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Is a strong currency really a sign of our success?

Is a strong currency really a sign of our success?

By Gareth Morgan

The economy is in rude health. It must be, our currency has been the strongest in the world this year - surely a sign of economic prowess, right?

In the global race to deliver the cheapest currency in the world, a stampede that has everyone trying to switch to export-led growth to make up for the slump in their debt-fuelled expansions of the past 20 years, there is a whiff of something not quite right.

Whereas economic orthodoxy would say a strong currency is an indicator of prosperity, in this environment it is one of vulnerability, of helplessness in the face of a clash of economic juggernauts.

We know why the world's largest juggernaut - the United States - is undergoing a currency meltdown.

Its household sector, the largest in the world, has led the charge to buying stuff with other people's money; its government has followed suit; and now the foreign creditors are nervous.

The second largest economy - that of Europe - has fallen victim to the delusion that all countries in that geographic locale could thrive in a world where exchange rates were forbidden, where there was one monetary policy and where a gent's agreement not to run budget deficits above 3 per cent of GDP would be enforced by fines for offenders.

The reality has been that many of Europe's new and southern members have maintained an economic trajectory fuelled by mounting indebtedness to the richest, most senior countries in that euro-folly.

The world's export juggernaut is without doubt China. It secures that position not just by having an open door to inward technology transfer upon which it can lever its abundance of labour, but by multiplying that advantage with outlawing the free trade in its currency. The Chinese central bank commandeers all foreign exchange remittances to China and prints and issues renminbi in exchange. There is no limit to how much of its own money a central bank can print, so any upward pressure on its value is easily countered by issuing more. So for the Chinese, keeping pace with the weakness of the US dollar is no sweat.

And that's just dandy, it means its economy can continue to be as export-competitive as ever. So long as the issuance of truckloads of its own currency doesn't lead to inflation of such magnitude that competitive price advantage is lost.

And that's where the state control over its domestic economy is such a powerful tool. With investment spending being over 60 per cent of GDP, a level matched by no other country, the Chinese continue to expand productive capacity at a rate that defies capacity constraint-induced inflation, its wages to employees are kept naturally in check by the sheer supply of workers, the rate of spending by households is kept in check by that wage inertia, helped by state-directed quantitative controls on consumer credit. The chances of an inflation-induced loss of competitiveness are not high. China's reward for its state-controlled capitalism is ever increasing ownership of global assets.

For the rest of the world, the important change that the Chinese economic miracle has spawned, is that its massive cost advantage in manufacturing has stimulated demand for those goods globally.

Two things flow from that. Firstly the share of global manufacturing production of other economies is shrinking big time, and the global overall demand for manufactures is stimulated by the cheaper prices. The explosive demand from China for natural resources to feed its production machine is driven by these two developments. Commodity producers are in the pink - well sort of, as we'll see.

And the scope for the Chinese miracle to continue looks huge. An example will suffice. Apple computers has its stuff made by Foxconn and Inventec in China in factories that employ 200,000 workers working 60-hour weeks and those firms receive roughly 5 per cent of the value of an Apple appliance. For the Chinese folk involved it is truly a wonderful opportunity for work and income. For the world, the ramifications from this nascent miracle will reverberate far more than we have seen thus far.

The rest of Asia is a microcosm of the Chinese cookie-cutting formula, all with varying degrees of success. But the formula is total inward technology transfer, low unit labour costs and central control of the exchange rate. China adds to that central control of consumer spending and massive state-driven investment.

Back to reality. Firstly let's deal with the buyers of Chinese-made products. We know about the debt-driven expansionism of our consumer economies that has been the 'miracle' of the financial liberalisation of the early 1980s. Now the creditors are a bit wary of the largesse they've funded we are in a bit of a lull. In the US and Europe those debt issues have led to a crisis of confidence in the currencies as economic orthodoxy would predict. By not using the credit to invest in income growth the creditors are exposed and the debtors have harsh times ahead. If the growth potential of the economy deteriorates so will the currency, other things equal. They're not quite equal of course, because as we've seen, China and some other US dollar-pegged Asian currencies have mechanisms to ensure the greenback and euro can't depreciate against their currencies.

That leaves fewer currencies against who these depreciating ones can move against - right? Guess who has to take the strain? The commodity producers who have 'free' exchange rates are ideal suckers for this role. Their export income is improving courtesy of Chinese demand so again economic orthodoxy would suggest, other things equal, so should their currency. And as we well know, it is.

Herein lies the huge risk these commodity producers face in our world of neomercantilism. It's called the Dutch disease, originating from the experience of the Netherlands in the 1960s after its discovery of natural gas drove the guilder up and laid to waste the competitiveness of the country's exports and leading to a major surge in imports. Already we see Western Australia and Queensland the only two states able to withstand the pressure from a surging aussie dollar and here the pressure non-agricultural producers are under is manifest in the layoffs we're starting to see.

Can the central bank here cap the NZ dollar rise and join those immune from the Dutch disease? Of course, it can just print money. But without the other policies that the neomercantalists use, such as controlling credit availability to households and channelling all funds to a range of successful investments that improve competitiveness, then that money printing is likely to spill primarily into household spending and inflation.

We've been there plenty of times in our past.

Have you noticed how indecently prices are rising in New Zealand right now? We all think we're going to be billionaires as the World Cup rolls through.

Has anybody looked at the slack number of forward bookings from abroad to visit expensive New Zealand this year?

The most concerning outcome is that New Zealand will swing on the end of an unsustainably high currency until the economic damage wrought warrants a major change. That damage would come via a hollowing out of our non-commodity producing businesses, no correction in our household savings rate and in time, a balance of payments/external debt crisis as those factors conspire.

So a rising currency, symptomatic of an economy in rude health?

Not really.


Gareth Morgan is a Director of Gareth Morgan Investments
This article was first published in the NZ Herald.

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Totally agree.....huge clangers of alarm bells should be ringing point blank in Pollies ears...130dba comes to mind....of course anything that might impact voters in an election year is a no no....and after that, well anything that impacts the support base of whom ever wins is a no no.....end result nothing will happen and a mess.

So "democracy" will seal its own fate I suppose.....


 This economy is held prisoner by a sick system of govt trapped in a benefit dependent vote buying scam of its own making.....nothing will change other than the colour and quality of the BS and spin spewing from wgtn.

National will embark of raising cash by selling while carrying on the benefit handouts game and the various ministers will be seen kicking the can down the Terrace and shouting support to Bollard above them where he will be polishing his near ZIRP policies to pork confidence and steal from savers.

Sooner or later the Beijing Bubble will burst and commodity prices plunge...a signal to change the BS theme and roll out new spin.

The govt politicians are working very hard...exceedingly stuffing an Elephant into the skin of a pig....visualise Gerry in size 26" pants wearing a T shirt size S

Great stuff Wolly.  The austerity train will pull into Wellington soon enough. 

Excellent article rare to see something explained without the asscovering spin you get from most  economic journo's ....enjoyed it.

Thank you.

Was that a sly dig at my mate Bernard ...... was it Count ? ........ Good on yer if it was , aha ha de haaaaaaaaaa !

...... Always good to read one of Gareth Morgan's articles ... A zero BS zone !

Cheers !

Well no it wasn't GBH....and you know how fond of The Big B I am....but i couldn't help but laugh a few minutes later when I was kicked off comment of the day  holding a six ...for a four albeit I did think elley's comment was worthy... gave her one myself I did.....but you know ya gotta wonder dont ya!....ouch!

....... might wanna edit that bit , Count ..... about Elley , how you gave her one yourself ! ....

oh sheeeeeeet..! I can't cause you just replied to it ...edit over....I'm sure Elley would not misconstrue my meaning.....damn your hide you....dagnabit....That's another fine mess you got me into GBH.

You two are hilarious. I reckon you should send Bernard a monthly bill for making his site a lot less depressing than it could easily be!

Oh, I did get comment of the day (although it does seem to have been undeserved, sorry!). Thanks for pointing that out :)

I think it was well deserved as I pointed out Elley.....we were referring to Bernards timing ...with the potential  that I got my ass kicked....for you know ...saying stuff about Journo"s.

Good for you problem here with that. 

I agree entirly Gareth. We where told that the exchange rate over time would balance the balance of payments over time. How long do we have to wait . Since we floated the doller we seem to have run deficits.Imagine if the dollor was in the low 60c v us$ then we would have an export lead recovery .As a farmer it appears that every time comodity prices go up so does the exchange rate sowe only get half the benefit. Before everyone tells me how much money I,m making in 1990 at the local Pub you could buy a jug of beer for a kg of wool now it takes 2kg .

Surely we (and Australia) should take advantage of this "USP" with respect to our currencies and introduce a transTasman Tobin Tax. 

You love that tax and spend, don't you Kate? Like all confrimed lefties you just can't help yourself. Just so long as it's somebody else's money that is being taxed (and not yours) and you get to call the shots of where it gets spent, according to your 'values'.


What did George Orwell write again about people of your ilk? Oh yeah that's right.

All animals are equal, but some animals are more equal than others.

No.....what we love is ppl paying their fair  share and  controlling excesses and way to stop damaging NZD speculation is to have a tobin tax.

Society chooses how it operates, society chooses how it collects income for what it chooces to spend a Libertarian? you consist of 1000 ppl in New Zealand out of 4million, that makes you an extreme fringe player....but we have chosen to let you leave at at time you are free not to stay.


A more productive way to decrease speculation in the $NZ would be to dissolve the idiotic EU , to go back to individual sovereign currencies . And to get those Asian countries who peg to the $US to free up their currencies .

....... why is the lefties answer to every-bloody-thing another tax ? ......

Yes it would GBH...but Ricky the Magic Pixie has his hands full trying to get Obama you know those things aint gonna happen anytime lieu of that  I'm with Kate n Steven in the sense a suitable deterrent is found for what has now become an epidemic of ...pure speculation....affecting productivity. 

....... why is the lefties answer to every-bloody-thing another tax ? ......

That my dear Gummy, is the $64,000 question! One can only assume that they are devoid (or is it bankrupt) of any other ideas.

Why all this sudden moral panic to lower our exchange rate when our dollar, with respect to the Australian and Japanese currencies’, is actually somewhat on the low side? Even against the Euro it's not that hugely different to what it was 4-5 years ago. Isn’t Australia and Japan two or our largest trading partners? What about the Korean won or the Chinese currency? America is in the financial toilet; of course its currency is going to collapse. That’s the whole rational around free floating markets in spite of what Gareth Morgan above has said. 


Alright David B..lets say I'm not keen altogether on the tax idea..? it does not make me any less frustrated that options to deter..reduce...stop rolling out the welcome speculation..are not explored....

let's say I'm happy with the idea of Jawboning the idea of Tobin....after all that was the main outcome in it's original instance and was effective......more the threat of it than the legislation.

But here's the problem with that now....there is sooooooomuch speculative money in currency ...that as a lobby group they could probably thumb their noses and say .."well go on punk" calling the bluff.

At that point ....I'd have to think on it seriously.

Don't see myself as a lefty....just want a level playing field to pusue what I started with all the capital I invested........

 If you are yourself an FX trader please disregard all of the above because your comment is completely understandable from that vantage point.

Agree, ..looking at whats being done to our manufacturing we have to seriously look at some options before they are decimated. 

Also Im all for exploring options and despite everything a tobin tax looks quite useful...and productive...mainly because the ppl with money and the fast computers can trade before the real ppl....the end result the real ppl lose out....this for me is "immoral" activity and produces no real good......its a corruption of the system.....


No I'm not a FX trader. That kind of activity for making a living doesn't appeal to me at all. Too risky. Well Tobian's idea was, if I understand it correctly, to use a tax to try and stop exchange rate volatility. I'm not too sure if it would also stop rising and falling exchange rates over time, which would reflect deeper underlying economic forces at play in each country.

But if it can be shown that currency trading and speculation is seriously distorting exchange rates globally, then yes, ways and means to control that should be explored. But let's not all jump on the tax bandwagon as the first or only means to do that.

As for Kate’s suggestion that a Tobian tax should be introduced on trans Tasman currencies exchanges, I'm sure you'll agree that that is utterly queer, pointless, perverse, and damaging. 

No, my meaning wasn't to tax only transTasman (i.e. NZD/AUD) currency trades - rather I meant both Aus and NZ should introduce the same Tobin Tax with respect to our two currencies - a joint-statement to the world's FX markets that if they want to play they pay.


Yes ..David B.... But if it can be shown that currency trading and speculation is seriously distorting exchange rates globally,  

and that is just where Central banks won't play ball...for their own reasons N.Z. case a dramatic slump in the Kiwi would cause a gasoline nightmare of unprecidented proportions...but I suspect that is not the only reason......the Americans despite their sad sad situation are still one of the most manipulative of Global players and will be well aware of the currency inflows to down under from Asia....what their move  or when is up for speculation....but (I believe) there will be a move at a critical point in an attempt to flank China into a depeg or currency apppreciation....perhaps when China's stall is confirmed.

In the meantime ..i'll try to did up that article a while back that showed the impact currency trading had upon exchange rates both in the short and long positions.....i appreciate that  corporate hedge has become a minor factor in this and to a large extent is necessary.(Fonterra) 

As to Kate's post it appears there was a misunderstanding of what she said on your part.

But thanks for your thoughts on the matter and glad to see your open to discussion as it is required.


I fail to see how disolving the EU would change the speculation on the NZD, directly anyway?  Ditto removing pegs...all that does is change the advantage to the USA...

For better or worse it seems that hitting ppl in the pocket for un-productive behavoir is best achieved this way.


Steven, just as your grasp on human behaviour and economics is at best marginal, so too is your branding of me as a libertarian, I'm afraid.

Opps I forgot to add, as a 5th generation New Zealander whose ancestors go back in this country to the 1820s, I won’t be going anywhere.

But I do invite you Johnny’s come lately, with your bankrupt socialist and or baby boomer hippy ideas, to leave it asap. Would you like me to buy you a ticket, Steven? I imagine that as a socialist you'll need some financial help?

Funny thing but as a democracy your vote carries the same weight as mine......


Yes, isn't it fantastic?  Thank God for the capitalist tradition! I'm so glad you are enjoying the fruits of it!

But you know what the other funny thing is? Well when you look for any sign of democracy in China, Cuba, North Korea, and the former countries of the Soviet bloc, one looks in vain. What do you think that might be telling us about the political philosophy of people on your side of the fence? 

Im not on that side of the fence ie NK etc.....logic lacking Im afraid....

So ok maybe you are not an out and out libertarian....but obvioulsy just another flavour of extremist who see's anyone not of his beliefs a "leftie"  which I suspect is a simlar number v the 4million I mentioned before, maybe founding member of the NZ KKK?


"maybe founding member of the NZ KKK"


So people who disagree with you are racists now?


Steven its hard to take people seriously who try and inject racisim into a debate about Economics.


There is no economic debate here....its purely politcal ideology....

Maybe I missed something about the KKK, but from my limited readings of their philospohy  they disliked anyone who wasnt an American....not just black americans, so Pollacks were not liked, Poms etc etc.....


No steven : You implied that DavidB may be a founding member of the NZ KKK ! ...... those were your words . Not American , but NZ , you said .

.......tch tch ! ..... 

David B: says "I invite you Johnny’s come latelys to leave asap. Would you like me to buy you a ticket"

You're singing my song. You are being too gentle. I've called them blow-ins plus a few other unkind descriptions.

The pigs, my dear DB, are the globalised corporatist system, not the citizens.  It doesn't matter whether the corporatists claim to be of communist or capitalist political persuasion - they all indeed emit the same stench these days.   

Taxing the pigs might serve to liberate, to some degree, our fledgling state from their destructive rutting behaviour.

Tax is a coercive measure - we should not tax labour and we should not tax profit - yet these are the two primary sources of income for our government.  Being a coercive measure they have the resultant effect - avoidance of the declaration of labour and profitability.  Whether a Tobin Tax were successful or not in its revenue raising function matters not - as lack of income to our government would be accompanied by a lower exchange rate, and a positive income would allow for a substitute on tax on labour and profit.

Would you not be happy with either of those outcomes?


The pigs, my dear DB, are the globalised corporatist system, not the citizens.  It doesn't matter whether the corporatists claim to be of communist or capitalist political persuasion - they all indeed emit the same stench these days.  

Were you once fired from one, or overlooked for promotion?

Taxing the pigs might serve to liberate, to some degree, our fledgling state from their destructive rutting behaviour.

Might serve? Might serve? You’ll need to do better than that. Where is your evidence that it WILL serve to liberate, and what evidence do you have that they are 1) destructive and 2) rutting? Or is that just your personal prejudice?

I have to go to lunch.

You can just look around you at the end result of 30 years of their behaviour....we are on the verge of a Depression not seen since the Great Depression, though i suspect not seen since the Long Depression...It is going to take us 1 if not many decades to get out of this fact in terms of teh standard of living we enjoy today, never...


The highest paid base salary I ever had was in the employ of central government - prior to that I'd earned more on an annual basis in private sector multinationals where my earnings were pegged to profitability.  Prior to that I owned my own business, and prior to that I started my working life in corporate sales.  Never fired and never over-looked for promotion - I was one of those people who from around 30 years of age got hired to fix a perceived problem, so had all the autonomy I desired (aside from having to put up with ever increasing corporate overheads, that is!), and once the problem was fixed to the best of my abilities, I went looking for the next challenge.  Travelled alot all around the globe on business - got a very good grounding in many cultures - opened my eyes to social (in)equity and how that inequity was fuelled by corporatist political systems.  As an ex-pat American, started to look critically at the social norms under which I was raised - norms which likely made me as successful (in monetary terms) as I had been in NZ. 

Decided to retire from the rat race and have worked part time in education ever since.

Now I'm a granny waiting for the younger generation to fix the mess mine has created.  If it takes a violent revolution, I'd be honoured to be the first into the paddywagon but I would hope commonsense prevails.




I don't think common sense has too much to do with it Kate, it is certainly clear it has been absent for the last 40 years anyway.

I am afraid that human nature is that it will take catastrophe to initiate change.

There is a simple rule that people will never give up power willingly, and money is power.

Much as I agree with your sentiments, I don't think history is on your side.

Hmmm, who to believe, Gareth Morgan, or Damien Grant:

Damien Grant: Exporters must adapt or die

Hmmm, strangely enough, I reckon Gareth. Not because my bias is favoured, but because of the more well rounded analysis shown in Gareth's article that looks at relevant contexural influences and drivers that are affecting outcomes in the here and now. This is something one does not expect to see in a classic faith-based Neo.Con treatment - this is where Damien is wrong.

Cheers, Les.



Agree, but it may have to be that exporters adapt or die.....despite the quality of their case.


I have a question for you old buggers:

Some years are years of great change. 1968 was a year of great upheaval around the world. For those who were sentient in '68 can you see any similarities with that year and our current global situation?



And for Wally, was it similarly upheavy in 1848? ;-)

Yes - as both times of movement/unrest are in the Marxian sense rooted in class struggle.

No - in the sense that there is less sense of hope regarding the ability to change the status quo this time around.