Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including markets were stable but on tenterhooks overnight as they watch politicians trying to solve gridlocks over mounting debts.
US President Barack Obama said he was considering a US$3.7 trillion deficit reduction plan and would also look at a temporary increase in America's debt ceiling to avoid a default by the world's biggest economy after August 2. See more here at Bloomberg on Obama considering a short term increase.
But Republicans and Democrats remain far apart on a long term solution to America's ballooning deficit and ratings agencies may downgrade America's AAA credit rating even if a short term deal is done. The longer this drags on the more nervous markets will get as the August 2 deadline approaches. See more here at Reuters on the debt ceiling impasse and the countdown to 'Armageddon' if it is not passed.
Meanwhile across the Atlantic, European politicians meet tonight in a crisis meeting to try to fix the European debt crisis. Some are describing the meetings as crucial to the future of the Euro. See Ambrose Evans Pritchard at The Telegraph on why Europe must agree a common fiscal policy and debt pooling or risk a run on Southern Europe's bond markets and the ultimate collapse of monetary union.
Markets were relatively steady overnight with the US debt ceiling and the European debt crisis meetings the focus of attention.
NZ$ at ruinously high levels for exporters
However, without much fanfare, the New Zealand dollar continues to trade near record highs against the US dollar, the Euro and the pound. It is also stronger vs the Australian dollar, which has pushed the Trade Weighted Index (TWI) over 73 to three year highs.
This is despite continued falls in commodity prices in the last four months. Milk powder prices have fallen 20% since March 1 yet the New Zealand dollar has strengthened 14% vs the US dollar over the same time.
Claims from Reserve Bank Governor Alan Bollard and Prime Minister John Key that the currency strength is all about higher commodity prices no longer wash.
The currency strength is as much about our foreign borrowing (mostly by the government), the reinsurance inflows and the US dollar money printing in both America and China.
In my view Bollard and Key are comfortable letting the the currency rise to do their own dirty work. Key likes a strong currency because it is good in the short term for consumers by keeping petrol prices, import prices and overseas holiday prices down. It helps him get elected on November 26.
Bollard likes a strong currency because it helps him control inflation in the short term without having to increase the Official Cash Rate. It means he can delay a rate hike until December 8. Key likes that too because any rate hike would be after the election.
In my view this is short term thinking that will stop the long term transformation needed to turn New Zealand into a producing, exporting and saving nation from a consuming, importing and borrowing nation.
In my view, our government needs to stop borrowing so much for a start and encourage much more domestic savings. Cutting KiwiSaver incentives and cutting income taxes while still spending large on middle class welfare doesn't do that.
The Reserve Bank needs to crack down much more on domestic borrowing funded through foreign borrowing. It is investigating macroprudential controls, but needs to move faster and do more.
How on earth are we going to export more high value, high wage-producing goods with a currency headed for parity vs the US dollar?
No chart with that title exists.
21 Comments
How can domestic savings be encouraged when currency debasement and near zirp decisions are the order of the day! Why save when prices are running ahead of your dollars and the your dollars are running away!
The RB has opted to bail out the indebted but they are using the money to pay down debt and fewer fools are borrowing from the farming bankers.
Because whatever you do manage to save, will buy you more, when asset prices fall. Consumerables: not much to do about that, except spend wisely on necessities, and save the rest. The interest rate is immaterial; it's what the principal can buy, that is. An aging population will require deflation, to make their savings ( what's left of them ~ after finance co's, leaky houses, stock /property market falls, earthquakes etc), buy more.
Wolly ... with 6 month term deposits ~ 4.25 % and say tax at 25 % ie 3.15 after tax - and Inflation running at 5.1 - investors are getting minus 2 % real.
How on earth do we think we can lift national savings under these policy settings ?
This is one of the reasons investors find property so attractive - it is basically inflation proofed.
The future is looking pretty ominous right now for anyone who bothers to think for themselves.
JB, I's suggets there is a difference between 'savings' and 'investments'. I don't expect anything from my savings, except that they retain their nominal value. My investments, I expect to 'work for me'. That's why in the current environment, cash is a good 'investment' ,as it's likely to increase in value on an asset purchasing parity basis ~ and property is lilkely to lose it.
NZ$ surges to record NZ$1 - US$0.8585 at 10:45am this morning, on reports that the Germans and French have reached an accord on EU debt problems. To be presented to EU leaders later today. But as one commentator has already said, hard to see this as positive "too many cans, too many roads" ...
all this depite a net loss on permanent migration mainly to Australia, and visitor arrivals down 9% y-on-y
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/86509… M3RceD3s Dear Mr. Pritchard,
Thank God you are beginning to realise what those who read and know the German sentiment already, have known for quite some time.
Angela is no longer viewed as a credible 'Vertreter' of her electorate and her dithering and dallying have been driving everybody crazy (not just Manuel Barroso, one of the most overpaid, use- and spineless EurocRats ever to ungrace our consciousness...as well as the €U political scene).
She is despised by her own 'Volk' because of her non-'Re'-action to this mounting and ever bigger 'Mount Everest' of (truly hair-raising proportions) debt .
I would like to make the humble suggestion that it was not 'Kohl' who is the "Father" of the €uro but Konrad Adenauer together with de Gaulle were intent shortly after the war to bring a peaceful resolution to the German-Franco conflict (which seems to be waning with each hour as we speak) and that included the 'idea' of creating the precursor to the ECU which transformed more and more with every decade to what has now become the horrible fake political currency that is showing and displaying all its weaknesses that were not thought of properly and sufficiently as none of these 'ideologues' of the €uro project were true and tested economic experts.
And therein lies the €uros biggest weakness:
It was always and solely a political currency. And because the whole 'debate' and crisis meeting is a 'political dog & pony show', it is not surprising that both sides across their respective Rhine Ufer are unwilling to budge.
None of this comes as a 'surprise' to those who have always been able to see both sides of the issue with Juncker not helping matters along - alas.
Kohl is an out-of-date stubborn old man and has paid for his own serious fraudulent wrongdoings (corruption as well as taking too much 'lobbying monies') and refused to give in and admit his own part in it.
It was Kohl who brought on Angela and who 'made her big' well aware of her Eastern German roots and the political ideology she was raised under. It shouldn't therefore be a surprise what we see unfold now.
None of this will be resolved 'prettily'. But I'm not holding my breath. I've arrived at this ugly realisation in 2008 already. So, this is really just the msm and the political shysters who've gotten us into this mess, finally 'catching up.
But, by now, the mountain has grown too big to even attempt climbing it. The 'waking up from delusion' is finally hitting the snails - but they're not prepared. None of them are because they thought they could get away with this back and forth - just one more time.
As the political brass is finding out much too late now: Time is running out. Here as well as in the US. This is going to hurt.
Badly.
Mr Hickey
You raise fair points regarding the election and needing people to feel 'well off' leading into November.. but I take issue with it being JK's fault... This is an issue of an uneducated NZ one that would happily vote in the other guy every other election without relising that we have 2 out of every three years wasted in ridiculous govt spending to follow through on stupid promises..
All you are doing is deflecting blame to individuals, allowing us to feel no responsibility for whats happening. Wake NZ up to what they are doing... We have the power to change things if we educate...
Here's Reuters on Germany and France reaching agreement on a Greek bailout. The french say it will include "a contribution by Europe's banking sector."
Haircuts?
http://www.reuters.com/article/2011/07/20/us-eurozone-idUSTRE76I5X62011…
Thats has to be a haircut/default?......even "voluntary" (yeah I bet) ...just needs some junior holder of debt to start screaming...and the ratings agencies click to "D".....have a nice day USA and CDS's kick in.....
"and a contribution by private sector investors."
Im sorry but what private investor gives millions away? to a bottomless pit like Greece anyway.
regards
The prospect of them actually managing some sort of cobbled together bailout is terrifying. We are talking trillions, debts so huge as to render them meaningless.
The trouble comes when, if you look at the various options open to them - if 'open' is the right word - is that all of them have major risks or problems attached to them. Some of the solutions are quite literally illegal on every level ranging from the German Grundgesetz up to the Lisbon treaty, some of the solutions will automatically panic the bond markets, and some of the solutions are as good as defaults in the eyes of the ratings agencies. I'm no financial expert but in all the commentary I've read, Europhile and Eurosceptic included, not a single reasonable or realistic solution has presented itself.
France, Germany, Greece, the PIIGS appear to have fudged, delayed and dissembled their way into a corner where the only options that remain open to them are scarcely options at all. They are a minefield of Catch 22's where you pay now and get screwed later (and by later we are talking in terms of days or weeks here) or you ride roughshod over decency, common sense, the law and in doing so ramp the stakes up so high that you could start a chain reaction of defaults and civil disorder accross Europe and Southern Europe in particular.
This is quickly heading to the stage where it is so volatile that there is no power or authority large enough to control this if it goes sour. This has the makings of a political Chernobyl. ReportRecommendReply drjonathanwilson 2 hours ago TTT
"This is quickly heading to the stage where it is so volatile that there
is no power or authority large enough to control this if it goes sour."
And that is the whole point - get the populus to the point of fear where they will willingly give up their freedoms if someone, anyone will restore some semblance of order - and of course there will be - the Marxist / Progressive / Maoist / Stalinist or straight forward bloody tyrant. Strip away the lawyers suits from the EU apparatchiks and that is who you will find underneath the disguise.
Jonathan
Happy Days...
"Germany and France have reached a common position on a second bailout of Greece in their effort to prevent the country's debt crisis from spreading through Europe."
http://english.aljazeera.net/news/europe/2011/07/2011720235745601105.html
A veneer of Problem Solved?
So true about the currency Bernard, I work for a software exporter and we get hammered by the high $. It's so annoying to hear various politicians trot out the same lines of "export led growth" and "higher savings" while still stubbornly protecting the idiots and speculators who got us in this mess in the first place.
Still, Labour's even more brain dead with their policy of "growing" the NZ economy by exempting small businesses from CGT but hitting them if they're successful and grow.
FYI from a reader via email:
Hi Bernard
Enjoyed reading your latest piece (RB currency claims no longer wash). I moved to NZ (via UK, Singapore and Malaysia in reverse chronological order) to finish up school in Dunedin in the 1980s. My political, economic and social formative years were largely informed by the Lange years and Rogernomics. Take the medicine on faith, bitter and awful as it tasted, and things will come right – we were told. I recall devouring economic textbooks then, some of which praised and we ourselves extolled our ‘squeeky clean’ float. We went where others did not and could not go. We led the world. Some of us thought that would pave our world towards economic heaven and everything would be sweet.
The early 1990s were even more grim. Imagine my surprise at the time when I observed, from my regular yearly trips ‘back’ to Singapore/Malaysia, and found out more about Singapore’s management, controls and carefully calculated policy gambles (or investments) and how, in pretty much half a generation (eg about 40 years), they moved from being a peasant society running a port for the British to a developed nation.
Meantime, back in NZ, things never seemed to get really better although there were moments when the sun shone through.
My years in Houston in the mid-1990s taught me that the US preaches free market and free regulation. It is anything but that. And there are layers and layers of regulation, exemptions and, quite often, protection for their industries and economy.
I don’t think taking the same kind of medicine that we’ve been taking, in larger and more bitter doses, for what will soon be three decades is the answer. Until recently, I thought * I * was losing the plot. It is heartening to read pieces like yours that question apparently well-received financial wisdom and sacrosanct policies that have been handed down, indeed, thrown down at us.
Hardly a week passes these days when I don’t think of just picking up and leaving the country. What keeps me here are the few social and professional friends, although the circle of contacts has been decreasing even more in recent months, and the thought that with the right leadership, we can change things even more quickly and effectively (compared to the larger nations in deep trouble).
Keep up the good work.
Best rgds
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.