The politics of the exchange rate
Fri, 21 Sep 2012 12:49p.m.
By Peter Wilson, Political Writer
For the last three months, opposition parties have been talking as much about the exchange rate as they have about John Banks and asset sales.
There's been scant attention from the media, but as the donations scandal runs out of steam and Maori water rights dissolve in a series of inconclusive hui, the debate is gaining prominence.
In the last few weeks manufacturers, exporters and unions have jointed Labour, the Greens and NZ First in demanding action.
The problem is that the dollar's value against other currencies is much too high and it is crippling exporters. New Zealand's products cost too much on the international market and they aren't competitive.
Two high-profile cases this month have helped the politicians who are calling for the dollar's value to be brought down - Solid Energy's coal mines and the Tiwai Point aluminium smelter are in strife.
They're laying off workers and both cite the strength of the dollar as one of the main reasons why their exports are falling.
The opposition parties want the Reserve Bank Act to be changed so it has the power to intervene.
"We can't be a pacifist in an international currency war," says Greens co-leader Russel Norman.
"Our trading partners are actively working to devalue their currencies, leaving the kiwi dollar at record levels."
Labour finance spokesman David Parker says the problem is that by law the Reserve Bank must give priority to controlling inflation.
"We must change the law," he says.
"The Reserve Bank is getting off the hook because it is being told it must keep inflation under control.
"Other countries are lowering their currencies so they can export more. They are playing hard ball while National is playing by the old rules."
NZ First leader Winston Peters' trenchant criticism includes the accusation that the Government is living in the past.
"Why try to solve yesterday's problems?" he asks.
"There is no help for manufacturers, no help for exporters, in fact nothing at all except tired old economic philosophies that have been debunked a long time ago."
The Government is just as adamant that intervention wouldn't work, even if the Reserve Bank tried it.
"There's no free lunch around the exchange rate," Finance Minister Bill English says.
"Any attempt to move it comes with large costs and large risks - New Zealand has been down that path before."
In Parliament this week Parker, Peters and Norman reeled off lists of developed countries they said were successfully devaluing their currencies.
English responded by saying only Singapore and Switzerland were defending a fixed exchange rate.
"They both have very large reserves and they are building up huge imbalances... and one has yet to see whether the experiment is going to work," he said.
"The UK and the US are printing money because they have zero interest rates. The fact that they are printing money is a sign of deep distress in their economies, not success."
At the end of this week the dollar was hovering around the US83 cent mark. Anything over 75 cents is considered hazardous, and Prime Minister John Key has acknowledged that.
The Manufacturers and Exporters Association wants it brought down to 60 cents, which English has rejected out of hand.
He told Parliament that would have a catastrophic impact on the standard of living as the price of imports rocketed.
For more than a year the Reserve Bank has held the official cash rate at 2.5 percent, a record low but well above most other countries.
It uses the rate as a blunt instrument to control inflation, and the main point of opposition party protest is that it must be given the flexibility to also use it to influence the exchange rate.
They say high interest rates offered in New Zealand are one of the reasons why the dollar is over-valued by about 20 percent.
Outgoing Reserve Bank governor Alan Bollard doesn't think much, if anything, can be done.
"New Zealand is a tiny country that no one else gives a stuff about," he said on Friday.
"They are concerned about their own problems, it's very hard to conceive of interventions that are going to change that."
Bollard says the Reserve Bank and the Treasury are well aware of the exchange rate problem and have been looking at ways to deal with it.
"So far, we haven't found them."
Peters has drafted a bill to amend the Reserve Bank Act and it will come up for its first reading in about three weeks.
The Government has said it won't support the bill but opposition parties will argue strenuously for it to at least be sent to a select committee so expert evidence can be heard.
The debate on it will be one of the most important Parliament has held since last year's election.
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22/09/2012 7:57:33 a.m.
Imagine our dollar dropped 25% as some idiot is claiming would be good for NZ?Ok, so now petrol goes up 1/3. Milk goes up 1/3. Banannas go up 1/3. Now we have everyone saying they can't afford the increased costs, so need a increase in wages to tackle the difference, ie need 1/3 more wages to get back to where they were before the devaluation.Then the costs of the wages flow through, raising prices further, so we have everyone needing higher wages to pay for the inflation of devaluation.How is this good for NZ? If you want huge inflation, then devaluation is the way to go.Look at the other side. We have the devaluation people saying that devaluation will basically lower the labour costs in NZ, so basically our min wage has been set too high, and yet these same idiots are wanting the min wage raised like 50% even before devaluation! Factor in 25% lower dollar and it will be closer to 100% rise in min wage they will be demanding! How can this do anything but cause inflation? Inflation solves nothing. So you have more dollars in your pocket, but you get less with them.In international terms, our min wage, mean wage, ave wage, benefit levels have increased since 2008 under National - not too shabby in a recession. And those increases we have peole wanting thrown away out of spite because they claim those that are investing into businesses and our export growth have been getting wealthier - its those people create jobs and help pay for our education/health and welfare!
21/09/2012 11:02:58 p.m.
It is about time the banking system, that is directly responsible for the misery in the world, be placed under the spotlight. The whole idea that anything tangible can be gained by supporting its ongoing dominance is insulting all those who know the truth.
Ask your self this, where does the money to come from to pay the interest on a loan big enough to debase our currency? Oh yeah, we will end up having to print that as well, only after we all drown in the inflation and misery it has caused, And the cycle repeats. Fraudulent, corrupt, enslaving pyramid scheme the sooner it crashes the better.
21/09/2012 7:19:32 p.m.
The exchange rate is a tool used to EXTRACT the wealth of NZ, Plain and Simple, ELSE the RESERVE Bank would TAX the transactions, But that wont happen because the Problem would fix it self, SHOWS everyone WHO the RESERVE BANK is working for and WHO its working against!.
21/09/2012 6:04:00 p.m.
If the dollar were to fall back to 60 cents where it sat for many years importers would do just fine... as they did back then.
Importers have had it easy for a considerable time now and that hasnt translatd into job creation primarily because the profits that they have been reaping have gone directly into their pockets.
I dont see mass unemployment coming because of the devaluing of our dollar... I see a rebalance of our economy with a much needed reduction in our trade deficit.
English lies somewhat about a fall in the standard of living.
What happens when exporters earn more? they hire more people.. so while importers may lay off staff... though this is doubtful... exporters will pick up the slac and rebalnace the economy.
Have to remember that importers had to deal with an exchange rate of between 50 and 60 US cents on the dollar for years.
Most of our importers bring in luxury items that also arent very necessary... and given the meteoric rise in the value of our dollar... the cheaper cost hasnt been reflected in retail prices or employment.
21/09/2012 5:00:24 p.m.
wiseacre what sort of post is that? You make statements without evidence and then start of the the conspiracy theories. No one can take your rants seriously.
21/09/2012 4:46:02 p.m.
What value are our trading partners?US - higherUK - higherEU - higherAus - higherJapan - higherChina - mostly we use US$ which is higherWhere is this overvalued currency as our currency is still lower value than our trading partners.If go back far enough, our currency used to be much stronger than the US currency, but then we had govt after govt that thought devaluation was the key to making money and our currency fell through the floor. Nobody has been made wealthy through devaluation. Hitler did what the US is starting to do - print money. There you could spend a million to buy a loaf of bread and it didn't make everyone rich and financial problems go away, nor will it help the US as it will just cause inflation without helping their economy.The reality is the moaning industries are moaning for the sake of moaning. Most of the complaining is being done not for hardship from the NZ$, but because their industry has not adapted.Take wool carpet manufacture, Aus has higher wages, higher dollar, added transport costs, and they can still export wool carpet to NZ! Our farming sector has increased exports even with a strengthening dollar, as they are adding value through manufacturing processes. Decades ago nz sold milk powder/butter/cheese and that was about it. Now we process it into more valuable exports which is why fonterra has grown so much and why the farmers payout has gone up. NZ farmers have added efficiency so the average herd size is well over 300 cows while the EU is 30 and some countries in the EU is 10. We need to work smarter, and idiots calling for killing our exports would kill the NZ economy so we cant afford health/education or welfare.Our high tech manufacturing is also experiencing good growth. We need to work smarter, and add value.
21/09/2012 2:02:58 p.m.
If, as outgoing Reserve Bank governor Alan Bollard claims, "New Zealand is a tiny country that no one else gives a stuff about", why is that the New Zealand dollar is one of the top 10 most traded currencies?
All the rest of the top ten are actively working to keep their currencies low so that their manufacturers can compete on the world stage. When their currencies go down, ours increases relatively. So why aren't we doing the same? Because National only know how to enact failed policies of the past? or is something more sinister afoot?
21/09/2012 1:56:41 p.m.
This is a no win situation for any govt. NZ is way too small to defend the a floating currency. While the exporters have a point on the high NZD hurting them, if the dollar was to fall to 60c what do you think would happen to the price of imports. They would go up. Petrol would rise, imported car, TV, computers electronics, clothing etc etc would all go up. So would the cost of anyone who goes on holiday overseas or shops online for overseas goods. Then you would end up with higher inflation and everyone complaining about how the cost of living has suddenly jumped and they cant afford to buy things. Farmers might get more for their sheep and beef but the price of the imported fertiliser and tractors etc would all go up. Both importers and exporters have the ability to hedge the currency (I understand the likes of probably our biggest exporter Fonterra does this) so maybe its simply an education for a number of exporter on how to manage this part of their business risk, just like they manage any other type of business risk.
21/09/2012 1:03:57 p.m.
So are we going to unfloat the dollar, if they are goinbg to tinker with it anyway why leave it open to attack by the money sepeculators. They should also re-nationalise the electricity industry, its privatisation has been a failure in its promised outcomes to the consumer. Its too costly to maintain as its stands.
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