By Bernard Hickey
John Key and Alan Bollard proved last week they are excellent at what they do.
They are the short term masters of our puny universe of an economy.
John Key is a master tactician. He is planning for one result (a second election win) on one date (November 26) and he knows which levers to pull to achieve that.
He knows that consumers and voters, particularly those stressed, urbanites with big mortgages and small petrol tanks, love low interest rates and a strong New Zealand dollar. It means they might be able to pay the bills each month, fill the petrol tank and still be able to go on an overseas holiday.
So John Key is happy to see the currency rise. He said as much again this week when challenged on the government's 'over-borrowing' and how that is driving up the currency. He said the New Zealand Debt Management Office had pulled forward its borrowing to take advantage of keen foreign lenders. Key answered a question about a fundamental long term problem by giving a short term tactical answer.
As a former currency trader his focus had to be on the next few minutes and days. Tactics are much more important than strategy when trying to pick the waves of currency movement. Planning on a five year or ten year time horizon is pointless when you're trying to work out where the currency will be after lunch.
Unfortunately for New Zealand's future, we need some long term strategy to build high-paid and interesting jobs that earn foreign exchange revenues so we can start growing our wealth as a country.
This requires a five or ten year plan to encourage a much higher national savings rate, much more investment in high value-add export industries and a deliberate strategy to favour producers over consumers and savers over borrowers.
In countries such as China and Singapore their leaders plan to build industries and jobs over decades. They control exchange rates and savings rates, albeit through undemocratic means, but it works. It is a Confucian approach. Here our currency is not controlled by officials. We have a laissez faire approach.
The other master of our universe is Alan Bollard, who this week doggedly stuck to his line that he was carrying out his orders specified in the Reserve Bank Act and his Policy Targets Agreement. That means he uses the Official Cash Rate to target inflation at between 1-3% over the next two to three years and ignores the exchange rate and employment.
Bollard could intervene to push the currency lower and has done it before, but he sees it as a risky strategy and the last thing a bureaucrat wants to do is take financial risks, particularly when a successful risk would hurt voters and make it more difficult for John Key to achieve his own short term goal.
So we have a tactician and a bureaucrat running our economy for the short term to get reelected and to hit an inflation target.
Meanwhile, we collectively keep borrowing and selling assets to support a lifestyle we can't afford in the long run and allow our currency to rise to level that makes it impossible for any manufacturing exporter to invest for the long term.
We are choosing to live in the now instead of planning for the future.
We are choosing consumerism over confucianism.
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