sign uplog in
Want to go ad-free? Find out how, here.

PM John Key says currency intervention or money printing simply wouldn't work and exporters have to 'ride through' the strong NZ dollar cycle

PM John Key says currency intervention or money printing simply wouldn't work and exporters have to 'ride through' the strong NZ dollar cycle

By Gareth Vaughan

Neither intervention in the currency markets by the Reserve Bank nor money printing would successfully weaken the strong New Zealand dollar, and the current strong dollar cycle is one exporters simply have to ride out, Prime Minister John Key says.

Speaking at BNZ's Partners centre in Auckland's Highbrook yesterday afternoon to business customers of the bank, Key was in campaign mode, even though the next election isn't due until late next year. He said the election would be a choice between his centre right government and a "far left" Labour-Greens partnership. It was going to be "quite a crucial election" for New Zealand.

Among his criticisms of the Greens was "these people want to print money."

"It didn't work very well for Argentina, or Venezuela or Zimbabwe and it could never be done in New Zealand at the sort of magnitude we've seen in the United States," said Key.

Then he went on to talk about Japan and the massive money printing, or quantitative easing, being undertaken there.

"Just take Japan. They're printing money. But this is how they're printing money. They're taking baseline money supply from 125 trillion yen to 250 trillion yen, they're doubling it in two years," Key said. "They're using all that money to buy corporate bonds in Japan. And if those corporate bondholders, basically those corporates who get that cash, make poor investments, it's all over red rover for Japan. Because their government debt's already sitting at 220% of GDP."

The seesaw analogy

As for the New Zealand dollar versus its United States counterpart, Key used a seesaw analogy.

"It's a bit like being a seesaw and if I weigh 85 kilos and you weigh 170 kilos, I'm going to go up when you sit on the seesaw and you're going to go down. And that's really the situation we've got at the moment."

"We kind of weigh 85 kilos and the United States weights 850 tonnes. Right up to this point it (the US) has been very unwell. It has got everything from aids to bird flu. It has really been pretty unwell so the market's just massively adjusting what they're doing."

When people say the Reserve Bank should be printing money, Key said you wouldn't do that with base rates - the Official Cash Rate - at 2.5%.

"All you do is cut interest rates for a start off. The second thing was even if you printed money, it's never going to work. I think they've printed US$5.5 trillion in the US. I mean it's massive. So what would we print? NZ$50 billion or something? It wouldn't make an iota of difference."

"So my view would be I know we want to get the exchange rate down and I know it's hurting a lot of companies. But it's a cycle you're going to have to ride through and all the Government can do is control the things that are in our control. So get out there and reform the Resource Management Act, make sure we don't spend too much money, make sure we keep pressure off interest rates, manage the place well," Key said.

Intervening on behalf of the BoJ; 'It just never worked'

Furthermore, he said intervention in the currency markets never works.

Here Key cited an example from his previous career at Merrill Lynch, where at one time he was head of global foreign exchange. One of Merrill Lynch's biggest clients was the Bank of Japan, which used to intervene in the currency markets through Merrill Lynch.

"To tell you how bad it got, one night we were sitting there and the Bank of Japan rang up and the US$-yen was about 90 or something and they didn't want it to go down lower. And the guy said to me 'I want you to start buying dollars at 90'. And I said 'how many do you want me to buy', and he said 'well, I'm going out for three hours so I'll give you a yell when I get home.' And I said 'yeah, but how many do you want me to buy?' And he said 'I'm going out for three hours, don't you understand the conversation?'

"I bought US$4.5 billion in three hours. He said 'where is it (the US dollar-yen exchange rate)' and I said 'it's 90, you bought US$4.5 billion. And he said 'ah, well I'm off to bed now give me a ring in the morning'," said Key.

"It never worked, it just never worked. I don't know how much money they lost on intervention but it was massive."

We welcome your comments below. If you are not already registered, please register to comment.

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.


I been riding John , far I got  two dead horses, the one I'm on currently looks nervously at me, as if I don't know where I'm going ....the saddlebags are full of pile cream traded for my cash...I'm down to eatin trail beans an wiping my ass with your goodwill messages.

  Have listen to this guy talk about farming in Australia starts 3 min in
 Then the banks and a Valuer disagree.

Cheers A.J. alarming and happening here on scale...3% on Capital on 7% lending, I'll direct a guy from another thread to look at this in terms of irresponsible lending practices.

Got your shorts on A.J...?pack a pair of gumboots to wade though the carrion, looking for the live ones.

you forgot the bush hat with corks dangling on strings to keep the blow-flies away

Stay away from the corks iconoclast, think of them as hollowed out canoes (ostrich),just smile and wave at em.

Im onto it.  Well i think I am :-)

JK talks as guest of a bank, to bank customers, and says what they want to hear, shock. Has he got that much time on his hands that he can spare time as a bank guest speaker? I am starting to really dislike that man as he reminds me too much of Tony Blair in the way he lies and smiles at the same time. As for his selected answers, no need to go over them again, the debate has been had on here for a long time

He said the economy was generally starting to pick up, with business and consumer confidence both on the rise.
"It feels to us a hell of a lot stronger than it did in 2008, when we first came to office."
New Zealand's 3 per cent economic growth last year was better than many other developed countries, with only Australia moving at a notably faster clip. Read Stuff
Funny that Stats NZ comes up with a 2.5% ann. growth figure.
He said the election would be a choice between his centre right government and a "far left" Labour-Greens partnership. It was going to be "quite a crucial election" for New Zealand.
Among his criticisms of the Greens was "these people want to print money."
And yet companies like Powerco are allowed to deny NZer's access to the fruits of corporate taxes due from their utility payments. There are unmentionable names for such avoidance behaviour. Read article
Powerco, for example, is a highly profitable business but has paid next to no tax for the last three years. Here are the numbers.
In the nine months to March 2012, Powerco reported earnings before interest and tax of $79.6m. The previous year to June its ebit was $118m and the year before that it was $136.3m.
Nevertheless, over those three years Powerco had an interest bill totalling $465m, which converted those operating profits into huge losses and obliterated its tax bill. Indeed, Powerco reported a net tax benefit for those years of $32m.
The arrangement is beneficial to Powerco's owners - Brookfield and Queensland Investment Corporation - because more than a third of the company's debt is related party, allowing owners to extract profits from the business as interest while paying no tax.
There are tax rules designed to limit the ability of overseas owners to do this, known as thin capitalisation rules, but Chalkie reckons they have been as useful as a fart in a fishtank.
Same for the comments from right wing ideological sycophants such as Simon Botherway:
In the absence of higher electricity prices, new generation will not be built and then we must all accept a less reliable, static and eventually rationed supply of electricity. Think brown-outs or electricity-less days.
Herein lies the deception of such policy. In fact creating an environment that encourages the build of additional generation is the surest way to both ensure adequacy of supply and the lowest possible wholesale price path.
The greatest cost involved in the build of clean renewable generation plant is the upfront capital cost. Reducing the cost of capital should be the prime objective of either side of the political spectrum. Labour/greens policy achieves the opposite. It appropriates value and disincentivises investment. Yeah Right!

How bout that Rabobank there's how you deal with uppity farming types....banking with a smile and a stab....Baby eating Bishop of Bath and Wells got nothing on this lot.
 Red Hot poker Time...!

'Rabobank's rural managers work closely with clients at the farm level to meet each client's unique financial needs.
Please explore our range of innovative, flexible financial products designed to meet the needs of primary producers in rural New Zealand.'
 having said that my persona;l experience with Rabo has been great.Aj

Yes the undoing with the Gray's  came with the Medowlea deal to block their enterprise, I'm fairly certain Rabo would have invested in the Enterprise with knowledge of the business plan, but like the Grays failed to spot the obvious...or the potential for it, at least.
 So , A.J. meets the needs...perhaps, but the portion of 2mill to capitalize the venture required dilligence of a higher standard by all parties.

All very less than third world - but what can I expect?

Well, untill you can see someone on the horizon wearing a mask n white hat shouting  "Hi ho Silver "...Stephen, more of the same I'd say......tipping point is here, but Banky boy's still getting some bounce back from the borrower under the see saw.

What a shocker - surely Meadowfresh used anti-competitive behaviour?

I wonder who and what the winning Tender will be. Looked like a top spot

It seems to me Auckland is our Gordian knot. House prices are rising because Auckland lacks new housing supply. The house price bubble may lead the Reserve bank to raise interest rates. Interest rates cannot fall even though general inflation is subdued because of house price inflation. Exchange rate traders know this and are attracted to the kiwi dollar because we are one of the few places globally where you can park your cash and get a positive return. The high dollar and high interest rates (in comparison to our global competitors) with the possibility of even higher rates is hammering our productive sector.
Auckland council does not rezone more residential land because they have an elected mandate to provide better infrastructure to counter the effects of previous sprawl, such as traffic congestion. If Wellington and Auckland cannot do a deal the whole country will suffer.

If 18k includes your architects plans thats not bad. 

Kimy, I recently submitted to DIA re the notion of making TLA's estimate and notify participants in their processes about the likely interest on capital committed, at ruling IRD rates for use of money.  This would highlight the cost for the time as well as the interest on the raw fees involved.
It would make a great article for Interest, if you were to keep a note of costs and timing, and add in the opportunity cost/interest at those same rates.
Would be a true working example of how time injected into processes, costs applicants real money.
A concept, needless to say, which never crosses the minds ('minds' ?) of anyone in the public sector.

I wonder what my late grandfathers' would say to this...
They fought facism in the early 1940's so that future generations could live in peace and prosperity. 
It appears many men and women lost their lives for nothing when I read posts such as these.

$4.5b is a very hefty amount indeed. I never heard of that story myself but would have been in 1995, when usdyen was in freefall (the Asian central banks were bailing) and hit a low of 79.65 in April that year. BOJ was intervening all the time and eventually managed to stop the rot, primarily by cutting interest rates. $Y rallied to 100 by the end of the year, and would hit 147 in Nov 1998. Go figure.
The key point is that intervention usually only works in the short-term. To create a longer lasting turnaround, the fundamentals need to change or be recognised. So the BOJ was only successful when they cut interest rates alongside the intervention. 
NZ's fundamentals are poor: high international debt and continuing current account deficits do not support an elevated currency. However, our status as a safe haven in rough times means that our obvious problems are overlooked. This is not likely to change in the near future. 
There are different approaches that could be taken but they would require some more visionary thinking :-)

"Printing money" is a phrase with many meanings. It depends what you are actually doing in technical terms and why. The QE programs (governments buying bonds from banks) is designed to boost the banking sector balance sheet so it can lend to the wider economy. Clearly in a debt deleveraging environment, this is not likely to work (and it hasn't). The excess liqudity squeezed out into financial assets instead.
Printing money for direct investment (something I have suggested for a few years now) is different, as it actually does the job of stimulating the economy. The issue is the scale of the new money. It needs to be balanced against resource constraints in the economy (i.e the output gap) but in general, 1-2% of GDP is not considered to be an issue for inflation. In countries experiencing major contractions in growth, the number could be higher, say 5%. 
Another way to constrain the impact of new money coming into the economy is to impose higher capital ratios on the banks, so that credit growth is restrained. So $50b would clearly be way too much. $2-5b would be much more manageable. So, for example, the funding gap for the Christchurch rebuild is around $1-2b and that could easily be funded by a direct injection of new money. 

eeerm Kimy , ahh...never mind.
But if as you said we print and..nothing happens...I'd guess we would have been doing that long ago......
 Nope Kimy best way to do to keep an eye on it.

I'd guess we would have been doing that long ago......
 Nope Kimy best way to do to keep an eye on it.

Not so true - the National government  issued the thick end of NZD 50 billion of new Government stock in the four calender years ending Dec'12.
Our banks monetise the crown promises to pay to give investors the proof that the electronic certificates of ownership have an element of genuine moneyness.
You will have to look hard to find where the proceeds were spent to benefit the citizens, charged with servicing and redeeming these debts, beyond Roads of National significance and many others of not much significance.

Ah Stephen H.... I was forgetting  the Bond Vigilanties while scouring for the Loan Ranger..
Cudos my good man. 

good one .. Loan Rangers .. many Tonto's .. Silver .. hi ho

Thanks as usual.
I agree totally with raf above, and indeed have advocated similar proportionate (so with limited if any inflation effects) direct funding of government expenditure here with the money we are printing anyway (as you, Stephen, point out), rather than washing it through foreign hands and paying them a margin for doing so.
Am I missing something, or if say the DMO had directly funded expenditure here, using raf's 2-3 billion as a start (at therefore nil cost in interest) would that not have saved the interest cost, and also potentially helped the exchange rate, that even John Key says is overvalued? If he's right that it would make no difference (and I don't think he is) then no harm done at all, and we've saved the interest and foreign exchange risk?

You are missing something, you cant simply finance government expenditure through printing as that is inflationary, more money in circulation for the same amount of goods and services (no new production) Foreign banks are buying our bonds with money from their clients that exists through actual production of goods and services. If it was as simple as printing to overcome our problems it probably would have been tried already.

How is the govt printing money any different from a bank making money from nowhere with fraction reserve banking for mortgages? It is printing with a fancy name.
I would rather the govt printed and decided where it went (although I don't trust them much more) than a bank only interested in their profit doing it.

The UK has printed over £400 billion to fund their government expenditure. The US, I think ~ $2 trillion to fund theirs. Japan now trillions. They do not seem to have inflation problems. More relevantly, Stephen Hulme points out we have printed $50 billion under National; just created it out of thin air; by tapping a few computer buttons. We have chosen for some reason to loan this to foreigners to loan back to us; such that our money supply simplistically is greater by $50 billion more than it otherwise would have been. No inflation to speak of.
The only catch with our process is we really do now owe foreigners the $50 billion plus interest; and certainly have to pay that back. Several BOE leaders have admitted the British Government will never pay the BOE back; while the USG will never pay back the Fed. In money supply terms our process is no different to the US or UK. It is likely though to keep our currency higher than it would or should be.
Raf, I believe, and the Greens among others, (and I) advocate cutting the foreigners out of this process for at least say $2 to $5 billion, and see what happens.

Overseas governments are printing to lower their interest rates and stimulate their economies, not to finance governemnt spending, that is a by-product of QE. You can only do this without creating inflation if you have 0% interest rates, which we don't. Before printing you would lower interest rates to 0%, but with our current housing market and Canterbury rebuild causing inflation pressure, can you say with a straight face that 0% is the appropriate monetary policy setting for NZ at this time??

Yes, I can say with a straight face that 0% is not the appropriate monetary policy setting for NZ at this time. I have never commented on the current level of interest rates, which are not relevant to what I am talking about. 

is not you say, so you agree with me! interest rates are very relevant if you are talking about printing, as interest rates and inflation are closely related. If you dont think so then how can the rbnz successfully control inflation using solely interest rates. To print you need to be sure it wont cause inflation, in which case you have 0% interest rates and a very weak economy. Hence printing not appropriate for NZ.

You're mixing up too many themes here. UK has had rates at 0.5% for a number of years now. In that time inflation went up above 5% and now its back around 3%. The main issue is not inflation, which is a very blunt measure these days, but whether there is spare capacity in the economy. $40b has been added to the NZ money supply in the last 3 years by the commercial banking system, and apparently we don't have any inflation (of course, house prices have gone up but they are not measured in the CPI). 
So let's be clear: QE is not appropriate for NZ at this time (and hopefully never) but small scale (1-25 of GDP) direct funding of infrastructure projects most certainly is. 

Johnson you mention money being matched by production above but seem to overlook the fact that growth, which it looks like you are trying to achieve, requires the consumption of resources. 
So really the only question is which method is best to stimulate the consumption of resources and your method requires taking a punt that the banks will free up money to permit spending. It also overlooks the wealth stripping by the financial institutions on the way through. raf on the other hand is talking about direct expenture by central government on resources so the outcome is guaranteed to consume resources, whereas your method is not.
Of course this all relies on the resources being available.

Better still Kimy, why don't we print NZD50trn and cure poverty in the world for everyone, its that easy - engage brain Kimmy please, or do you think there are no consequences ?

Just  another impecunious retiree here who has recently discovered that my local council,Hurunui, wants to loan Hurunui Water Project ltd,  6 mill as a suspensory loan .Shareholder of this company include Ngai Tahu , Mainpower. This loan is to be raised from an extra 2% on the rate bill for three years, roughly $750 per rate payer. The company owes $4 mill already and being a suspensory loan dosnt have to pay interest or repayments until it feels like it. The loan is for further feasibility  studies on the proposed hurunui irrigation scheme. Do you astute financial types think I should go for this. Any advice for sticking a spoke in would be appreciated.

Sell up and move on - as you have no democratic say in the outcome, and you will never beat the forces ranged against you due to the total apathy of your neighbours.

Well thats what some of the farmers are doing. The wall of water comes with a seemingly higher wall of costs. Not at all like the earlier border based schemes with their dev cost help.

Waitohi Storage
Waitohi is an alternative storage site to the South Branch and Lake Sumner. It  is more expensive but it has been recommended by the Zone Committee as a location that will have the least environmental, cultural or recreational impact. If we can find a way to make Waitohi affordable then it will fast-track water storage for irrigation to the Hurunui Waiau Zone.  
In December 2011, the Waitohi Irrigation Scheme Selection Panel report endorsed HWP's Waitohi scheme over two competing developers. The independent panel was initiated by the Hurunui-Waiau Zone Committee, Hurunui District Council and Environment Canterbury in August 2011 to ensure whichever scheme is developed for the zone is the best possible solution.
HWP's Waitohi scheme ranked the highest against the panel's own criteria including environmental acceptability, consentability, the potential for hydroelectricity to offset costs, the price per hectare and the value of infrastructure, as well as the ability to proceed at the earliest possible opportunity. While all irrigation scheme options using the Waitohi Basin look expensive, HWP has concentrated on keeping capital costs low and reaching an energy-balanced solution that provides some future proofing around power pricing.

It's worth putting in your submission to the LTP,  expect it to be treated with respect and perhaps even a talk to the Council, but please don't expect any Action or Change thereafter.
Hurunui will be able, thereby, to tick the 'active consultateration undertaken' box for the public record.
Just don't look in their rubbish skip on your way out of the Council chamber....

THIS IS NOT THE WHOLE STORY .....What JK has not indicated is that the sale of SOE's is likely to make the currency even stronger , as foreigners buy Kiwi $ to pay for the shares.
As a currency trader , Key surely  knows and understands this  

I see,  you saw..... that ostrich..? facinating shorts in winter , who woulda thought. 

Ok an exporter of professional services we certain ride through the issue by doing the most logical thing...leaving NZ, 55 staff in Christchurch 30 in Auckland, just two years ago.
Fail to see what is in that for NZ thou...
Amazing when you leave being a  resident company in a national hub and move to an international city what a instant impact it has on what you do,. Now 370 staff on a scale we never contemplated...

In reality, ride it out means give it up.