NZ dollar overvalued, says Brash
"We're the only ones who think our dollar's overvalued. It floats on the open market and it is what it is."
Featured commentFormer Reserve Bank governor Don Brash believes the New Zealand dollar is overvalued.
Speaking at the weekend on TV3’s The Nation programme, Dr Brash said that was is hurting exporters and those who compete with imports.
“But getting the New Zealand dollar down would actually have the effect of reducing the real wages of New Zealand workers.
“That’s how it works. It makes us more competitive by reducing real wages.”
Dr Brash said that the bank could intervene in the exchange market or it could cut interest rates and that would lead to higher inflation.
NZ First leader Winston Peters – also on the programme – said Dr Brash was talking “absolute bunkum”.
But Labour finance spokesman David Parker said that if the bank moved a little bit further away from the primacy of inflation did not mean “you're somehow going to give way on inflation”.
He said that was a false dichotomy.
“I'm not saying we should ignore inflation, no one's saying that.
“I'm just saying we shouldn’t give primacy to inflation targeting over other important aspects in management of the economy.
“Other countries aren’t. We're facing competitive devaluation abroad and we ignore it at our peril.”
But Dr Brash said New Zealand was the first central bank to introduce inflation targeting and now 23 countries had followed us.
“David Parker and Winston Peters both want to reduce the real wages of New Zealanders, because that’s what devaluation means.”
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Comments and questions49
Look, we all know that the kiwi is overvalued and hurts our exports.
The question is: what can you do about it (besides fiddling with the interest rates)?
Adjusting the reserve requirements for residential/ property lending, would be quite effective.
In combination with lower interest rates (high rates attract vast flows of 'hot money'), these would succesfully dampen down our dollar.
There is no reason to believe such policies would not work -- and be equally, or more successful, at controlling inflation.
No we don't all think it's over valued!
Many if us are extremely happy that our dollar is finally worth something - actually it's what we all need - a stronger NZ economy and productive & highly competitive industry.
Simple equation really:
A stronger NZ economy = a stronger NZ $
A weaker NZ economy = a weaker NZ $
NZ was at the top of the OECD once and that was when our dollar was worth more than the US$.
The rebuilding of Chch and the upgrade of our nation's infrastructure will require billions of $ of imports - so why would we want to devalue our dollar?
As an exporter, we're finding it difficult, for sure - but our inputs are all way cheaper than they would be if the dollar was worth less - give me a strengthening economy any-day!
Over simplified version of NZD value. where do you factor in all the speculative FOREX trading?
Unfortunately your grasp of the economy leaves a lot to be desired.
A stronger NZ economy does not equal a stronger $NZ and vice versa.
In theory, if the NZ economy was in a bubble you are correct but more importantly the equation that effects us the most is:
How will the Reserve Bank strategies of large economies effect the value of that states currency which then translates to how it impacts the NZ dollar when we exchange currency with them.
The back bone of any economy is its international competitiveness. We are lucky that the back bone of our exports being food (dairy) is almost an essential like oil and it demand/supply is very inelastic as compared to say financial services as an industry.
Brash is wrong in that our dollar is not over valued, rather, other currencies are being artificially devalued through stimulus i.e. money printing and low interest rates which drives up demand for our dollar as our interest rates are comparatively much higher.
Sorry but I don't appreciate the put down around my grasp of the economy - these are my humble opinions after 30 years of exporting, dealing with FOREX, studying international economics & financial history, reading heaps on global financial markets. questioning, testing, debating and having to make ends meet...
If we lower our exchange rate, we will push up the daily cost of living for all NZ households by an equivalent %...
I didn't mean to be disrespectful. However, your theory is consistent with all that is currently wrong with the financial markets an the global economy and its drive for constant globalisation.
The plank of your argument is that the cost of living will go down if our dollar is high. You noticed a drop in the price of groceries since our dollar went up? what about petrol? what about elecricity? what about rent or your mortgage payments? school fees? taxes? telephone bills? your gardener charging less?
Hmm, I figured, non of those have changed for me and I bet we probably live within an hours flight of each other.
A prosperous economy which is multi faceted and globally competitive is the only way ALL the people can be prosperous. This hog wash about a highly skilled work force is just that. We dont all have the IQ to be computer engineers or surgeons and a healthy economy is one with lots of different sectors all of which together generate a stable healthy economy by dampening the impact of economic cycles.
The low lying fruit on route to becoming competitive has already been picked. Anyone in manufacturing will tell you there is nothing that can be done to suddenly increase productivity by 20%. If there was they would have done it already!!! yet we allow other nations devalue thier currency by almost 30-40% and expect our manufacturers and the productive part of our economy to compete so that we can buy an LCD TV for $300 less than last year? Does that make sense to you?
Who is it that overvalues it then? Not me. There's nobody sitting behind a desk setting the value. The value of the dollar is no different from the value of your house, your car or anything else. Like shares and bonds, here is a market that sets values. They can't all be wrong.
Who says it is overvalued? In the 50's the NZ Pound was worth 25% more than the Australian pound, and was on a par with Sterling. Then it slowly started losing value, and has only recently started re-gaining it. It is now worth only some 78% of the Australian.
As Bollard states, to lower the exchange rate, save more money , don't buy overseas items - which reminds me, I must get a new iPhone 5.
Please could someone, anyone here, give us the RBNZ definition of inflation? They must have one as they "target inflation" and, after all said and done, if you go a huntin' for pork, you surely gotta know what a pig looks like, don't you???
So please, give us the RBNZ definition of inflation???
Policy target agreement sets the the target at 1 to 3 percent over the medium term i believe.
To this day, I have not been able to find out why the reserve banks are so against inflation!!!
Inflation when it is rampant is dangerous as it may outstrip our ability to manke wage adjustments and makes the economy a more risky proposition but we need inflation more than ever.
The ONLY REAL LOSERS when we have inflation are the LENDERS i.e. banks because what they lent you 10 years ago will be insignificant if there is above 5-8% inflation i.e. we win they lose!
The world is currently in a situation where the debt of the too big to fails has found its way back to us the public!! The lenders will not forgo the debt, so we should be inflating our way out of this by making the debt less onerous by devaluing that debt i.e. increasing the money supply.
Our homes will be worth more yet our debts will remain the same and consumers will begin to spend and so on and so forth.
There is no other way. There must be game changing moment (WW1, WW2, Chinas emergence, rise of Asia, huge tax cuts during Reagan era, the emergence of the two income family and so on and so forth) as an agent for getting us out of this mess. The problem? the powerful lenders do not want a depreciation of their assets and hence our slow demise in a weak global economy!
So you think it is only banks who lose when we have inflation. Who lends money to the banks, and to businesses and to others who employ people? Savers do. That's who. People in Kiwisaver and retired people linving off their investments. That's who. People on low incomes also lose as the costs of imported goods and services go up in a never ending race with wages. That's who. Dr. bollard's point is that we do not save enough domestically to meet the needs of borrowers. Hence we have to borrow overseas and that puts upward pressure on the NZ dollar when the overseas borrowings are converted to NZ dollars.
Banks dont need savers to lend and your understanding of the modern banking system is the reason you have made the comment above.
Many people depositing money in a bank think that the bank simply holds it for them as a form of safekeeping. Since most people are both depositors in banks and borrowers from banks, it's a puzzle that both these ideas are held by the same people.
After all, how can a bank both hold a depositor's money and lend it out at the same time? The answer is that they can't. And they don't. Banks don't lend depositors money to new borrowers. They CREATE new accounts for new borrowers. And they don't hold depositors' money. They send it to the Central Bank as "reserves".
With the advent of factoring a bank can lend 10 more than it has actual cash on hand. It relies complex equations which enable to predict on a daily basis how much money will come in to the bank and how much goes out. Your bank account is not a true account of how much money you have in your account sitting there for you. Its in essence a tracking system to see how much the bank owes you if you wish to withdraw your money from them.
Re your investments, they will also grow in line with inflation unless you have invested in a low interest bearing account but you will find interest rates are always set to exceed the inflation rate otherwise you would put your money under your mattress.
Domestic savings is important, but that only comes from looking after the productive parts of the economy and not as you have, concentrating on what are the non productive aspects of the economy. A healthy buoyant economy can look after its poor, its elderly and infirm.
A simple example for you is this. A Jeep Cherokee 8 years ago was unaffordable as the US dollar was around 67 cents to the dollar. Now it is cheap and who benefits?? the car maker, the workers in the factory, the sales reps etc etc.....need I say more? Look at China and how we are loosing jobs left right and centre to them. Why??? cause they have kept the RMB low artificially so they are super competitive against us and the rest of the world. I dont think thats the right way about it, but its certainly making everyone uncomfortable in the "first world".
Yep - but all around a pig's a*se aint pork!
Inflation as by my understanding is this. It is a 'value' put on a comparison between imports and exports, our GDP and a few other factors that seem by the 'wave of a magic wand' comes to a figure, that defines how well a country is doing. Myself I think it is a load of rot and not conducive to a truer account of the books, as to how well or not a countries 'books' weather they are in the red or the black.
Cheers Dave
Pardon???
Is that the official RBNZ thinking?
We're the only ones who think our dollar's overvalued. It floats on the open market and it is what it is. It's easy to remember the old devaluation days. Continual wage adjustment. Continual inflation. I don't know what to do either, but I suggest we'll just have to grin and bear it!!!!!
We should devalue by printing up some cash and handing it evenly to every Kiwi. Anyone with debt must use it to pay it down and anyone with out can consider it compensation for the excessive borrowers eroding there true wages.
That's a bit like watering down the porridge...
Get real. Our dollar doesn't float on the open market. We have a central bank trying to control its value via the OCR. Problem is, they're failing.
RBNZ says, on its website:
There are various ways of measuring inflation. The one used in the Policy Targets Agreement is the CPI published by Statistics New Zealand. This records the change in the price of a weighted ‘basket’ of goods and services purchased by an ‘average’ New Zealand household. Statistics New Zealand weights and indexes the various items in the basket and forms the ‘all-groups’ index. The percentage change of this index is typically referred to as ‘CPI inflation’, and is usually expressed over both a quarterly and annual period.
http://www.rbnz.govt.nz/monpol/about/0053316.html
Except it ignores asset prices, which is the reason we've got the problem we have now. We have seen incredible inflation in home prices, yet the central bank is allowed to ignore it. The CPI is a thoroughly inadequate measure.
From the Statistics NZ website referenced above:
"The 1999 revision
Interest and residential section prices removed from the CPI all groups.
Introduction of the use of hedonic regression quality adjustment of used cars and fridge-freezers prices.
The inclusion of charges for bank account maintenance, bank transactions, and other bank fees into the ‘credit services’ group in the index"
"
Are you guys saying that the RBNZ, ".... records the change in the price of a weighted ‘basket’ of goods and services purchased by an ‘average’ New Zealand household."
Often a "change of price" is the natural balancing mechanism of supply and demand.
And you guys are telling me we are paying the RBNZ to interfere with it?
Yes, our government is telling the RBNZ to ensure consumer prices rise while the market is actually trying to bring prices down through deflation of the money supply. And yes, we pay them handsomely for the trouble.
(They are actually making the whole thing worse because low interest rates are adding to our debt burden, which will only increase the deflationary pressure because we are not using the loans very productively.)
Our interest rates don't add to our debt burden. We borrow in NZ$, and we pay a premium for that because we ask others to take our currency risk. And as we borrow more, we have to increase the interest rate we are prepared to pay for the luxury of those NZ$, driving up the carry trade again.
Why do we borrow in NZ$? Because politicians and Auckland City Council don't like to be trapped by foreign lenders when they behave stupidly economically wise . If we were borrowing foreign currency and making stupid economic decisions, we would be slammed immediately, so there would be no DPB, no tragic train sets, no glorious leader memorial societies, no spend up large on crap paintings by TePapa etc.
No. You are bieng told the RBNZ measures it.
Says who?
Dr Brash! Dr Bollard and other dudes who have never produced a darn thing to replace what they consume. Their maintenance is a tax on those who do produce and therefore an upward push on the cost of production and a negative for our productivity. They and their ilk ARE the problem!
We should devalue by printing up some cash and handing it evenly to every Kiwi. Anyone with debt must use it to pay it down and anyone with out can consider it compensation for the excessive borrowers eroding there true wages.
That is a superb idea. But it is revolutionary, and we are ruled by old money. They don't want things to change and would rather impoverish the world in order to keep their relative standing. I think something more radical than money-printing will be needed as a precursor...
Yes, really superb. One of the major reasons that the Kiwi is "overvalued" is that it is considered reliable - no-one believes that the government would start the presses to debase the currency. If that happened, then confidence would be lost and "value" would go straight down the toilet, along with living standards.
haha.. the NZD considered reliable??? try bringing the interest rate to 1% like in the US and see how "reliable" its perceived to be then.
The only reason the NZD is so high at the moment had to do with TWO things and only two things.
1. The USD is devalued against all currencies due to printing money:
2. the interest rate in AUS and NZ is some of the highest in the developed market.
Thats it!! if you want reliable you go to the swiss franc!
So does anybody know how much GOLD the Reserve Bank of New Zealand has in its reserves?
If the Reserve Bank started selling off its gold stash, that should cause the kiwi to drop ... or?
If they sold any gold they owned, they would be the biggest fools in the world. Seeing as the world is not going down the path of deflation and is instead pumping out money as fast as it can't to keep prices inflated, it would appear the only long-run option is a return to a gold standard. That means the price of gold would rocket. (What we're doing now is patently unsustainable and central banks know it, which is why worldwide they have become net buyers of gold.)
It's not relevant. The gold standard went out the window long ago.
The market is trying to correct by way of deflation. On the other hand, we have a government working against the market by ordering the central bank to give us price increases of 1-3 percent a year.
People need to make up their mind: free market or not? We already don't have a free market in our most important commodity -- money -- and the way we do things now serves primarily to keep the asset rich relatively better off than those who have to work for a living. It is wrong.
Time to reward work over wealth and stop letting the rich get the best of both worlds. They drove the market up; let them suffer when it comes down. Wage earners will pull through.
So muich for Winston Peters being teh champion of the elderly and retired people.
Lower the NZdollar as he now wants and the costs of everything(and I mean everything) will skyrocket.
Fuel will go to maybe $4/litre or more, which means that all goods in shops will increase in price. Those on fixed incomes will bear the brunt.
Winston nPeters, you are a blithering idiot.
David Parker is a socialist who wants nothing more than everybody being a dependent of the state.
And NZDollar is really only high against the USDollar (north american peso), so I fail to see why exporters want to be paid in that worthless currency, someone please explain.
Get paid in renmimbi (Chines currency) or OZDollars as these are two biggest export markets.
inflation measures the increase in price of everyday goods and services. It is essential for knowing the real value of wages: that is, how much of these everyday items people can actually buy.
Also, the rbnz stopped using the gold standard a long time ago.
Print more money just as United States and Japan are doing. This will bring NZ$ down. You do not have to adjust interst rate.
That may suit you, but not the majority who would be left worse off.; especially those cash savers..
The quality of this debate, and the average level of 'misinformed-ness' is incredible. Fortunately it is likely those involved in this discussion are not the decision-makers in this country, but rather those with little else to do but prattle on as above.
BS... the comments of someone trying to protect their nest egg from inflation that could come if there is a devaluation... most of Mr & Mrs average are not in this position, sorry buddy you will have to take the hit as well and stop pulling your snobby little 'they're too dumb to know' it's soooo see through.
I agree with your first statement, the level of mis-information put out there by vested interests and "Schools" of Economic thought has achieved a thoroughly confused state of affairs surrounding what exactly money is.
Only when all the other poor options have been tried will common sense prevail and a return financial soundness begin anew. "History doesn't always repeat but it often rhymes."
http://monetaryfreedom.org
Japan has been able to afford to print money because domestic savings have been sufficient to fund government debt over the last few decades. However that line gets crossed later this year and they will need to get money from the international markets, money which won't be given freely. At that stage you can expect to see credit downgrades and a currency decline. It won't be pretty. And the US is in the firing line already for the same end results.
Winston was the treasurer in 1996 and he didnt alter the RBA. What hypocrisy he spouts when convenient to him.
Extreme Crown spending is at the root of any problem NZ has to do with currency strength.Second, is citizens who after being taxed too much, borrow to maintain their standard of living - an expectation encouraged by state interventions like Working for Families even the National party seems to want to keep.
Has anybody factored in the huge increase in demand for NZ dollars that the billions and billions of Canterbury insurance claims has created. It seems to me that most of the insurer's assets (including EQC's reserves) will have been invested into something non - NZ dollar denominated. These will of course need to be realised (if not already - over the next 12-18 months) and NZ dollars purchased in order to settle NZ dollar claims. The consequent demand for NZ dollars will inevitably skew the equilibrium point on the supply / demand curve, even though the rebuild will also require the utilisation of at least some of those same NZ dollars to acquire the overseas goods and services needed for the rebuild and which cannot be generated internally. With this as the backdrop, all those budding economists who are calling for a drop in the currency and/or a return to rampant inflation, may wish to consider whether the resultant NZ dollar insurance proceeds will in fact enable them to achieve replacement of internationally priced goods and services. We may have these overseas funds "locked-in" but our next round of overseas "earnings" must be exactly that - EARNED - which means that unless all our exporters are only spending in NZ, devaluing our currency is but a short-term respite and will never be a substitute for increasing NZ Inc's productivity and competitiveness and / or the rest of the world's demand for our products and services.
The fact that $20 - $30 billion of aggregate insurance claim can have such a dramatic effect on our currency is a stark reminder of how thin our economy is.