90 seconds at 9 am with BNZ

90 seconds at 9 am with BNZ: NZ$ hits yen high as Bank of Japan prints again; NZ$ hits 53p as UK rating outlook cut; Greek nerves back; US retail sales disappoint

15th Feb 12, 8:53am by Bernard Hickey

Here's my summary of the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news the Bank of Japan surprised markets late yesterday when it announced plans to print money to buy around US$130 billion of government and other bonds.

This latest bout of Quantitative Easing (QE) or money printing by a major central bank reinforces the fears of those who aren't printing money that their currencies will be driven ever northward by investors who can borrow at near 0% interest rates in the currency that is being printed and invest in other currencies with higher interest rates such as Australia and New Zealand where central banks are not printing.

This is known as the 'carry trade' and is generating fear for many with commodity-linked currencies of 'currency wars' where 'beggar thy neighbour' policies spark a race to the bottom. See more on the Bank of Japan move here at Reuters.

The New Zealand dollar rose yesterday to a 5 month high of almost 65 yen. See our currency charts below, which also show the New Zealand dollar rising on a Trade Weighted Index basis to a six month high.

Meanwhile, the nerves are back in Europe. A meeting of European ministers to decide on Greece's bailout meeting was canceled overnight with Greece's donors still unconvinced that Greece will carry out the budget cuts agreed to in parliament earlier this week.

European ministers are demanding written assurances and details of €325 million of budget cuts agreed to, but not implemented, by Greece's parliament. Time is short with any bailout deal having to be finalised by the end of this week or Greece is likely to default on a €14.5 billion debt repayment due on March 20. That would trigger a disorderly default and could force Greece to exit from the euro. See more here at Reuters.

Also increasing the nervousness in Europe, Moody's cut its credit ratings for Spain, Portugal and Italy late yesterday and said it may cut the ratings of France, Austria and Britain. See more here at Reuters.

The New Zealand dollar firmed to a near record high of 53 pence overnight. The Bank of England announced its own fresh round of money printing last week, adding to the pressure of the carry trade on non-printing currencies like the New Zealand and Australian dollars.

Meanwhile, US retail sales grew by a weaker-than-expected 0.4% in January as consumers remain cautious, particularly about buying new cars. The Dow as down 0.7% in late trade, which saw the New Zealand dollar off its highs versus the US dollar at around 82.8 USc in mid-morning trade. See more here at Bloomberg.

No chart with that title exists.

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77 Comments

by Andrewj | 15th Feb 12, 9:21am 1329250869

Bernard, Im getting 5.8% for a little bit of money deposited on call in Australia. Need I say more.

by Bernard Hickey | 15th Feb 12, 9:51am 1329252668

Andrewj

Do you worry about the exchange rate risk? And if you do, how do you handle it?

cheers

Bernard

by iconoclast | 15th Feb 12, 10:49am 1329256157

Risk? What risk Bernard? If you have a bank acount in NZ and a bank account in Australia, you can shift the money back and forth at the click of a mouse button, at no cost, courtesy of Dan Bell.

by Andrewj | 15th Feb 12, 10:46am 1329256003

I went to Australia when we were .88c to the Aussie $. If we get back to .88 then our exports to Aussie will be stuffed. Hate being exposed to currency risk, will look to get into some kind of business soon. I think its about competitiveness and I dont think we are getting better in that area. NZ is a very expensive place to live, in the last few weeks the Beef schedule is back a dollar and lamb is back a way too. Milk I believe will follow, then what do we do?

by Andrewj | 15th Feb 12, 9:43am 1329252198

It's Not Just Gasoline Consumption That's Tanking, It's All Energy

by steven | 15th Feb 12, 10:53am 1329256414

Its possible there is a lag.....after all such an event has no recent parallel....so at best its stay sitting on the side...

regards

by Neven911 | 15th Feb 12, 11:58am 1329260302

Andrew

i put this down to the instability introduced by an energy constrained world, when its cheap we boom and consume more, this then drives up the price which then whacks the economy. In the background we have the emerging nations who get a greater marginal benefit from energy so they underpin the demand

Of course economists don't get this, they just look puzzled and say why aren't you substituting?

Neven

by Ms de Meanour | 15th Feb 12, 1:15pm 1329264946

Please give some examples or evidence of economists failing to understand the situation you describe.

by steven | 15th Feb 12, 1:51pm 1329267061

There are numerious posts and articles on the Internet on this....

Its almost considered economics 101 modeling ie as the price of good A rises ppl will switch to B. As a real world example Proctor and Gamble had to back off a 8% price hike when they lost 7% sales....but as always its to simple a model for a real complex world.

So it doesnt always work this way....ie there is the assumption there is an alternative....many economists think in terms of money when really our entire society/economy works on energy...money is a proxy for energy....hence for me gold is considered worthless because it symbolises wasted energy.

regards

by Ms de Meanour | 15th Feb 12, 2:04pm 1329267845

Please give examples of an economist saying, or an economic text book stating, the assumption that there is always an alternative.

by steven | 15th Feb 12, 2:23pm 1329269002

LOL, such an alternative is implicit....its there......for instance that expensive deep sea / tar sands oil can be subsitute cheap oil as it runs out.....

is worth watching....

http://www.youtube.com/watch?v=QhsMr49AKM8

regards

by Ms de Meanour | 15th Feb 12, 3:12pm 1329271927

Sorry - not able to watch youtube here.

You are changing the goalposts: previously you were saying that economists say that when one good runs out there is always an alternative, now you are saying that economists say there is always an alternative which is just as cheap and easily obtained. I remain keen to see any example of any economist or economics textbook saying that.

PS: How does your earlier Procter and Gamble example support your case? I would have thought that if they lost sales when they raised their prices, that illustrates precisely that their customers were able to find an alternative and hence did not need to keep paying the higher price.

by powerdownkiwi | 15th Feb 12, 4:27pm 1329276432

MdM - you're a classic example.

It's nothing REPEAT NOTHING HE SHOUTED to do with price. Ultimate scarcity is ultimate scarcity. Given that all activity requires energy, the inability to supply energy at ever-increasing levels, meant the end of growth.

You're witnessing it now. I turned to my partner, watching the Bejing Olympics, and said "you're watching the peak. This is it". Tell me how many economists are saying that? Herman Daly, Chris Martenson, and? That's the end of my list.

It's a tad shorter than the list of those who think it goes onward and upward forever.

by Ms de Meanour | 15th Feb 12, 4:39pm 1329277182

Please give an example of an economist or an economics textbook stating that growth goes onward and upward forever.

by skudiv | 15th Feb 12, 5:12pm 1329279148

again I look to Google. continuing growth economic health

by Ms de Meanour | 15th Feb 12, 5:38pm 1329280682

Nope. Shows that some economists - not all - think that economic growth is the goal of economic policy, but that is not the same as saying that economists think that economic growth always happens.

Most New Zealanders think that it should be the objective of the All Blacks to retain the World Cup, but that is not the same as saying that they think that the All Blacks will win the next World Cup.

by skudiv | 15th Feb 12, 6:41pm 1329284489

Ah I see, I misunderstood, sry.

by goNZ | 15th Feb 12, 4:42pm 1329277364

not much growth here is there -

Population growth slows right down

Wednesday, 15, Feb, 2012 1:28PM

Statistics New Zealand shows the population grew by fewer than 30,000 people, an increase of 7 percent.

That took the total population to 4,422,000.

International migrant departures exceeded arrivals, resulting in a loss of nearly 2,000 people.

Population statistics manager Andrea Blackburn says it's the lowest overall growth since the turn of the century.

by skudiv | 15th Feb 12, 5:08pm 1329278916

Google is your friend MdM. economic substitutes

by Ms de Meanour | 15th Feb 12, 5:17pm 1329279440

Nope. Saying that economic substitutes exist - you are presumably not denying that? - is not the same as claiming that there is always a substitute for everything, and most certainly not that there is always an easily obtainable, equally useful and similarly-priced substitute which will deliver just as good a result.

by skudiv | 15th Feb 12, 6:46pm 1329284781

again. I generaly find substitutes to be inferior, such as the example of substituting steak with burger patties.

by Miggle | 15th Feb 12, 10:48pm 1329299312

You probably never haved tasted Angel Bay Burger patties then....

by skudiv | 16th Feb 12, 7:23am 1329330180

All generalisations are false, except this one.

by powerdownkiwi | 16th Feb 12, 8:24am 1329333844

MdM- a straight question then - can the current fiscal system survive a permanent reduction in ability to produce goods/services? (Which would inevitably result from a reduction in energy available/work do-able).

It seems to me that - nonsense aside - banks, indeed lenders of any nature, have to expect a less-than-zero return, in that scenario.

Which suggests an increasing reluctance to lend. Which suggests an increasing move to once-were-borrowers retreating to living within their means.

Which signals a permanent recession.

The wide-eyed stupidity that thought it could get wealthy by 'investing', was based on a total fallacy (I do hope I spelled that correctly).

by Ms de Meanour | 16th Feb 12, 11:15am 1329344110

You change the goal posts again. What I was challenging was the assertion, very often made on this site, that "economists are useless because they say (something that is obviously stupid, but which economists do not in fact say)".

I would also challenge the assertion that "economists are useless because they don't understand physics" which is akin to saying that Roger Federer is a useless athlete because he wouldn't do very well in the front row of the All Blacks.

And the assertion that it's nothing to do with economics. If I ask "why can't my car do 0 - 100 in 4 seconds?" an engineer would explain the technical limitations of a second-hand two-litre Ford Focus, an economist would explain the limitations of my bank account in the context of the price of a new Porsche and a policeman would explain the rules of the road as regards driving in suburban residential areas. They would all give different answers, but that does not mean that two of them are wrong or irrelevant.

As for your question above: If you could convince an economist to accept the premise in your first paragraph, I do not think he would disagree with your second, third and fourth.

As for your fifth, he would probably point out that there are plenty of historic examples of people who have in the past got wealthy by investing. Put the paragraph into the present tense and whether he would agree with it depends on whether he shares your arrogant and misanthropic outlook, which some economists do and some don't.

by Nic the NZer | 15th Feb 12, 9:32pm 1329294745

Absolutely correct. There is no assumption that substitution is always possible, but there is a kind of opposite mistake typically made, at least in the reporting. This mistake is assuming that simplistic supply and demand models always apply (and that they actually work) so if the price of some good or service rises then the assumption is that there must have been a related shift in the supply or demand for that good or service, and that the shape of this can be assumed from standard downward facing supply and demand curves.

In fact it is one of the better known theorems which dis-proves this.

"Thus microeconomic rationality assumptions have no equivalent macroeconomic implications."

You can't prove anything about aggregate supply and demand curves from microeconomic assumptions.

http://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem

However in practise (by which I mean theory) some economists ignore this,

"The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles"

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

Steve, if you are going to lampoon economics in future, make sure to stick the skewer in the soft spots, please. Its not like they are well shielded.

by Neven911 | 15th Feb 12, 2:10pm 1329268243

umm..the present is an example of the situation I describe, if you are looking for a historical example i doubt one exists because there has not been a situation in the last 200 years where a fundamental resource has been at it production limit.

In fact the feds zero interest rate is evidence, interest can only be supported by growth (delta GDP) GDP is proportional to Energy use, therefore no growth, no interest charged,

by kin | 15th Feb 12, 9:52am 1329252755

It is blindingly obvious that the rest of Europe wants the Greeks to jump and leave Europe "voluntarily". That way they don't get blamed for the chaos. Every step that the Greeks takes from now on will be declared "insufficient".

As for our great NZ$, it is time to load up on Gold and Oil futures with it now before we declare "soft default" with a devaluation. The Kiwi dollar has crashed twice in the past ten years. It is high time soon......

by steven | 15th Feb 12, 10:30am 1329255028

I think you are wrong, trouble is Greece is just the start, so while its possible EU voters think like you suggest I dont think the pollies consider it an option....Greece Pollies however might and probably will do it (leave).

Lets just look at the effects on the German and French banks from the debt Greece has to them....leaving the Euro would mean Greece has already, or would shortly after default....Just Greece doing that alone is enough to send quite a few EU banks insolvent due to leverage ratios....teh snowball/domino effect would then probably kick in....ie all the PIIGS would collapse and leave...

"Load up" I dont agree........in a deflationary event cash is king.....of course being past peak oil Im not sure if this simple statement applies, however its a lot more robust that printing = inflation.....

If nothing else we will see a consistant upturn in the core inflation indicating its going to be an inflationary event (pigs might fly personally) ...right now thats showing a downturn....so a deflationary event.

regards

by kin | 15th Feb 12, 10:41am 1329255704

Greece leaving the Eurozone is a foregone conclusion. If the present goverment won't leave (it won't) the next goverment will...after April. Everybody wants it, the Greeks, the Europeans, the only people who don't want it are the EU commission beurocracy.

As for "load up" yes, right now we are starring deflation in the face, but as default gathers pace and debt is wiped out, Central Banks will print to "stimulate". Gold will not fall in "price" nor "value" as savers will gravitate to the safest assets next to paper money.....Gold has nothing to do with inflation anymore.

by steven | 15th Feb 12, 12:40pm 1329262806

I think the Greek voters themselves will force it, it may not be April....At some point the pain of doing so will be less than the pain in staying.....

"load up" The problem is the size of hole from a collapse of the private sector (consumer but also business spending) v the amount a Govn can a) print AND b) spend it ie it has to get out into the economy to cause inflation.

So the thing I see is printing wont matter its too small a % and it will be highly ineffective....unless the Govn starts writing you and I cheques so we spend it simply wont matter.

So teh Q I ask is the same I ask when a share market tout tells me to buy "defensive stocks" to minimlaise losses, my comment is why not leave stocks all toggether?

Same for your gold v paper money argument, if gold isnt as good as paper at the beginning of an event, why hold it?

Also consider liquid v illiquid...its easy to buy gold even when everone is buying, its hard to sell when everyone is selling....you have to discount...

Now at the bottom of the event, then gold and some other assets start to become essential....gold has clear advantages once deflation has stopped......at that point the Q is will we see inflation? and if say yes then will other assets perform better? property say? and if we see stagnation, property should be earning an income, gold's price should be flat....so no income....

Right now a major depression will take 5 or 6 years to bottom, plus however long it takes to actually start, so any asset holding is dubious IMHO.....but I think gold will lose less than property......Im happy to sit and watch....

regards

by scarfie | 15th Feb 12, 9:37pm 1329295024

What happens if deflation doesn't stop? :-P

by steven | 16th Feb 12, 11:29am 1329344979

A very good Q.....so we go back to earning 1 shilling 5d and our food bill is 8d....

;]

So what does happen? somethings will I think retain value, others are massively over-valued....somethings will become worthless......

Take the Internet if that goes bye bye (and the odds I think are good it will, it uses too much energy) all that cisco kit is worthless, Cisco goes bankrupt, its shares are worthless, books go from almost worthless to priceless......

regards

by skudiv | 15th Feb 12, 12:54pm 1329263695

There is no deflation. Cash is trash.

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.”

...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation. Ben Bernanke

by steven | 15th Feb 12, 2:05pm 1329267954

We have 2% core inflation with big indicators of dis-inflation......and this is continuing....

I think we can see that a) No Govn is that determined to get higher spending no matter what they try...in fact with Govns cutting spending and govn spending roughly being 50% of the economy its oobvious that they are playing with fire when they cut...b) The US Govn/congress seem determined not to stimulate again....there is determination NOT to print.

He (bernankie) it appears misses Minsky's work.....Steve Keen does not, hence when Bernankie is reputed to have printed Trillions (16?) and he has at best managed a flat trajectory you have to wonder how long that can be kept up....6months? 12? 24?

cash is king....but you are a grown up, make your own decision.

regards

by skudiv | 15th Feb 12, 6:05pm 1329282355

Dis-inflation is a falling rate of Inflation, it is not deflation. Turn it around for a sec, and in an imaginary keynsian world suppose we are actually having -2% deflation, how retarded would I have to be to call that inflationary? What would your reaction be if I called that inflation?

Seriously you yourself have repeatedly stated that house prices have fallen in real value, when in notional value they have not. Many assets are falling in real value, but at a slower rate then money is falling in purchasing power.

What govts call cutting spending, is not a reduction in nominal spending, it is a slow down in the increase of spending. A Dis-spending if you like. Check it out, nowhere is there a nominal reduction in spending.

Core inflation is the most reactionary to consumer wasteful spending. It excludes food, energy, and housing. What is left is TV's, slave made iPads, toys, cars, boats, carpet, etc. Baisicaly the first place to look for deflation, because demand is elastic. Yet there is inflation, your King can buy a smaller boat this year, then it could've last year.

Inflation is purely a monetary phenomenen, it is an increase in the supply of money. Every monetary aggregate in any currency you can name, is growing. In the main currencies, the monetary aggregates are growing during a period of deleveraging, thanks to the various forms of printing going on.

Bernanke has always and continues to promise to ctrl+p if it is required. Obamas budget was released the other day, increased spending. The only reason there is some lame rhetoric against stimulus is because they believe the lies about unemployment, and have not worked out that Okuns Law is broken.

by Roelof | 15th Feb 12, 11:24pm 1329301448

Well said skudiv...

I'd just add that there are only 2 ways that money supply can expand.. One is thru credit growth as a result of Banks creating loans ...and the other is thru Central Banks expanding their Balance sheets..( ie.printing money ).

Japan, China ,ECB, Britain and the Fed have done alot of this.

This is considered high powered money.. ( or base money )...High powered because of the money multiplier effect it has as it goes thru the banking system ...when there is demand for loans. ( ie another credit cycle)

Steven... If there is a QEIII...will u rethink your views on deflation..??? how about QEIV..??

I am pretty sure there will be a QE III...

As skudiv says, ... in the economies that count... there is NO reduction in GOVT spending...AND the Monetary aggregates are growing.

If the "mkt" loses confidence in currencies and debt instruments because of inflationary expectations ...it will not take much for inflation to become "unmoored".

just my view of course.....

Cheers Roelof

by steven | 16th Feb 12, 11:51am 1329346285

Dis-inflation...if that continues we go from inflation to deflation, its a trend to watch....Inflationistas would expect the opposite to occur, ie the rate of increase of inflation to increase, it isnt the opposite is occuring.......Im not sure what you are trying to say with -2% it makes no sense.

A world isnt Keynesian...a world is, Keynesian is a possibly valid decription of how its economics/ economy operates....

Slow down in an increase in spending, if a service is no longer available or the wait is longer that is a real impact, also the UK seems to be slashing actual spending...so a double whammy if you will....same with house values....and yes house prices have fallen in real terms. So there is no profit, but also you have an illiquid asset so in effect there is risk of a notioanl loss let alone inflation adjusted...yet you have no return to pay you for taking that risk....

Core, the point is to take out volitle and seasonal changes or products that have a high % of their value in them.....what is left is a index or focal point to make medium a and long term decisions and adjustments on.....So tomatoes were $14 a kilo some months back and are now $3....so did we have massive hyper-inflation followed my massive deflation? or did nothing really change? is having say the OCR jump up on the price of tomatoes one moneth and drop heavily 3 montsh later make any sense? no.

Bernamkie can promise to print all he wants....it wont be enough...at most he can delay the coming depression...

I see nothing to suggest Okuns Law is broken if you look at its underlying premis. That is if you look at real GDP and take off the make believe parts that are the fnancial sectors "contribution" there is no growth in GDP...so sure GDP is growing because the banksters are using cheap money to gamble and making huge profits..yet nothing ie a good is produced....meanwhile in the real world....Okuns Law is holding....ie explaining why we see no drop in the un-employed.

regards

by wtf | 15th Feb 12, 11:10am 1329257400

The kiwi "corrects" 20-30% at some point just about every year, usually at times like this when there is renewed angst and chatter about how high it is - its a good contrarian indicator. John Key talking about the dollar is another one. I'd expect a 20% correction before the end of March. I watched on screen the kiwi plummet 10% in less than 30 minutes last March. Scary and mind boggling how vulnerable we are when the markets or their trading computers "turn" on us.

Can someone explain why the kiwi has never recovered against the yen with all the headwinds Japan is facing, the carry trade and their continual money printing? Hit .98 in 2007 and started to retreat even before the GFC when it crashed to .44 in a matter of weeks but despite being supposedly so strong has never got past .70 again, mostly trading between .58 and .65

If our dollar is so divorced from fundementals how does a floating exchange rate benefit us again? Who does it benefit apart from large speculators?

by steven | 15th Feb 12, 2:10pm 1329268251

Except you look at the past and expect it to happen again....and again....there is no irrefutable law that says it has to....the GCF has never occured before, not since the Great Depression. So all being equal and with eveyone else printing I cant see how a significant drop is possible......

Now if and when the Depression really starts I expect there to be huge runs to the USA as the hot money exits and others buy USD as a safe haven....then the NZD could well tank....

regards

by JimboJones | 15th Feb 12, 10:00am 1329253227

Bernard, how do you think NZ should slow the carry trade?

Drop our rate to 0%?

Print?

RBNZ buys foreign currency?

The way I see it, doing anything to try and lower our currency may offer short term gain, but may create some very long term pain.

by steven | 15th Feb 12, 10:41am 1329255698

Well I think there are three things taht can be done,

Drop the OCR to 1%, but the Q is would we (the govn) then be able to sell bonds so cheaply? ie the productive sector is I suspect supporting teh Govn's debt borrowing / spending....to me, thats nuts.

A tobin tax....a small amount such that it wouldnt seriously effect companies moving goods but would curtail the currency speculators who do hundreds of trades....

a CGT tax so any foreign investor betting on a capital gain by buying and selling later is liable for an exit tax...

regards

by JimboJones | 15th Feb 12, 11:12am 1329257555

I'm not sure about lowering the OCR - I get the feeling that the countries that have done it will be stuck at those rates for a very long time - maybe even Japan style deflation (although to me Japan is a very different beast). Is the risk really worth it? Is our manufacturing sector really hurting that much? Also if Europe really does cause a second world recession we currently have a rate to lower - unlike other countries.

A tobin tax on currency exchange might be a good idea. Is it possible? Can we tax a foreign company that exchanges our currency? Can we apply CGT to a foreign company just because they traded our currency?

by steven | 15th Feb 12, 11:50am 1329259852

Im all for discusing this as I dont understand all the implications of a tobin tax...so I'd like to see/hear all sides...but I see little against it and much for it....

We all will be stuck with a low OCR indefinately IMHO. Since the banks say the mortgage rates are disconnected from the OCR anyway I cant see why the OCR cant drop to 1%. the carry trade will die(is that all bad?)

What risk? deflation? deflation is going to happen anyway and a high OCR will help make deflation a reality....

Manufacturing sector, yes I believe so and its looking strucural ie for a long time.....this sector employs ppl.....if that goes so do jobs and thats deflationary...

Tobin tax, I believe so....they buy and sell into NZ....but its not so much companies as currency traders and the micro trades from the likes of GS who aim to get in before a real company buys (or sells) thus forcing the price up or down against the real company. A tobin tax is aimed to stop or curtail financial transactions of no benefit to NZ, manufacturing and main street...really its against parasites.....but these are of course JK's [ex-]mates....

regards

by iconoclast | 15th Feb 12, 11:59am 1329260370

Steven: The bulk of the carry trade in NZD is probably conducted in London, Frankfurt, New York and Sydney. I doubt if the money actually passes anywhere near NZ shores. So the question is: how would you capture it?

by steven | 15th Feb 12, 12:21pm 1329261675

If you reduce the OCR to 1% there wont be a carry trade?

I thought the carry trade was borrowing abroad at 0.25% and lending into NZ at (say) 5%? your suggestion seems at opposites to what I understood....

Also its about reducing volitility and hopefully costs for manufacturers by stopping the micro-traders etc...I didnt imagine at all that the tobin tax was primarily aimed at the carry trade....

Its looking likely there will be a tobin tax in the EU anyway....London may try and dodge it....dont know if they will succeed.

regards

by iconoclast | 15th Feb 12, 12:41pm 1329262887

I'll revise that before I get corrected. The carry trade .. the money has to physically arrive in NZ ie buy NZD and sell the other side of the pair .. the bulk of the daily transactions is Forex trading which doesnt physically arrive .. but does set the price for the carry traders .. and right at the moment I would consider an NZ carry trade of buying NZD a dangerous trade ..

by iconoclast | 15th Feb 12, 12:11pm 1329261117

You dont need to lower the OCR.

If the NZ government were to fiendishly announce to the world it was "going" to implement a tobin tax, introduce a capital gains tax, tighten up the corporations law, introduce data matching, immediately implement the money laundering legislation that has sat in limbo for several years, the NZD would plummet. Just the threat would be enough. No action necessary. Just words. Plus a non-residents annual land tax of 10%

by steven | 15th Feb 12, 12:22pm 1329261771

Possibly, but you want to target certain aspects of the economy and not kill it all...

At least I hope so...

;]

regards

by goNZ | 15th Feb 12, 3:32pm 1329273175

taht , teh - we speak Enclish inNZ

by kin | 15th Feb 12, 10:47am 1329256038

On the contrary, a devalueation now will give us short term pain but long term gain. Only a massive devalueation right now will force us to restructure and "reprice" our labour cost and output vis a vis out trading partners. Yes, short term we will see inflation and but natural economic adjustment will balance our economy to be "priced" competitively.

Goverments don't like devalueation because of it's political cost, (ie loose elections) not because of its long term economic cost.

by Bernard Hickey | 15th Feb 12, 1:02pm 1329264165

JimboJones

There's a few options, all of which are worth looking at.

There's some surgical strikes around capital controls. A rising lid on the core funding ratio and a drive to reduce bank reliance on foreign funding could help. A loan to value ratio limit on bank lending would help. As would limits on large foreign purchases of NZ land.

I also think the RBNZ should look at buying NZ government bonds to fund government investment in infrastructure/housing etc. That's much better than the NZ govt borrowing the money from overseas and pushing up the currency in the process.

Then there's full on intervention where the RBNZ sells NZ$ to buy US$.

A few ideas, none of which have been tested/bullet proofed/thought through. The RBNZ has looked at the LVR idea and decided not to do it. It is extraordinarily reluctant to intervene.

cheers

Bernard

by neco | 15th Feb 12, 1:14pm 1329264852

Money printing intentionally encourages investment into "risk assets". In the short term this works well for whoever is doing the printing since stocks go up (happy days) and the printed currency goes down (competiveness increases). For some reason that is obscure to me the NZD is considered as a "risk on" currency so speculators have no trouble translating "money printing" into "buy NZD". While a high NZD might give us the warm fuzzies for a while, fact of the matter is the appreciation of NZD through speculation will snap back sooner or later (and the greater the deviation from fair value, the greater the snap back will be). This NZD volatility has a negative impact on the NZ economy way beyond the export sector - it would therefore seem desirable for the value of the NZD to reflect economic fundamentals and not speculation trends. How to achieve that is not difficult - DON'T encourage the markets to consider the NZD as a "risk on" currency. How to achieve that is also not difficult - COME CLEAN on the state of the NZ economy. Easily achievable if all of those MSM opinion leaders (RBNZ, bank economists, statisticians and above all treasury/government) just spent a little more time telling it like it is. FOR EXAMPLE publish accurate employment stats INCLUDING UNDERemployment numbers FOR EXAMPLE admit that we now have a structural fiscal deficit and there is no way that we will be in surplus by 2014 FOR EXAMPLE remind everyone how much of our debt is held overseas FOR EXAMPLE remind everyone that we have a STRUCTURAL CURRENT ACCOUNT DEFICIT etc. etc. etc.

Never going to happen, I know, but in the long run "smile and wave" will turn out to be toxic for our economy as well. sigh :-(

by goNZ | 15th Feb 12, 3:36pm 1329273382

you are SHOUTING using capitals

by iconoclast | 15th Feb 12, 1:24pm 1329265450

Bernard, you suggest reducing bank reliance on foreign funding. I think it's starting to unravel now. About a month ago I posted that an extraodinary number of real-estate listings of high-value properties had suddenly appeared just after xmas. And they are not selling. In some streets every second house is for sale. Asking prices have fallen up to 40%. (finally you get to be right). It appears the banks have finally pulled the plug on evergreening mortgages, and owners who purchased at 90% LVR over the past 4 years are now seriously under water. It's happening now. Here you go http://www.heraldsun.com.au/news/more-news/richer-suburbs-feeling-the-pinch/story-fn7x8me2-1226268198456

This is the long awaited puke and deleverage

by neco | 15th Feb 12, 1:48pm 1329266904

Bernard/Iconoclast/anyone: is the local bank foreign funding really 100% hedged as they would like us to believe or might they also be speculating on an appreciating NZD? (Might explain why they are always so bullish)

by iconoclast | 15th Feb 12, 2:21pm 1329268907

Neco: While the AUD and NZD were both rising against the USD, at some point the banks could have (and would have) discontinued hedging while they had enough profit up their sleeves to make it un-necessary. Now as both currencies appear to be topping out they re-commence hedging (ie locking in the currency profit), and those costs of insurance are the increased costs they are now facing and wishing to pass on to consumers. As I said in my post the other day on the "Swiss Loans Affair" the banks are now the principals and have made a killing.

To answer your question:- conceptually they were covered at all times.

by neco | 15th Feb 12, 2:53pm 1329270793

Thanks iconoclast. So in effect they speculate but within a "safe" limit. My point is therefore that at any particular point in time the banks will have a vested interest in the currency moving in a certain direction and the commentaries from "bank economists" (and from those over which the banks exert influence...) could well reflect this bias: they will be bullish when they need a strong NZD and bearish when the opposite suits them. Presumably not concerned about collateral damage to the "real" economy.

by iconoclast | 15th Feb 12, 5:28pm 1329280139

Neco: read the thread on ASB makes $48 million from derivatives and you have your answer

by scarfie | 15th Feb 12, 9:47pm 1329295636

Good comments today Iconoclast. Q for you.

What do you see happening to international trade if there is a global financial system meltdown. No doubt it will be a temporary event lasting some months, or even a year or two, so how is trade facilitated while there is doubt over the means of paying?

by skudiv | 16th Feb 12, 7:21am 1329330076

Barter, see Iran - India/China/Russia

by scarfie | 16th Feb 12, 8:46am 1329335211

I guess so, but that is a direct trade for oil. (I would be interested to know how they are transporting that and is it private enterprise that carries it). It gets more complex down the chain when the means of transport for goods is relying on someone having already done a barter for the transport fuel. Lots of questions really, like how quickly an alternative can be set up. I must admit I don't really see a barter system coming off, I think there has always been currency and always will be.

by Stephen Hulme | 15th Feb 12, 2:29pm 1329269374

Neco

Local NZ banks convert foreign loans into NZD via these reversible mechanisms.

by neco | 15th Feb 12, 2:54pm 1329270848

Thanks Stephen much appreciated

by wtf | 15th Feb 12, 2:15pm 1329268557

Bollard doesn't think higher LVR's would work. More like they're worried they'd affect the property market too much. The RB and Govt want a very very slow deflation of property by inflation not a volatile correction. Ironic considering they don't seem to mind the extreme volatility of the dollar and the effect it has on business planning, hedging aside.

Restrictions on overseas ownership of residential or rural land - too scared of foreign government or super- national organisation reaction including overt or covert trade sanctions.

RB buying govt infrastructure bonds would be the equivalent of public credit. The banks would spit the dummy and again govt petrified of reaction.

RB trying to maintain "stability" by indicating long term intentions on interest rates combines with similar indications from big central banks overseas to create a one way carry trade as well as incentive for foreigners to invest in NZ assets, especially property.

If the RB really wanted to shake out speculators and establish a stable fundemental value for the kiwi under a floating exchange rate mechanism it needs to be unpredictable rather than predictable with unannounced and sudden changes, even if they're small. Most speculative currency trades are computerised very short term scalping - what is it, about $10-15b a day on average traded in NZ dollar? Globally only 15% is for business transactions, importing or exporting. 85% is trades or transactions by FX dealers or banks.

by Les Rudd | 16th Feb 12, 12:11pm 1329347503

Bernard - agree:

http://www.realeconomy.co.nz/244-cpi_down_ocr_cut_makes_sense.aspx

A better strategy for the Reserve Bank would be to:

• Target non-tradeable inflation;

• Use Loan to Value Ratios to control credit volumes; and

• Specify the amount of savings (deposits) banks are required to raise in New Zealand to limit offshore exposure.

“Had this been done 10 years ago debt levels and servicing costs would have been lower even if average interest rates had been higher. Overall the New Zealand economy would now be better balanced with higher wages, more jobs, more savings and better housing affordability,”

I can't understand why RBNZ won't implement an LVR regime?

Cheers, Les.

www.nzmea.org.nz

by JimboJones | 15th Feb 12, 1:18pm 1329265121

How about the RBNZ lowers the OCR to 0% then the govt applies a 2.5% loan tax. I'm no economist, but I can see a couple of upsides:

- Our currency will drop

- The money we are paying in interest will go to our govt, not an overseas investor.

by Andy Rodgers | 15th Feb 12, 10:32am 1329255153

I think the best news story today is the Auckland RE Agent who jointly bought a house that she was selling for a client. She bought the house for $1.7 mn and sold it shortly after for $2.1 mn. Making her share of the profit of $200,000. She was fined $15,000. White collar crime pays very well in NZ. I bet a lot of RE Agents are now looking to see if they can find similar deals.

by Fossil | 15th Feb 12, 10:48am 1329256095

Regarding the current Greek bail out, pardon my ignorance, but what is to stop them taking the money only to renege after april's election?

I presume the $$$ comes in tranches conditional on suitable progress towards real reform - is this the case? From what I can gather they have made little *structural* progress in public sector and labour reform so far. Cutting wages and pensions is one thing but only meaningful structural change will save them long term.

by steven | 15th Feb 12, 11:41am 1329259277

they need regular installments....if they fail to get the changes done there wont be another transfer...

nothing will save them long term...

regards

by Andrewj | 15th Feb 12, 11:02am 1329256958

Bernard, what happened in last nights dairy auction?

by Andrewj | 15th Feb 12, 11:52am 1329259957

Ominous silence, no results, whats going on? Fonterrible collapso?

by Colin Riden | 15th Feb 12, 12:09pm 1329260953

Andrew, I think you will find that this month the auctions are on Wednesdays (GMT) rather than Tuesdays i.e a day later than normal.

Might still be an interesting auction with WMP quantities back to normal.

by neco | 15th Feb 12, 1:40pm 1329266436

Roy Morgan has already reported: 2.21 Million Australians unemployed or underemployed - highest ever recorded unemployment at 10.3% - a record 1.28 million Australians looking for work.

http://www.roymorgan.com/news/polls/2012/4742/

Steve Keen's take on this + comparison with ABS stats here:

http://www.businessspectator.com.au/bs.nsf/Article/RBA-interest-rates-employment-house-prices-propert-pd20120213-REURE?OpenDocument&src=sph%20&src=rot

And if Roy Morgan were to do their poll in NZ???

by Stephen Hulme | 15th Feb 12, 2:20pm 1329268816

This latest bout of Quantitative Easing (QE) or money printing by a major central bank New Zealand where central banks are not printing.reinforces the fears of those who aren't printing money that their currencies will be driven ever northward by investors who can borrow at near 0% interest rates in the currency that is being printed and invest in other currencies with higher interest rates such as Australia and

The New Zealand dollar rose yesterday to a 5 month high of almost 65 yen.

Bernard I vehemently disagree with you on this point..

New Zealand prints enough money beyond that which we export to allow us to run a constant compounding trade deficit with Japan.

Excess printed NZ credit is sold to purchase yen to import cars, tvs etc. Japanese investors kindly purchase those excess NZD to stop the crash in the NZD/YEN pair. We could easily stop making these unearned NZD available by forgoing Japanese product purchases.

by Living in Clover | 15th Feb 12, 9:47pm 1329295642

Doesn't a strong NZD make our overseas borrowings cheaper in NZD terms and conversely more expensive if we have a lower dollar. Good reason for the Govt to keep the dollar high isn't it?

by iconoclast | 15th Feb 12, 10:20pm 1329297643

A mistake a lot of people make. The Big 4 banks have been borrowing all along. It's not a periodic event. Now is the time to use the strong NZD and pay down earlier borrowings and clean the slate.

If you are a late starter, now would be the worst time to start. Of course, if you are a punter, and think the NZD is going to strengthen another 20%, you go for it.