I happily confess to knowing little about monetary policy, but I'm sure most people would agree that our dollar is overvalued. It's great if you're in the market for a new car or TV, but not so good if you're an exporter.
The other problem with our dollar is its volatility. It's high now, but the bottom could easily drop out of it tomorrow.
The reasons why our dollar is so high at the moment, and why it is historically volatile, are complex. But one of the main problems with our dollar is the fact that it is one of the most traded currencies in the world.
I know, it seems mad, and yet it's the truth. Speculators love our dollar.
A lot of this currency movement has nothing to do with the inherent strengths or weaknesses of the New Zealand economy, but instead has more to do with what is happening elsewhere. Low interest rates in a particular market may lead traders to buy more New Zealand dollars, while a downturn in another part of the world might lead nervous investors to send their money back home. It's unpredictable, and there's precious little that we can do about it. Or so it seems to followers of orthodox monetary policy.
The followers of this orthodoxy will tell you there's no point in playing around with the Reserve Bank Act, and that we'd be fools to do anything at all to control our currency. The currency markets must be our master, and we must just accept our fate.
I don't know if Russel Norman's plan to print more money to bring the dollar down makes any economic sense, nor do I know whether Labour's proposal to amend the Reserve Bank Act to give the Reserve Bank more powers will make any difference.
On the other hand, I cannot help but observe that a great many of the followers of the current orthodoxy also believe strongly in deregulation generally, and letting the market take care of everything. It seems to me, therefore, that the current orthodoxy deserves to be scrutinised. The speed with which many commentators have shot down the proposals by the Greens and Labour suggest to me that many of our so-called experts are trapped in a mindset of thinking that the government has no business interfering in our economy, and that we must go where the markets take us.
As I said, I am not an expert on monetary policy, but nor are many of those commentators currently taking the mickey out of Russel Norman. Some of them probably know less about quantitative easing than I do, and yet you would think they were experts, the way they opine so passionately.
I don't have the faintest clue how to manage the dollar, and I freely admit to that. But I don't accept that doing nothing is any sort of solution. The same people who say do nothing have been telling us for years that the government is the enemy of business and that we should deregulate everything, and then when the global financial crisis showed the folly of deregulation their only response has been to demand more deregulation, as if a stronger poison might somehow bring about a miracle cure in the patient.
So if these so-called experts think any sensible person would take their word that nothing can be done, then they really are dreaming.
Monday, October 8, 2012
15 comments:
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We (New Zealand) are not doing nothing. And despite obvious problems our economy is not in bad shape, relatively.
ReplyDeleteLabour are suggesting targeting three things, inflation, unemployment and the exchange rate (which currency?) - giving the Reserve Bank multiple targets seems like creating an impossibly complex task.
The opposition seems to be using reactionary policymaking - tweak this, prop up any company that is shedding jobs, tweak that, etc etc.
We (New Zealand) are not doing nothing.
DeleteReally? Name one positive step the government has taken to tackle the high dollar.
As usual your solution is "it's complex, so let's do nothing". I don't buy it.
giving the Reserve Bank multiple targets seems like creating an impossibly complex task.
If it's so hard, then how do other countries manage it?
The opposition seems to be using reactionary policymaking
Yes, reacting to serious structural problems in our economy in an effort to fix them. Imagine that! Even if they don't have all the answers and there is no easy fix (which they'd probably themselves admit), your solution as ever is to do precisely nothing.
Other countries with much bigger printing presses than us struggle to manage it, and they create different problems and huge risks.
DeleteSee: http://yournz.org/2012/10/08/quantitative-easing-and-swiss-roulette/
New Zealand trying to compete in exchange rate manipulation is akin to the minnow humping the shark.
Someone really likes schlepping their mediocre blog. The orthodox solutions have proved to be such an unmitigated failure, it's time to consider the unorthodox. But then again, you can't rely on anyone associated with UF to do anything risky, it goes against their doctrine of political flotsam, floating with the tide of popularity
Delete"The orthodox solutions have proved to be such an unmitigated failure..."
DeleteNo they haven't, they New Zealand economy is in better shape than most.
"...it's time to consider the unorthodox."
But Norman is claiming we are out of step with more desperate economies trying to force an advantage - with very questionable success and with high cost and risk.
Pete, in the 2012 Budget Treasury, and Bill English, conceded that our current account deficit will exceed 5% of GDP fairly shortly if their growth forecasts were met. So, under the current orthodoxy we are heading for a balance of payments crisis. In that context, sticking to the current settings is going to land us in the shit one way or another. Why not look at moving away from the high exchange rate, high interest, low productivity and low wage model? Because it really has worked well hasn't it?
DeletePeter Dunne meanwhile, is championing tax avoidance. He says that positioning New Zealand as a tax haven is a good thing, an honest role for us and perfectly legal.
ReplyDeleteWhat a louse.
You're off topic here, but most sensible people avoid paying any more tax than they are legally required to pay. Have you ever claimed a tax refund? A donation rebate?
DeleteDunne correctly says that it's not New Zealand's responsibiity to ensure foreign people pay their required tax in foreign countries, but that we co-operate with other countries to help them prevent tax evasion.
He also announced that New Zealand would sign a multilateral convention on tax assistance later this month.
"The Convention on Mutual Administration Assistance in Tax Matters will give Inland Revenue the ability to request help from other tax authorities in detecting and preventing tax evasion, and collecting outstanding tax debts."
I am also no expert at currency and banking, or anything at all really. However, I think QE could work if it is targeted at our largest trading partners.
ReplyDeleteThe problem, as has been said, is that we are a pimple on the back arse of beyond. This is where it is helpful our banks are owned by Australia.
Conventional QE (so far as quantitive easing could be called conventional) involves the central bank purchasing commercial financial assets, usually from the trading banks. This increase of supply of money acts like an interest rate cut. The increased supply also reduces the equilibrium price for the currency on the international market, reducing our exchange rate.
New Zealand’s banks are privately owned in Australia, our largest trading partner. If you ignore ANZCERTA for a moment, it is likely there are instruments that can be set up, or even regulated into existence, that has the effect of using central bank easing that targets only the Trans-Tasman market for money.
This would also make their 6% agricultural subsidies look even more ridiculous.
Further, a 'currency war' between the two countries seems unlikely, given that New Zealand takes less than 5% of Australia's exports, compared with their taking more than 20% of ours.
Delete"But one of the main problems with our dollar is the fact that it is one of the most traded currencies in the world."
ReplyDeleteBased on a comparison of that table and wiki's list of countries by gdp, our share of currency exchange is 7.3 times our share of total global gdp.
For comparison, australias share of currency exchange is 3.7 times their share of global gdp.
Curious thing on that wiki article you linked though - it says the reserve bank tried to devalue the currency through QE in 2k7. And it didn't work very well. Why hasn't that been mentioned in the news articles?
While being in favour of lowering the NZD, I do wonder how much flow on effect it will have for the government repaying the money it is borrowing to fund the current deficit and outstanding historic loans?
ReplyDeleteThe lower the dollar the larger the foreign repayments will be.
Challenging the orthodoxy is never easy as the strength of the response to Russel Norman's suggestion reveals. But I can't help but wonder just how engaged are the opponents' critical faculties. Evidence is emerging that the effects of QE are not always as expected. For example I'm curious to know how many of those shouting Norman down have read this briefing on currencies in this week's The Economist. My impression is three fifths of f**k all otherwise they wouldn't be so EMPHATIC in their response. A few snippets from the briefing
ReplyDeleteA strong currency can not only drive exporters bankrupt—a bourn from which the subsequent lowering of rates can offer no return—it can also, by forcing down import prices, create deflation at home. Falling incomes are bad news in a debt crisis.
...
the history of currencies and unconventional monetary policy over the past few years makes clear. In Japan’s case, a drop in the value of the yen in response to the new round of QE would be against the run of play. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started.
...
“The implications of QE on currency are not uniform and are based on market perceptions rather than some mechanistic link.”
...
The odd thing, however, is that the old rule that high inflation leads to weak exchange rates is much less reliable than it used to be. It holds true in extreme cases, such as Zimbabwe during its hyperinflationary period. But a general assumption that countries with high inflation need a lower exchange rate to keep their exports competitive is not well supported by the evidence—indeed the reverse appears to be the case. Elsa Lignos of RBC Capital Markets has found that, over the past 20 years, investing in high-inflation currencies and shorting low-inflation currencies has been a consistently profitable strategy.
...
Another factor is that trade imbalances do not seem to be the influence that once they were. America’s persistent deficit does not seem to have had much of an impact on exchange rates in recent years: nor does Japan’s steadily shrinking surplus, or the euro zone’s generally positive aggregate trade position.
In short, foreign-exchange markets no longer punish things that used to be regarded as bad economic behaviour, like high inflation and poor trade performance.
Time for a bit more thought and less heat I reckon.
One problem with this debate is that everyone seems to be climbing Mount Stupid.
ReplyDeleteI stopped reading at "... I happily confess to knowing little about monetary policy."
ReplyDelete:) Unfortunately, neither does Cunliffe or Norman.