is a good thing for the country, and that your comment it is part and parcel of a "cycle" and that we should just bear with it.

Ever wonder why there is such a cycle in the first place ???

by Stephen L | 19th Feb 13, 9:25am 1361219113

Is deliberately and actively championing the current account deficit to keep growing, responsible? Seems to me that that is in fact blowing out our national debt (or loss of assets) at the fastest rate possible.

Who on earth considers that we are doing the right things? Nearly all the G20 are doing something very different, so one imagines they are not truly cheerleaders of our approach.

by Ms de Meanour | 19th Feb 13, 9:39am 1361219958

"Nearly all the G20 are doing something very different, so one imagines they are not truly cheerleaders of our approach."

If I were foolish enough to stand a heater near some nylon curtains and my house caught fire as a result, I would call the fire brigade and have them shoot water at high pressure at my house, calculating that the immediate benefit of putting out the fire outweighed the likely water damage.

As my more safety-conscious neighbour, whose house was not on fire, would you expect me to advise you to have the fire brigade shoot water at high pressure at your house as well? Or would you instead expect me to realise that standing a heater near nylon curtains had not been sensible and resolve in future to act differently?

by Stephen L | 19th Feb 13, 10:07am 1361221641

Analogies are never perfect, but you imply that our house is not on fire. Record high unemployment since the Nats were last in power; a current account deficit also getting back to record levels; growing inequality (with civil servants and property developers the winners); meagre growth in GDP solely on the back of rebuilding Christchurch; pensions/healthcare in particular looking unsustainable in the medium term, very high fiscal deficit.

I would be looking at squirting a bit of water on some of that.

by Ms de Meanour | 19th Feb 13, 10:58am 1361224725

To torment the analogy further - the neighbour's house is by no means problem free. It may have a leaky roof, or mould in the bedrooms. That still doesn't mean that it's sensible to address those problems by adopting the same methods that a different householder is using to address different problems in a different house.

by Stephen L | 19th Feb 13, 11:32am 1361226726

Good points that I certainly do not disagree with.

So to give some credit to the Nats, what is not broken just now in NZ:

GDP arguably just trundling along; though without Christchurch rebuild, that would be unlikely.

Consumption of imports: Going very well; so the current lifestyle seems good, and those doing the importing are fine.

Education, health systems largely as always, and mostly okay; as presumably are most government departments, and spending. Except that we cannot afford them all in the current paradigm.

Other micro changes could be doing something. Its hard to tell.

What's broken:

Current account- a symptom of over consumption of imports vs exports; and getting worse. This equates to a loss of wealth and long term incomes. Would be fixed by a determined approach to the exchange rate.

Fiscal deficit: Still very high, and not really looking bridgeable in the near future, despite the Nats' rhetoric. I don't see fundamental change to help that.

Unemployment; See current account above.

Housing and farm bubble; and further private indebtedness compounding the problem.

Solutions? Lowering interest rates worsens housing/farm bubble and current account.

Raising interest rates sucks in more foreign money, raising current account.

Government borrowing offshore raises exchange rate, rasing current account.

Possible solution:

Fund enough of the government deficit to have exchange rate stable to slightly negative. Message to exporters/import substituters that the government will no longer kneecap you at every opportunity. Employment grows. Welfare declines. Tax revenues grow. Government real debt significantly lower, as funded by RBNZ; and in any case declining back to balance quickly.

Nearly all G20 countries are doing at least this, in case you think it is whacky.

Do you disagree with the analysis of the problem. Or with the solution? If so, why?

by stp | 19th Feb 13, 9:40am 1361220059

For guys who think JK is an idiot - he is smart guy. He knows how to propel himself into Hawaiian dream in retirement....

by xingmowang | 19th Feb 13, 9:52am 1361220756

I personally think that you are spot on.

For a career money maker/investment banker/FX trader, I bet JK's mission will always be profit-maximizing.

Human being things are just not placed in any economists/financiers' equations.

Sigh~~~~~~

by vavau.to | 19th Feb 13, 10:28am 1361222889

yes pretty obvious the world will wake up to how very clever we are. Those other fools let them carry on, keys on to it for sure. Our $$ will be top dog, three cheers. Export who needs them so over rated, what wrong with good chinese milk & cheese.

by Happy123 | 19th Feb 13, 10:50am 1361224243

Key is right and wrong and a politician.

He's right that in the short term a higher dollar, and more importantly a rising dollar, will attract foreign investment in the NZX, NZ houses, NZ business, NZ funds. All an injection into the economy. Hopefully the next fridge, TV or gas fill will be cheaper too, all good things in the short term.

He's wrong in the medium term because as the NZD peaks and starts a decline, that same investment will be pulled out of NZ and NZD as fast as it went in; a withdrawal from the economy. And of course the higher the dollar goes the more exporters suffer or fail and the higher our balance of trade/payments becomes. All bad for the economy.

There is of course little he can do about this, the OCR can't be dropped without further inflating the housing market and we're too small to do QE effectively. So politician Key kicks in and puts a positive spin on the whole thing.

Regarding his leadership, I'd rather have a personally successful and clearly intelligent person like Key running the place than the career politicians at Labour, Greens, etc.

by Boatman | 19th Feb 13, 11:05am 1361225101

Question for Mr Key ... If the strong Kiwi$ is good for us , then why has the price of fresh milk and fish ( as examples) not come down? .At this excahnge rate , we are now paying more per litre for Fonterra's Milk then Australians do for Fonterra milk.

by Alex13 | 19th Feb 13, 11:18am 1361225880

Strong NZ$ is good. But your question about milk and fish prices is a good one too. Does the answer have something to do with volumes (market size)? lack of competition?

by Waripori | 19th Feb 13, 12:48pm 1361231283

I think what Key is saying is that we cant do much about the value of the currency without taking enormous risks . The amount of NZD traded is large compared to the size of our economy.and we cant do much to control the rate at which it exchanges.

Given that ,we should realise it is not all bad news even for exporters. High currency means less inflationary pressure and lower interest rates which helps exporters as well. They also have lower input costs for plant, fuel and probably some raw materials. .