By Bernard Hickey
There's an old Swahili proverb that Alan Bollard mentioned today when talking about New Zealand's economic predicament.
According to the AfricanProverb website it goes something like this: Ndovu wawili wakisongana, ziumiazo ni nyika. (When elephants jostle, what gets hurt is the grass)
The Reserve Bank Governor was trying to articulate how apparently helpless the New Zealand Kiwi dollar is amidst the Currency Wars sparked by the US Federal Reserve's money printing and China's reluctance to let its renminbi currency float higher.
Bollard denies that we're completely helpless and proved his point by jawboning the currency down by as much as half a cent after saying that markets had gotten out of line with the Reserve Bank's thinking about the economy in the last couple of weeks.
But he later pointed out that mass intervention in the currency markets to try to force down the New Zealand dollar when the driving forces were the US and other central banks was pointless. He referred to ultimately futile attempts by the Bank of Japan and the Swiss National Bank in recent months to try to drag their currencies lower.
Bollard also ruled out the use of capital controls or the sort of bond taxes imposed by Brazil and others in an attempt to stop newly-minted US dollars from boosting their currencies. See more here.
There's a lot going on behind the headlines in the Currency Wars that New Zealanders and their policymakers need to know about and prepare for. The debate is only starting and if the intensity of the questions for Bollard today are anything to go by then it shows this problem will keep coming back.
It's not a simple story and it doesn't lead to simple answers, but the implications are enormous and can't be ignored.
Here's what I think is going on and why I think New Zealand needs to investigate some clever ways to control its capital flows to prevent the destruction of the rest of its non-commodity export sector.
Print baby print
Firstly, the main headline is the US Federal Reserve's announcement last week of plans to buy up to US$600 billion of maturing longer dated US Treasury bonds. This is described as QE II or Quantitative Easing II. This is effectively a second round of money printing by the central bank in the world's biggest economy.
The US Federal Reserve or the Fed as it's known bought US$1.7 trillion worth of US Treasuries and securitised mortgages in late 2008 and early 2009 to stabilise financial markets and try to fire up the US economy after the shock of the collapses of Bear Stearns, Lehman Brothers and AIG, along with the slump in the US housing market.
Normally when a central bank wants to boost the economy it cuts interest rates, but short term American interest rates are already at or near to zero. Meanwhile, American unemployment is stuck around 10% because the domestic economy is stalled. About two thirds of the US economy is dependent on spending by households and they're not growing spending because they are up to their gills in debt.
The US Federal Reserve wants to encourage consumers and businesses to borrow more and spend more to start up the US consumption engine again. It also wants to boost export earnings for businesses by reducing the value of the dollar. Given it has cut short term interest rates to almost zero, it's only option is to try to reduce long term interest rates. Many American businesses and homeowners borrow at rates based off these market rates for long term Treasury bond yields.
That's why it is planning to buy longer term Treasury bonds, although not too long term. Long term US bond prices actually fell last week, meaning yields or interest rates rose, because the US Federal Reserve said it would mostly buy 2-10 year bonds.
The big demand and supply problems
The Fed's problem, however, is that US consumers and businesses and banks don't want to play the game.
Households already have too much debt. About a quarter of all American home owners with mortgages are under water, where their mortgage is worth more than their house. About 10% of those with mortgages are delinquent. About 5% of all homes are in foreclosure and are either being sold through what we would call a mortgagee sale or are backed up waiting to be sold. US house prices are falling again. Households can't and won't take on more debt.
Secondly, the banks are reluctant to lend to households because so many are already delinquent on their loans or unemployed.
Thirdly, US companies are reluctant to borrow to invest more because they are so uncertain about the domestic demand, again because the unemployment rate is so high and spending is weak. They actually have the capacity to borrow, but don't have the confidence to invest at home. One of the ironies of QE II and the low interest rates is it makes it cheaper for companies to buy each other to find efficiencies and reduce employment. It also makes it cheaper for them to invest in new factories and production offshore.
QE II does however help boost the balance sheets and profits of the big banks. They can sell their shorter term bonds to the US Federal Reserve and then lend their money out at longer terms for slightly higher interest rates to the government.
There is a risk QE II will be just as ineffective as QE I. Some commentators are saying the US Federal Reserve could have to print up to US$10 trillion or 60% of US GDP to generate enough economic growth to significantly reduce unemployment.
Squirting out the sides
If the US Federal Reserve has to keep printing the risk is that much of the newly minted cash will squirt out the sides into assets seen as more stable or countries seen as having better growth prospects.
So commodity prices are surging, as are the currencies connected to them. Oil prices hit a two year high overnight. Cotton prices are at record highs. Coffee prices rose to 13 year highs and the price of copper is near a three year high. The Brazilian Real, the South African Rand, the Canadian dollar, the South Korean Won, the Australian dollar and the New Zealand dollar have all surged to multi-year highs vs the US dollar.
This is causing all sorts of havoc on global markets and will spill over into economies. Brazil has tried to protect the real from being shunted through the ceiling by imposing a tax on foreign investors in local bonds. South Korea is looking to do the same. India and Ukraine are looking at intervening in currency markets. There's even talk of capital controls being imposed in Japan, and China has started imposing such controls.
The World Bank itself is saying that Asian economies need to respond to America's quantitative easing with capital controls.
So why are we staying hands off?
Bollard was determined in his defence of the status quo in New Zealand in his appearance before Parliament's Finance and Expenditure select committee on Wednesday.
He pointed out that farmers were receiving record high commodity prices, helping to offset the pain of a high currency. He said that currency intervention rarely worked to force currencies when the big drivers were weakness in other major currencies.
He dismissed talk of capital controls as being only marginally effective and inappropriate for New Zealand.
He essentially said we needed to tough it out, as we have in the past.
Bollard dangled the remote prospect of some new tools in a suggestion of a discussion about Supplementary Stabilisation Tools with Treasury in the New Year, but he was virtually immovable.
The problem now is that America seems determined to do whatever it takes to keep printing and devaluing its currency.
What happens if it has to do QE II or QE III or QE IV and print the US$10 trillion that is feared? It would unleash a wave of commodity price inflation and currency appreciation throughout the freely floating emerging and commodity currencies, including ours. Parity between the NZ dollar and US dollar is not out of the question in that sort of environment.
The assumption is that QE II will work and eventually the US dollar will rebound with the US economy, allowing the New Zealand dollar to fall back to its long term sustainable level under 70 USc.
But what if the US dollar is permanently devalued? What if some sort of Bretton Woods II shakeup of the global currency system locks in a New Zealand dollar north of 80 USc?
Get used to being a farmer or a barmaid
A currency north of 80 USc for a sustained period would wipe out whatever is left of our manufacturing sector that doesn't export to Australia.
Farmers, foresters and fishermen would be OK because the money printing is driving commodity prices higher, softening the pain of the US dollar. A world of a permanently weak US dollar and the refusal of China and its neighbours to let their currencies rise vs the US dollar essentially sentences New Zealand to being a farm and tourist destination, and a foreign owned one at that as foreign investors look to spend their newly minted US dollar on hard assets in stable, food-rich democracies with proper legal systems.
Any manufacturer trying to sell to Asia, America or Europe would have no hope. Any that remain would have to focus on exporting to Australia, assuming of course the Australians leave their hands off and allow their currency to rise even further above US dollar parity than ours.
Some would argue that the world wouldn't end if New Zealand had no manufacturing base exporting outside of Australia.
However, I think this would be a mistake. Manufacturing implies factories employing lowly paid manual workers, but in a modern sense manufacturing actually refers to higher wage jobs that will keep our youngest and brightest from leaving the country permanently.
The Hobbit was a perfect example. Fisher and Paykel Healthcare and the other companies in the TIN 100 technology companies that produce NZ$5 billion in exports annually, just behind Tourism and Dairy as one of our biggest export industries.
These are the jobs and businesses we need. Can we really build incomes and repay our debts with the promise jobs on dairy farms pumping out commodity products or more jobs in cafes and hostels cleaning up after Australian tourists?
Doing nothing is not an option
There are plenty of ways New Zealand's government and its Reserve Bank can try to stop our currency and high wages jobs from being stomped on by the elephants.
It could move much faster to reduce consumption and improve savings, reducing the need to borrow or sell assets in a way that pushes up our currency.
Introducing a capital gains tax or land tax would make a good start. Such a move to improve our national savings rate would also allow lower interest rates, which would encourage investment in exporting businesses.
The government could impose limited forms of capital controls to discourage big lumps of freshly minted US dollars (or their proxies) from entering the country. Big farm and property sales to foreigners could be banned or limited. Other asset sales to foreign interests could be discouraged or blocked.
New Zealand's savings institutions, particularly the ones with government mandates or subsidies (the NZ Super Fund and the KiwiSavers funds), should be encouraged or forced to invest in New Zealand.
Foreign investments in New Zealand government or corporate bonds could be taxed.
Government companies could be directed to buy goods and services from New Zealand companies.
The IRD could be much more aggressive in forcing foreign owned companies to pay their fair share of taxes. Its success in forcing the Australian-owned banks to pay a fair tax rate sharply reduced our current account deficit. Allowing Google to make NZ$150 million of revenues in New Zealand and to pay just NZ$7,726 in tax here last financial year would be a good place to start.
In a world where it's every country for itself, New Zealand needs to look after itself.
We can at least try to tip-toe between the stomping elephants.
No chart with that title exists.
112 Comments
I agree, I dont think we can afford to do nothing, but I dont think we can stop the NZD going higher (temper it maybe), principly because the Fed will keep printing until it gets the desired result (which I personally think it wont) so it will print and print again......
You did say we can export to OZ, so Ok where else can we export to? Forget the USA and EU....lots of middle east and asian economies are interested in our produce, so build up exports to them.....Saudi after all has oil.....what does the USA hold? um....consumers who are now not purchasing and wont be for a decade.....Wait until the GOP gets into full swing, the poor US voter will just go into a shell so why worry about exporting to them? They will increase protectionalism to "help" their farmers....we'll find we cant export there I reckon....
Seems silly IMHO.
regards
Steven
The growing parts of the world -- in particular China -- have tied their currencies to America's.
That's the problem when America prints it inflates bubbles in other places.
The Saudis and other Middle Eastern countries are looking for alternatives but are still closely connected to the US dollar. They still get paid for their oil in US dollars.
That's the problem.
That's why we need a new reserve currency or basket.
cheers
Bernard
Bernard - good stuff.
Similar here:
http://www.interest.co.nz/opinion/guest-opinion-why-new-zealand-should-be-managing-its-exchange-rate-other-successful-economies#comment-586842If one of the major problems is overseas investors trading our currency and pushing it way higher, why not directly address that?
Surely there is a way of stopping our currency from being the 10th most traded in the world.
Some taxes or disincentives could be put in place around the trading of the Kiwi $
If you compile a list of the top 10 traded currencies in the world, then assemble them in descending order of their OCR interest rates you will begin to see where the money is coming from and going to. Bollard states the drivers are "the US and other central banks". Don't agree. Trillions of hot-dollars slosh around the globe electronically every night and have been doing so for many years. It's not a new phenomenon. But where it comes from and where it goes, can and will change, over time.
Why not say it as it really is. The primary drivers are (a) Carry trades. Examine the list suggested above. Merchant Banks can simply borrow off the Fed and BE and ECB at 0% and shift into CAD and AUD. (b) Flight to safety or certainty or stability. This means stable economies and stable currencies ie CA, AU and NZ. (c) Purchase of commodities. The CAD and AUD are considered the two main global commodity currencies. These two currencies are used as a proxy for the commodities themselves, where the currency-cowboys can move into a currency and out again without buying or selling or influencing the commodities themselves. I have no concept of the relative proportions that each of these 3 components account for the movement of the two currencies. But if the NZD is regarded as a commodity currency then it is subject to the same forces as the AUD and CAD. High-speed movement of funds. In one day, gone tomorrow. This has very little to do with production, productivity etc. One thing RBNZ and Bollard could do is frequently and capriciously jerk the OCR around every couple of days. There is nothing set in concrete that says the OCR can only be changed periodically. It could be used as a very powerful weapon. It could potentially scare the cowboys away and create a sense of instability. He doesnt have to stand in the market and spend $200 billion to defend the currency. Unless of course there is a tacit agreement among central banks not to do this. Look what happened to the NZD when RBNZ held the OCR. Gone in nano-seconds. There is no loyalty in this game. Its hot speculative money.
OOh, naughty, but interesting nonetheless. You mean run the currency up and down, ramping and unloading. Jesse Livermore stuff. A more devious and manipulative RBNZ.
This is an interesting thought. Active manipulation rather than passive. Do it to make a profit. Probably work great for a few short years, but when it goes wrong it goes very, very wrong and we have no NZD.
Worth understanding the possibilities though, at the moment we just let Goldman Sucks rob us at every opportunity, ie we play a defensive game, this would take the fight to them.
Michael Hudson would be great to have on board. At least he understands this stuff.
As an aside I think the last lot did try to push costs onto local government, which is a way of increasing property taxes. It all seemed very bureacratic and stifling though, and the net effect seemed to me to be negative. We essentially stagnated for 10 years.
Bernard
I went to a briefing by an ASB economist last night regarding the 'recovery' in NZ as part of a CANZ Special Interest Group
It was very interesting , covering the macro elements of the entire NZ economy and how external factors are impacting .
They outlined the facts , and let you derive your own conclusions
Two things that I did not realise , firstly the biggest purchasers of and investors in the US$ is not China, which uses much of its US$ income to buy inputs . The biggest investors in the US$ are the oil producers , ( since the 1970's) and they understand the dynamics in the currency market quite well . They also understand the need to diversify from the US$ and this flow of funds to other currencies is likely to be disruptive to the currency markets for some time yet . The Chinese have actually been stockpiling commodities such as metals , iron ore , etc and not saving the $ as much
The other issue that brought up some debate , as always , was the housing market . The presenter postulated that there are two distinct housing markets in NZ and supported this with data . There is Auckland , and then there is the rest of the country . The market in Auckland appears to resesearchers to continue have supply constraints and this may be holding the market together and keeping prices relatively high. There is real strain in the housing market outside Auckland however with oversupply of stock .
The other issue is that very low mortgage interest rates since 2008 seem to be shielding borrowers who under a normal Mortgage interest rate scenario would be extremely stressed
They dont see a dramatic fall in house prices in Auckland ...... for now.
Hi Bernard,
Just a suggestion. It may be helpful to regularly publish money supply aggregates to interest.co.nz readers.
http://www.rbnz.govt.nz/statistics/monfin/c1/data.html
As money supply x velocity of money will be the cause of any generalised inflation in NZ. With all this hot money sloshing around the world, it is a major risk for anyone holding cash. At the moment the money supply in NZ stable.
Cheers
RP
Inflating the money supply is not likely to lead to asset price rises in NZ. Only the 'necessities' will rise, as households are already tapped out and will have to sell assets to live. Overseas observations are similar.NB: the money supply can be deflated instantaneously or progressively with the stroke of a pen, by increasing the banks capital ratios.
"Inflation will squeeze household budgets, Mervyn King warns"
rp
Here we go. Here's our interactive chart on money supply
http://www.interest.co.nz/charts/credit/money-supply
cheers
Bernard
Against which one has to balance that one might buy a new TV every 5 years whereas you might buy your sarnies for lunch 5 times a week (or 250 times a year).
oops reply to Nicholas further up.
Bernard - why is it not possible to stay logged in for a prolonged period (despite ticking the appropriate box)?
That's okay, andyh, I got the reply. And that's kind of what I was getting at! Assets will get cheaper, and necessities more expensive. But overall, the 'Big Ticket' items are the things that are going 'deprectiate' more. Those with cash, in that situation, are the winners as interest rates will mitigate prices rises in daily living costs.
Funny, I had this converstion with my wife yesterday. One thing we realised though was our new TV at $850 is no way going to last as long as the old one at $1950 did. It does have at least twice as good a picture though.
The length of life of the replacement is an important part of the equation.
Worth noting also that in the US (I am not sure how many other nations do this) their inflation calculation takes account of the fact that products 'improve'. Hence a computer bought in 2010 (for example) for $1000 will have a much greater functional capacity than one bought for the same price in 2003. I believe this is incorporated via the use of heuristic algorythms in the inflation calculation. Many people point to this 'adjustment' as being a manipulation of the inflation figures as it tends to negate the upward pricing pressure arising from increases from mundane things such as electricity bills and the price of apples (the latter of which are much more closely aligned with resource constraint). Governments have of course a highly vested interest in fiddling the inflation rate downwards (as many annual social security bills are adjusted on an inflation adjusted basis).
Watch the price of oil carefully - if it runs much above $100 it will cause yet another deflationary event (aka another recession). I think the inflationary/deflationary environment is going to be incredibly complex in the forseeable future with as Nicholas says inflation and deflation co-existing in different asset classes/essentials but with temporal volitility superimposed on top of that.
I think youa re both right - there'll be up and downs between different goods, services and assets. There could also be a nasty recessionary shock with price of oil rising.
My initial point was "generalised inflation". If say $50 billion of hot money comes in (M3 will show this) it have to go somewhere. This will mean those holding cash could suffer major losses as general purchasing power goes down i.e. more money in the economy chasing same goods increases prices.
A short cut for these cash-holding people is to watch the nice money supply chart Bernard put up. If M3 is rising rapidly, cash is at risk of devaluation.
What about " more money comes into the economy, and people pay down debt".? That doesn't spur purchasing power, and leaves the same goods being chased by the same, or less, money as debts are continued to be paid down. That's the difference with this recession~ the level of embedded, accummulated debt. "We" are too old, well older anyway!, to do the 'borrow and spend' bit again. There isn't time to do it, and save for a less- welfared state retirement. And those with savings in 'assets' are going to release them, to retire on.
true, any new money coming in may be saved or used to repay debt...i.e. velocity of money slows...people just not spending like they were. And yes, plenty of this is happening. Still I think it a major risk for NZ, especially anyone holding cash, if big quantities of new money enter here from offshore QE (imported inflation)
That's when the economic defense is....Quantitative Tightening. What the Aussies, Canadians, Indians etc. are now up to. Cash gets worth more by the day as it's nominal interest rates rise, pushing more debtors to repay, and spend even less ( the price of cash goes up, to stop people borowing it)....If we had a balanced ( where have I heard that word before?) economy, we could get general price inflation. But we don't. It's heavily indebted.
Nicholas
You still don't "get it", even after all of the stuff Iain and I have been writing, and you are a regular here. This new "money" that is flowing into the US economy is flowing into the economy because the Fed is BUYING debt. The new money can never be used to repay the debt it can only be used to create more debt. Any debt if it is being "paid off" is always being paid off by inflated “money out of thin air” and as a result the system is inherently unstable and will collapse. The “central bank control money via inflation” model is flawed, fundamentally flawed. I'm convinced a “fiat + freegold + freebanking” model is the best solution.
It's impossible for the "people (to) pay down debt" it can't happen, not the way the banking structure is set up with the SIV's and shadow banking.
Thanks for your contributions Iain, Boatman and Iconoclast. Always good to read more in depth analysis.
Am still reading the book 'The Great Crash' by Selwyn Parker, which refers to 1929 and subsequent years. I am looking to find lessons from the past that apply to our current situation.
One thing stands out that I don't think the author even comprehends, that is the criminal behaviour in the form of white collar fraud that became tipping points. Although it was primarily stocks that the investment of the day, I can't help but see the parallel with the US Sub Prime issues. Ponzi schemes all over again.
If you think commodities are the place to be, well checkout this lesson from history.
Overall trade within Europe fell by 18% in the first year after the Crash. Between 1931 and 1932, it fell by a calamitous 1/3. Thereafter, volumes continued to drift down for the next three to five years, the steepness of the drift depending on the country. Measured as an index in dollar terms, the global volume of trade between 1929 and 1934 fell by a ruinous 2/3rds. No kind of cargo was immune from the contagion. Foodstuffs, live animals, raw materials, commodities, automobiles and other wholly manufactured products-they all plummeted in volumes. As buyers disappeared, prices inevitably dropped too. The fall in commodity prices was particularly disastrous for the worlds vast agricultural sector. What is also evident from history is that the writing was on the wall even before the 1929 crash. Australia in particular was in depression through most of the 1920's. But also the parallel for today is that it did take a number of years of shuffling money around trying to stem the downward spiral before the capitulation finally occurred. Capitulation being the key word, until we get it we haven't hit bottom.(Encyclopedia Britannica.) Bernard I don't think we have to worry about our dollar. When investors in it realise the poor state of our economy (read housing bubble) they will exit pretty quickly.
Scarfie
Interesting points. The problem (of sorts) for us is that others are in a much more precarious position than us with higher unemployment and broken banking systems.
We're much more attractive than Ireland, Greece, America or Spain right now. That's more than enough to send our currency flying.
cheers
Bernard
Alan Bollard over rates himself and the NZ Economy if he believes that he cannot intervene in the forex market to lower the NZ$. I agree it is difficult to APPRECIATE ones currency but for a deficit ridden (both trade, capital and goverment account) country like New Zealand, it is a myth to believe that other people actually has any faith and confidence in our ability to repay our debts other than to ride on our high interest rate and currency volatility.
With NZ current account / trade and Goverment account borrowings, all the goverment has to do is to announce an ever lower exchange rate every month vis a vis other currency (either by way of invervention of even money printing) the NZ$ can go into a freefall in no time !!!
Tend to agree with you there. I can't see any reason why Dr Bollard shouldn't just buy gold with NZD at current level and just keep doing it until the currency comes down. Make hay while the sun shines.
I guess there is a danger this leads to abuse down the track by his successors, and there is the point that technically he is stealing from us, but not sure how relevant or real these issues are.
The point is there is no cost to being wrong other than the cost of storage.
I mean, the creation of NZD is cost free to the RBNZ. The cost to us is that our dollars are worth less. The advantage to us is our export industry prospers, which is presumably a good thing.
I am kind of arguing against my non interventionist background philosophy here, I guess it is just that if you are going to have a fiat currency then be good at it. Offensive and defensive play as appropriate.
Isn't that like saying 'there is no benefit in being right' either? I'd suggest that if gold falls out of favour, again, like it did years after the 1980 high, and the Central Bank end up dumping it again, there is a cost. But gold's not my thing, I'm the first to admit it. So I won't debate you too hard on this one, Roger!
"Offensive and defensive play as appropriate"
Amen to that.
The system requires tension between buyers and sellers (RBNZ is fundamentally a seller of NZ$). If the seller doesn't take advantage of favourable conditions price signals cease to mean anything and bubbles start to develop. We are in danger of blowing (another) bubble in the NZ$. the good thing is that - just for once - we can do somethign about it and do some good for the nation at the same time.
Regarding downstream risks. If neccessary I'm sure jonny-boy can pass some short term legislation allowing the RBNZ to play this game for only the next 24 months. Should have quite a pot of gold in the vault by then with which to balance the inevitable swing back of the pendulum as the market tries to crush the NZ$ once it sees how badly the manufacturing sector has fared.
No you're not Roger, you're dead right. Nicholas is struggling a bit with having some fundamental ideologies challenged, but he'll come round when the hard-nosed investor inside him figures out that the cost of funds for a Central bank is zero for all-time. They are never subject to margin call and can hold the asset ad infinitum (in fact the entire point of buying back some gold reserve in the first place).
To repeat: 1. Central bank prints worthless paper. b. Idiot foreigner gives you valuable gold bar in exchange for worthless paper. 3. Even if the gold bar is worth half as much tomorrow as today, who holds the value?
Given the abhorrent liberties being taken with the US$, sooner or later OPEC are going to move the Oil price to the Gold standard (see posts above). When they do the n everyone else will have to follow somehow. if you don't have any in the vault to back yourself up (currently we don't) then the emperor is suddenly goingto be naked and cold....
Of course the cost of money creation is zero to the Government. But it's creation is of negative value to those it is applied against, ie: us. It's what the Americans are going to figure out. They are creating money at zero, for 'the rest of us' to pay oif our debts. And who is left with the debt? The American taxpayer...or rather....their successive generations. Having 'Bollards Gold' at half , or any, price - and a mass of newley created liabilities, - just leave us all the poorer?
'But its creation is of negative value to those it is applied against,'
By which I think you mean creditors of the currency and in particular domestic savers. True and in normal times also inflationary. What that has to do with debtors I'm not sure..... (as inflating away debt is very good for debtors)
In addition let us just canvass the current landscape:
1. To quote Chris J. "Everyone's doing it". This is not a whacko Zimbabwean scheme. The BoE, the BoJ, The ECB and the Fed have all bought assets with printed money in the last year. Compared to the rotting piles of impaired mortgages, devaluing treasuries and the like that are now sitting in the vaults of these esteemed institutuions - buying straight hard gold (or any other basket of assets quite frankly) is a prudent and sensible measure.
2. The global flow of currency swaps in the NZ4 is 17 times GDP. Let me repeat - speculative offshore electronic NZ$ money suppky is 17 times that being used in the NZ economy. This means we can add several times GDP to the international volume of NZ$, without making any marked impact on the money supply in the domestic economy. Note that we will be buying our gold on the international market....
3. NZ has a private debt problem. Too many consumers have too much debt. A little bit of inflation is going to have to occur somehow to free up private balance sheets as right now we still face asset-deflation risks. If, despite the sterilising effect of the offshore market, we get a bit of inflationary leakage back into the economy then this is no bad thing - otherwise Bollard's going to have to drop the OCR (and pray) anyway.
I guess the same result is achieved is we as individuals buy hard assets with our NZD. That is probably the better way.
It would be even better if we bought NZ hard assets (you know the good old "factors of production" - the gold mines, the coal mines and the oil fields, those things that give an income stream denominated in useful physical stuff). That way we hedge against currency risk and the risk that our fellow citizens are destitute and resort to stealing our stuff.
Yes, absolutely. However, individuals can't obtain NZ$ at zero cost and in addition we have a massive private debt overhang.
Accruing hard assets (gold, platinum, trusted foreign bonds (ie NOT US treasuries)) is just step one in the process. Once there is some money in the NZ inc. bank account, then investing in some infrastructure and syustems to enable the factors of production to kick-in is also vital. But that can't be done whilst the country is broke and playing patsy to the FX market.
Note that I'm VERY WARY of letting the RBNZ pass its profits from this venture over to politicians. I would far rather they held onto most of the gold as reserves, and any excessive profit, was directed straight into a dedicated sovereign wealth fund that the politicians can't fiddle with.
Because it's not 'profitable'. It's theft of value from the populous. "Inflation" is not 'good for debtors"; it's mereley an excuse to 'do it again'. Why would anyone, if they knew with certainty that their debts would be 'inflated away', save? It' suprising how many everyday people think' inflation' is good. It's not. It's destructive. So let's try stimutaing our growth through a zero OCR; a lower taxation regime and a reduction in Government spending. Forget the 'let's buy gold with printed money' idea. It doesn't work ! Go back 40 years and have a look at how gold figured in the global economy; then 40 years before that; and 40 years before that. What do you notice? It's different ...everytime! "Gold buying" and issuing debt to pay for it, is just another itteration of gold's political usage.
I'm all for cutting government spending but it isn't easy. It involves taking things away from people and they do not like that. They then elect the "Even More Incompetent Party".
My idea allows the RBNZ to achieve its devious objective of 1-3% inflation via equally devious means without further destruction of NZ manufacturing.
Oky doky, Roger. But at some stage soon the NZ economy is going to be just like that chap who fell of a rock wall miles from nowhere a few years back. He got his leg wedged, and had a choice; to cut it off with a pen knife or remain trapped and die. Our economic leg is trapped....
"So let's try stimutaing our growth through a zero OCR; a lower taxation regime and a reduction in Government spending. "
First up we've had the discussion about when is inflation growth, and vice versa before. Right now the economy just needs to get enough money sloshing around to sort out the debt overhang.
Secondly, I don't see why a zero OCR is more likely to promote productive growth than a small and controlled increase in the money supply. Too low for too long interest rates have been fingered as a prime cause of the last round of bubble-blowing - why do you want to do it again?
Thirdly, you really need to get that ideological twitch under control. Government spending is not the prime cause of debt overhang in this country - its actually less than 1/3 of the total debt - the vast majority being private (mortgage) debt. Now I'm all in favour of dropping taxes and killing WFF, but these issues are utterly unrelated to the fair value of our currency, or our overhanging national debt. If you want to make a dent in the debt you need to address the private component - which means, not so much inflation as, "asset price dis-deflation".
Its a dirty little secret that the built-in inflation of fiat money supplies, has been the fuel for the world's development for the last 60years. Without it billions of marginal small businesses would not have been able to increase their earnings sufficiently to pay off their long-term debts. The true power and the gift has been the pact between creditors and lenders to sit stably in the 1-5% inflation band for extended periods (a period of oil-induced madness in the 1970's aside), so that both sets of balance sheets prosper. I'm concerned that this pact has now completely broken down - with creditors unwilling to accept any loss of value and debtors thus unable to pay.
(1)The economy does not need 'enough money sloshing about to overcome the debt overhang!' What it needs is that debt to be repaid from productivity, not monetary falsehood. (2) Yes, 'too low for too long' is not an answer either. But if I was to say to you " Righto, Chris. Here's an environment of lower taxes and lower interest rates for a short run" What would you do? Start a(nother) business and employ people might just be up their on your list of things to do. (3) I have no problem with "Government spending" if and when it's affordable., If, as I am told, we have foreign borrowings of X$'s per week to sustain it, it needs addressing ,in my view. (4) I know that private debt is 'our' problem. That's why I believe that it needs to be repaid, productively, not artificially or we will never escape the trap. If that means pain for the overcommitted, so be it. But the Government has well and truely given us all suffiecient lead-time to prepare.
And finally to agree with you completely ( where's the whisky!). The 'pact' has indeed started to break down. Let's not worsen the situation by printing ourselves any further problems.
Ahh Nicholas, you're like a dog with a bone today!
Increased productivity basically mean getting paid more $'s for doing substantially the same amount of work. Price inflation means getting paid more $'s for the same goods or service. Economists are actually really bad at telling the difference between the two, and when it comes down to the balance sheet they both look the same on the bottom line. Importantly both enable debt to be paid off faster as earnings increase whilst debt capital remains static (in nominal $ terms).
We both agree that what we actually want is for NZ to develop export-earning industries so that it can stop being a persistent current account debtor and pay for the required vital imports of oil and manufactured goods. To do this requires a stable and competitive exchange rate, China has taught us all this lesson well. In addition it also requires the absence of a debt-deflationary environment - new export businesses won't emerge if they do not invest - and nobody's borrowing when inflation drops below zero (just ask Japan).
At the moment neither of the above requirements are met. By nationalising some wealth (in the form a RBNZ gold reserves) we kill two dogs with one stone and get us to aplace where reduced taxes and OCR changes might actually have an impact. Its worth remembering that 17/18ths of the wealth, that we "steal " from the NZ$ money supply to do this, is held by foreign investment banks - whom I and much of the NZ populace have no compunction in screwing over whatsoever.
Exactly. There is one more facet to my cunning plan (actually there wil no doubt be unintended consequences that make it not very cunning at all really). Since buying gold with new dollars is inflationary it helps the good Dr keep gentle upward pressure on interest rates just to encourage us to pay off our debts. Most importantly it puts the same gentle pressure on our beloved leaders to pay off the debts they have so thoughtfully run up for us too.
Until we pay off our debts we really are debt-serfs to wealthy foreigners.
@Chris B : "Increased productivity basically mean getting paid more $'s for doing substantially the same amount of work. " Really? I'd have thought increased productivity was 'doing more work for the same amount of dollars?' In your analysis, you are 'producing' money. I'd have thought 'real goods' was the objective of our economic excercise.
Roger, there is an element of semantics here that we should be wary of, but I think your question is - how is productivity defined and measured?
Economists measure productivity in terms of $'s earnt per man-hour. The idea is that investment in efficient processes and plant will enable more goods to be produced - hence the term, "productivity". But productivity is a term that is not restricted to the manufacturing sector. Many service and retail industries claim increased productivity when their profit per employee increases year-on-year. Clearly this is BS as the salesmen don't produce anything - and it actually reflects some form of wider inflation that is not being properly accounted for. Often claims of increased productivity in these sectors sheets back to the fact that broad measures of inflation are rarely accurate or reflective of individual industry's experiences.
Now NZ has a problem - it has an awful lot of its workforce in tertiary industries (ie not primary and not-manufacturing). It can't just turn them all into factory employees tomorrow - but long-term it needs to change its tax structure and FX policy to allow that to happen. Short-term we have a debt problem which will impede the new investment required to transform the economy. To pay this off, Nicholas wants everybody to work harder and be more productive. Which is fine - but inevitably means turning over more $'s in the service and retail industries - which will show up as an incraese in the velocity of money in the economy - which in the presence of a stable money supply is otherwise known as inflation.
What Nicholas actually wants, Chris, is for the velocity of money to stablise along with the money supply, and thus displace workers from the services and retail sector to the manufacturing sector. Yes, it will take time, but a comensurate wages reduction ( work longer for the same wages etc.- they did it in Australia in '83 (?) when they brought in a national pay freeze) should achieve that goal, and encourage our future workers into the non- services sector. In the meantime, stabilse the money supply - don't inflate it- and nominally pay down private sector debt. After all, that debt is just paying for last years consumption!
Hmm, surely the only sector that has a pay problem is the pork barrel, oops, er, sorry, government sector.
It appears my delicate suggestion to cut the pay of those earning over $120,000 by 20% and go down to say 0% for those earning $35000 was not taken up. It would have sent an unequivocal message to the people in well paid government positions to get serious about cutting the flab.
Hopefully the next government will not be forced to make large scale cuts ala Ireland.
Come on now, are our polticians and civil servants really that good? Surely their pay comes from comparison with other overpaid jobs in other countries. Send a clear message I say, but then I am a bit simplistic at times.
Pay me $400,000 a year to say there is not much I can do really if you must but it is probably not a good idea.
I learned something about this funny money through using Bartercard in my business for several years. As a member I sell goods to another member who pays Bartercard dollars in return. I then exchange these for a meal at a local Bartercard restaurant. I get a sale I would not have got so I gain by the value of the meal less my costs in producing the goods and in selling them.
The system works fine as long as my NZD cash flow is helped by this process and as long as there are useful things to buy. This limit is rapidly reached with Bartercard.
The NZD is just Bartercard with the added benefit of convertability and a wider range of useful things to buy. Unfortunately my business rapidly reaches the point where I cannot find sales that are profitable.
Something about the similarities between the two currencies is touched on here and I don't seem to have tracked it down yet.
Thanks for the encouragement, it has gone to my head.
On the oil front, I'm sure Michael Hudson said somewhere that the US had told the Saudis they would consider it an act of war if the Saudis stopped selling oil in US $. Wasn't there also some thought that Saddam Hussein selling oil in Euros led to his downfall? Or was that all just tin foil hat stuff?
Roger,
Connect the dots. The oil exporters are the biggest buyers of US debt, it would be an act of war to not charge in USD. Why are they still “happy” to keep buying US treasuries. The answer is that clearly the US will not be leaving the middle east in the near future. Every barrel of oil purchased in USD by a non US country does what? This is the reason we have a complicated ETS instead of a simple carbon tax.
No conspiracy at all, it's out in the open.
Not convinced
Read Webster Tarpley, Mike Ruppert, Naomi Klein and the "Trojan horse: drugging America" book (Not sure of the exact title there).
And of course Michael Hudson
Memo to Messrs Hickey and Vaughan,
This is a valuable exercise. Your task now is to keep this at the top of your list, in the public gaze. In the nature of the 24 hour news cycle, of which you are purveyors yourselves, it will all disappear within a few days and be lost in the mists of time. Use the power of the collective mind. Consider establishing an ideas/suggestions/solutions section on your site and extract from these threads the positive suggestions and hold them there for a period so the non-coal-face clean-skin clean-hands bureaurocrats will have a reference point.
The background to my idea is that the RBNZ can create unlimited NZD at no cost to itself. If it buys a physical asset such as gold it has exchanged something with infinite supply for something with finite supply (probably, unless the alchemists really could lead into gold, I had always assumed this was a metaphor).
It is probably suspect because of the potential for misuse the precedent creates.
To Roger W....
I suspect this is what China has been doing. They've been on a massive buying spree of hard assets all around the world...who's to say this is not printed money. They are pegged to USD, avoid domestic inflation by using printed money for external hard assets...and thereby end out owning assets all over the world.
Maybe they have or haven't been doing that (but I've suspected it for a while). But I definitely don't think it's a road NZ should go down...highly unethical and likely to enrage our trading partners.
Cheers
RP
Unethical? This is financial warfare. At issue is the future wealth of the inhabitants of the country. None of the players are ethical. It is an exercise in the ruthless use of power. Do not be conned by the flowery rhetoric, particularly of the Yanks and the French.
Goldman Sucks has that name for exactly that reason. Michael Hudson gives chapter and verse on the systematic pillaging the world's bankers have been able to carry out. This is not idle chatter.
In outline it goes like this.
1 Extend credit to stupid government. Lets say at 3% interest repayable in 10 years.
2 Stupid government spend money on warfare and/or getting itself re-elected by bribing voters depending on the personal preference of those involved.
3 10 years pass.
4 Due to stupid government the country can only repay the loan by re-borrowing, but because they can't find anyone else to lend them the money the bank is able to charge 12% repayable in 3 years.
5 3 years pass.
6 The government accounts are totally stuffed because the country cannot afford the interest payments. The bank proposes the following solution - government must sell some assets, eg Telecoms to reduce the debt, and they will re-lend the rest at 5% for 5 years. The bank to mange the sale and collect fees accordingly.
This is how the world works. Clever bankers outwit stupid governments. No contest.
Wolly. Alright clever clogs. You're the gold expert round here after all. What precisely do you expect Mr Market to do when it figures out that we are sitting on a big pile of Gold bought by printing our own money? Exactly what form is this head squishing going to take?
- They're hardly likely to decimate the currency - given that it is now backed up by gold reserves (that have been completely missing for the last 15 years).
- They're hardly likely to pay less for our milk or timber
- They're hardly likely to reduce wholesale lending to the banks (as long as the inetrest rates are reasonable and there is enough domestic activity to service the debt)
- The IMF won't say jacksh*t as it is already telling small nations to get on and do this stuff.
- The US has lost all credibility on the world stage and is not about to launch a military strike against NZ. (No, it just won't don't be silly).
So, Oracle of the south, enlighten us with wisdom and open our eyes to this almighty shellacking we would apparently be courting?
Sorry. I've been MIA this morn. Someone may have raised this above, I haven't re-read all the posts, but here's an interesting fact."
"There is believed to be as much as 70 million tons of gold dissolved in seawater. There may be another 10 billion tons on the bottom of the oceans."
Sure: at the moment it's impractical to 'mine' it, but if we found a way...?
Yes, it is a problem. The basic idea is sell NZD buy physical asset as NZD cost free to RBNZ, gold cost real physical effort to get out of ground or sea. Taleb talks about this in his Black Swan book, physical stuff is hard to double, electronic or financial stuff can go up or down 1000 times.
Total global volume of water in the oceans = 1.3 x 10^18 tons (thats 1.3 billion cubic kilometres)
So concentration of dissolved gold is approx. 1 part per trillion (thats 0.000001 parts per million). I really do think entropy might trump economic s on this one....
Global gold production is less than 1% of total held gold (approx. 2000 tonnes compared to ~220,000 tonnes). This compares with the year on year 30%+ growth we saw in M2 global money supply during the last decade....
Who knows, Chris; that's the point! Maybe that new fangled gold magnet will work. Besides, it's not all dissolved. It's what has been washed down the rivers as well. And, I mean, I never imagained talking to you by computer 40 years ago. Things can evlove quickly, can't they.....
Yes the sky may one day fall on our head, but reallyNicholas, this is Chicken Little stuff.
In the specific example given, your gold magnet will still require you to pump through 28 million tons of seawater per oz of gold. Pumping technology is well developed (!) and at present prices pumping that much water would cost ~$1.4million in energy costs alone. That is 1000 times the current gold price, and before we even consider the running costs of your "gold magnet". As I said - entropy trumps all!
the NZ$ is at an all time high agin the US$....but not the Aussie$
Surely a strong $ is the sign of a strong economy....weak $ the opposite..eg.US
We dont export that much to the US...go elsewhere?
The RBNZ cannot alter the NZ$ .....we are to small, insignificant in the world money supply.
Get over it ...maybe we get cheaper oil(joke), cheaper US cars(joke again)
You have the easiest win out there, just do something to stop the trading in the kiwi$.
Why even consider anything without doing something about that first.
It's ridiculous that the kiwi$ is the 10th most traded currency in the world, when the size of out economy is probably something minuscule like not even a 1/10000 of the world economy.
If you don't even want to address that by taxes or something on trading the kiwi, then forget anything else, because your not serious about fixing the real problem anyway.
You:
"Some commentators are saying the US Federal Reserve could have to print up to US$10 trillion or 60% of US GDP to generate enough economic growth to significantly reduce unemployment."...
"What happens if it has to do QE II or QE III or QE IV and print the US$10 trillion that is feared? It would unleash a wave of commodity price inflation and currency appreciation throughout the freely floating emerging and commodity currencies, including ours."
So if I understand you correctly here, your concern is not actually with the current policy of the Federal Reserve but with some mutation of it that you and some unnamed others speculate might emerge in the future, yes?
You (emphasis added):
"The problem now is that America seems determined to do whatever it takes to keep printing and devaluing its currency."
Bernanke (via Bloomberg - http://bit.ly/baJAvn) :
----
“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy... Our credibility must be maintained... it’s critical for us to maintain inflation at an appropriate level.”
“Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome”.
----
I'm guessing you would agree that devaluing the USD in the way you predict would result in an elevated level of US inflation. So your characterization above of US intent appears to be at odds with the Federal Reserve Chairman's actual public position. Do you have some inside knowledge that leads you to believe that he is willfully deceiving the public, or is it your view that he will simply find himself unable to stop purchasing securities in time to prevent the kind of devaluation you predict? (In case of the latter you may find comments yesterday by Martin Wolf in the Financial Times helpful - http://bit.ly/b9T2wX)
Further to my comments above, CNBC has reported today some remarks by Treasury Secretary Geithner that are relevant (http://www.cnbc.com/id/40122177) -
---
The United States would never deliberately weaken its currency to grow its economy, U.S. Treasury Secretary Timothy Geithner told CNBC on Thursday.
"The U.S. will never do that," Geithner said in response to a suggestion by former Federal Reserve Chairman Alan Greenspan that Washington was pursuing a policy of weakening the dollar.
"We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy," he said, adding that it was "not an effective strategy" for any country.
---
I would be interested to know whether you consider these comments and those of Bernanke that I mentioned earlier to be credible representations of US policy intent or whether you believe they are simply trying to mislead the public.
Proposal - We establish a New Zealand Sovereign Gold Reserve:
OK, I've had some time to mull over the discussion we had yesterday. Perhaps there is something in what I thought at the start were idle musings. However, there seems to be some surprisingly strong support for the idea that the RBNZ issue NZD and buy gold when the NZD is at a level where our manufacturing base is being destroyed.
I think the idea has merit not because it supports monetary policy (which it does, as far as I can tell anyway) but because it strengthens our sovereignty as an independent nation. That is it's true value.
So my proposal is that:
The Reserve Bank be mandated to establish a New Zealand Sovereign Gold Reserve by issuing currency and acquiring $200 billion worth of physical gold bullion at such time as it is able to do so without compromising its dual mandate of price and financial stability. This is in addition to its ongoing requirements for foreign exchange reserves.
I think if it is kept as simple as absolutely possible it will work. So gold, not precious metals or foreign bonds. It's simplicity is it's strength. If it is broadened it just becomes government money that a future government will waste on their clever schemes. I think New Zealanders will not elect a party that promises to spend the Gold Reserve.
Obviously it can be used in dire emergency, but it's very existence makes a banking crisis significantly less likely and would at least give us more options if we were actually at war.
I think it helps address New Zealanders' deep sense of unease about privatising government owned businesses too. The sense that we have been forced to sell the family silver in the past and we should not do it again.
Is this an idea whose time has come or merely the idle musing of someone with the time to idly muse?
A good opinion piece, Roger, (below captioned) on why inflation etc. is not the thing we have to worry about, and my opinion that gold is, and will remain, a political tool, and not to be trusted.
"But gold? Does anyone expect politicians to put 'placating the world’s most speculative commodity market' (ahead of) worrying about a slump? Whom the gods wish to destroy they first make mad."
"my opinion that gold is, and will remain, a political tool, and not to be trusted."
But fiat paper backed by fine words and hot air is an investment of solidity and value? C'mon Nicholas....!
No-one is suggesting returning to the Gold standard - just reintroducing a 2000 year old practice of backing up a sovereign currency by holding some actual physical reserves. Martin Wolf actually notes in that very article that "monetising debt" may be aacceptable in the current climate - and that's all that being suggested here - with the debt having been used to acquire assets which increase the total wealth of the nation (yes - it will be an increase as long as gold has a price above zero).
Righto, Chris. Well I tell you what. I'll pop over to your office and you can give me all the cash you have in your wallet if it's "hot air (as) an investment of solidity and value".
And, yes. This conversation started, way back, with the "bring back a Gold Standard" debate. Using gold 2000 years ago, or even 100 years ago ( backing a promissary note) was fine when there were a billion of us crawling about the planet. Now there's, what 7 billion? We, and the medium of exchange, have changed, and we aren't going back to something that suited a population 6 times what it was. The point is, there aren't enough assets to go around! If 'we' all want, say gold, who will sell if we all want it? No one. So by implication some of us are going to miss out. That's the stuff of warfare.
Until recently I shared your scepticism about gold. I could not reconcile the fact that owning it gave no return. If owning it gives no return, I reasoned, then its only value is as a tradeable commodity, in which case, why not silver, or neodymium, or soy beans?
Is the missing link the idea of equity that just sits there and serves only to ground the system?
As I said earlier, I'm not fully able to explain this quality, but I think it may be the bit that you are overlooking. As a trader you clearly know much more than I do, but from a trading point of view even to me gold is not necessarily the way to go. I think the grounding quality has to do with the intrinsic quality of gold, the fact that it is untouched by time, that gives it the simplicity to be effective as a core equity.
Is gold a commodity? Or is it a currency? Or is it both?
After a long period (approx. 1986-2007) of being treated like a commodity, right now the market is behaving as though its a currency. Maybe tomorrow it'll change its mind again. Does it matter? It has 3 key attributes in that it (1) is physically held, (2) is widely (and easily) exchangeable and (3) has a fixed supply. That's pretty much all that is required to perform the function of asset backing for a currency reserve.
The actual industrial use of gold represents less than 0.1% of its total tradeflows. Personally I'm pretty convinced that that means it actually always has been a currency - and its value is backed by nothing more than human willingness to accept it as a medium of exchange (at least for large transactions). Which is pretty much the same way any currency holds value. The difference being governments can't debase it by printing more of it when they run out...
Anyone who rails against the fiat currencies of the world , and lauds gold as the only safe haven to invest in , has forgotten to look at a long-term chart of the price of gold .
The next crash in gold's price will make the $US look positively platinum plated !
Bernard , got a price chart on hand for the gold-bugs ? May as well have some fun stomping on their illusions .
That's not the point. It is not being bought to trade, merely to cap the price of our currency so we can keep our productive businesses alive.
The objective of the foreign banks is to bankrupt us if they can, so they can buy our land and resources cheap. The objective of our foreign competitors is to bankrupt us if they can so they can have our business' income flowing to their businesses. Both have been very successful over the preceeding decades. This is why Sealord is half Japanese owned for instance.
I am not advocating gold for investment reasons, merely because it is a convenient physical commodity.
Calm down GBH. No gold bug here - and I'm well aware that gold still hasn't recovered its1980 price. The thrust of this thread however is that if you can get something for free (by printing your own free money and giving it in exchange) then why wouldn't you?
Of course if you're happy for Bernanke to keep printing away that house payment of yours then go right ahead - but you know thats dumb and so you actually have income producijg investments. Very sensible for an individual - but very dumb course of action for a central bank. All that central banks should do is hold money. Gold is money - albeit one that has exhibited a pretty volatile exchange rate with the US$ over the last 30 years. However when you're between the devil and the deep blue sea - which way do you jump?
My comment was a generalisation , not aimed at you & Rogie . Ken Fisher produced an excellent book of 90 charts , which dispels a few investing myths . Gold is ugly . As is bare blocks of land ( " they don't make it anymore " ! ) .
But there is no free lunch in the financial world . A Zimbabwean hyper- inflation will occur anywhere that follows the same " print and be damned " mantra . The USA isn't . $US 600 billion from the Fed is a mere drop in the bucket of an economy that big . There may be no discernable effect from the stimulus ............ and that would upset a few bubbles around the world .
There's a long discussion further up the page about why hyperinflation wouldn't occur if this action was taken as part of an FX intervention program.
And I repeat - central banks are not private investors. Whats sensible for a private investor is pretty much irrelevant with regard to a currency reserve.
What makes you think QEII is the end of the madness? if this one doesn't achieve anything(and i believe you're right that it won't ), he's not just going to stop and say - "sorry, you were right, I was wrong, lets do something more sensible", is he? It's print to the bottom and be damned now.....
Bernanke's mission is to breathe life into the US economy , not to bugger it ! The first trillion of QE appears to be sitting on the balance sheets of " too big to fail " banks . Where the next lot of QE goes is anybody's guess . But Ben'd be damned if he sat on his hands and does nothing . If he does act , however stupidly , he gets less criticism if those actions fail .
The US $ is still the reserve currency of the world , and will continue so for the foreseeable future .
And if along the way , Bernanke's actions get the Chinese squealing alike stuck pigs , so much the better . They are culpable in the GFC too !
Roger, the basic idea that the central bank should hold a physical gold reserve is one that should never have gone away!
Your proposal sounds entirely sensible to me with a couple of provisos:
(1) Its probably better to mandate a specific physical quantity of gold rather than a $ amount - as otherwise the goalposts keep moving everytime either gold or the NZ$ hits a bump in the road.
(2) $200 billion is actually not a lot. I'd be perfectly happy for this number to be larger than this - $500billion is about 3 years GDP which is a nice big defensive buffer, and gives the bank LOTS of ammunition to play on the FX front. (Maybe I'm just a bit too gung--ho for this sort of thing - but hey better to die trying ....).
Thanks Chris,
I agree with your thoughts there. The thing I was trying to solve was what is there that we as a country can do in the situation we find ourselves in, preferably without reference to the other players? So we don't engage directly in the currency war as such, but we do move decisively to protect and enhance our independence and sovereignty.
I have taken issue with John Whalley and Bernard and those of my friends who are aware of these issues when they have advocated such things as capital gains taxes which I believe are unspeakably destructive, but until now I have not been able to put forward a credible alternative.
As a young man I watched in horror as the unions held Britain to ransom and as Mrs T destroyed Sheffield in her attempt to defeat them. To me knives should say Made In Sheffield on them. This was stupidity on a massive scale and all political parties were guilty of the destruction of the wealth of the nation. In effect a big fight where the earning ability of the country was simply burnt. I watched as a stunning engineering heritage was destroyed. Land Rover with its fanatical worldwide installed base. British motorcycles, where Brough Superiors in the 1920s could be ridden no hands at 90mph, when Harley Davidsons had a top speed of 45mph. Velocette Thruxton, the first motorcycle to average 100mph for 24hours. Engineering excellence destroyed through squabbling and dereliction of duty.
I think New Zealand has more sense than the Britain I grew up in, partly because those that came here, or their forefathers, had to overcome significant obstacles to get here. There is thus a culture of solid good sense that underlies everything we do.
I take the view that when a good idea arises it often does so from a number of places at the same time, so we shall see whether this one gathers force or simply fades away.
What is at stake here is our ability to produce stuff that we can sell in the future. The forces at play in the world are seeking to destroy our already seriously weakened manufacturing capacity. In effect to destroy us as a competitor. This is not a sporting contest with rules, it is a ruthless struggle for power, in effect a financial war.
There is another aspect to this idea that I have difficulty explaining. It is the idea that there should be some equity in the system that is just there. It is not used, it just sits in reserve, and by some means this gives stability to the whole system. Hopefully someone else will be able to describe this. The system becomes stable and grounded. It is prevented from floating away on airy schemes. I am convinced this is a real attribute but I can only describe it in abstract terms and other people find this frustrating.
Wikipedia might help you articulate this:
http://en.wikipedia.org/wiki/Official_gold_reserves
From my point of view - in a world where nobody can be trusted not to devalue their currency, why would you hold excess foreign currency reserves? But you still need a medium of exchange with which to complete inetrnational transactions, and if neccessary defend the currency. As you noted earlier the very existence of a gold reserve makes the likelihood of the latter being required less likely. And whilst others may point out that we are too small to ever attempt to defend our currency, thats not true at the extreme. In fact , at present the market implicitly believes that the RBNZ and the NZ economy can defend it at its current level (its wong about that - but not about the concept that it could be defended "at some level").
Yes, I can't see any theoretical reason why you couldn't have a strategic $200 billion silver reserve as well, and, just for good measure, a strategic $200 billion copper reserve. I think the point is there needs to be some physical (ie finite) equity somewhere in the system otherwise it just becomes a race to the bottom.
The point is to defend your abilty to earn a crust in the future against the actions of your competitors who seek to destroy you.
Yep they will keep printing,because their is nothing else they can do. But the Chinese are getting very pissed off because the more they print ..the more its hammering the Chinese.In fact when the collapse of the dollar occurs ,the Chinese will have the equivelent of "Fairy money".What then?
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