By Bernard Hickey
Is New Zealand ready for the currency wars that are breaking out all over the globe?
New Zealanders and our policymakers seem remarkably relaxed about the implications of the turmoil that threatens to push our currency through 80 USc in the coming months and destroy any exporters that are not reliant on booming commodity prices.
Other countries are not so relaxed. In fact, they are positively panicking. Brazil described the situation unravelling across global foreign exchange markets as 'currency wars'.
This week Brazilian Finance Minister Guido Mantegna spoke for many when he talked about an international currency war.
The growing talk of a new programme of US Federal Reserve money printing to push down long term interest rates and the US dollar is forcing others to think about similar devaluations. The Bank of Japan is intevening to push its currency down. China is refusing to let its currency rise much versus the US dollar.
This triggered moves in the US Congress this week to give President Barack Obama the power to impose tariffs on virtually all Chinese imports to America. The drums for trade wars are beating just as loud as the drums for competitive devaluations.
A race to the bottom in the world of currencies is akin to a game of musical chairs. Anyone who chooses to stay on the sideline risks left standing high and and dry when the music stops.
New Zealand seems set to stand aside and let its currency rise as others desperately act to hold their's down.
Along with Brazil, Mexico, Korea, Columbia, Taiwan, South Africa and Russia are all either already intervening in their markets to keep their currencies down or are considering some form of capital controls.
So what could New Zealand do?
Should we join the game and put up our shutters too?
The collective groan from our policymakers ingrained in 30 years of orthodoxy is already emerging from Wellington. Trade controls worsened the Depression, they say. New Zealand is now an open country and we can't be seen to be doing the 'wrong' thing, they say.
These arguments are naive at best in a world where there is no wrong or right. It is what it is. We cannot step aside and play the holier than thou card when our export sector is being smashed and we are again being swamped by cheap foreign capital that leaves us in a hollowed out wasteland of indebted consumers, beneficiaries and public servants.
There is precedent for intervention, even in New Zealand
The Reserve Bank, despite its history of arch-orthodoxy, has actually been the most pragmatic under current governor Alan Bollard.
It intervened in 2007 to push the New Zealand dollar back below 80 USc. It should consider it again if we head towards that mark again.
It introduced the Core Funding Ratio (CFR) last year, which in effect is a type of capital control. It makes it much harder for the banks to borrow heavily and cheaply overseas and then shovel it on through to the housing market. It's no accident that the currency has been relatively stable between 65c and 75c over the last year since the CFR kicked in.
But it won't be enough once the Fed's printing presses start rolling later this year.
Other options for capital controls include limiting loan-to-value ratios for property lending, a mortgage interest levy, making the NZ Super fund invest in New Zealand assets, forcing KiwiSaver funds to keep their money at home and limiting foreign purchases of land.
We need to start thinking about these things. Standing aside and waiting for the music to stop is not an option.