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David Parker’s currency fantasy

As managing partner of a South Island law firm, David Parker was a big fish in a little pond.  He still is as finance spokesman for a failing opposition party.  This may explain his delusion that the Reserve Bank of New Zealand (RBNZ) could successfully confront the markets and drive down the dollar.

“Pull the levers”
Mr Parker has recently announced he would “pull the levers” to get the dollar down.  His rationale is that the US Federal Reserve is printing yet more money, devaluing its dollar and pushing ours up.  Other trading partners, he says, are also trying to devalue their currencies, so we should too.

Put aside the irony of Labour wanting to increase the price of petrol, milk, sugar, kid’s shoes, fruit, vegetables, meat, fish and bread to subsidise Carter Holt Harvey, Rio Tinto Alcan and Norske Skog.

More fundamental is that Mr Parker’s objective could not practically be achieved unless New Zealand abandoned an independent monetary policy (as Portugal, Italy, Greece and Spain did when they joined the euro) or introduced capital controls (like China).  Neither is Labour’s policy, nor likely to be.  In practice, that leaves direct intervention in the markets.

$210 billion risk
The case for currency intervention is, at best, mixed.

In 1992, the Bank of England lost British taxpayers NZ$10.5 billion in today’s money trying unsuccessfully to keep the pound in the European Exchange Rate Mechanism.

Japan had a policy of holding the yen down against the US dollar.  In 2010, it spent over NZ$41 billion trying, losing its taxpayers around NZ$7.4 billion.  Last year, it spent nearly NZ$210 billion, for losses, luckily, of only NZ$931 million.  Needless to say, despite this vast expenditure, far greater than anything the RBNZ could contemplate, the yen appreciated over 18% against the US dollar.

Swiss efforts have been somewhat more successful.  For losses of only NZ$26 billion since 2008, the franc has been roughly stable against the euro for the last year – although since 2008 it has bounced around between €0.62 and €0.92 with a net appreciation of over 34%.

The RBNZ has a better record.  Its NZ$4 billion of interventions in the dying days of the Clark regime achieved an estimated net profit of NZ$411 million over the next four years, and may even have had an effect.  After the only publicised intervention, on June 11, 2007, the dollar fell from around US$0.765 to US$0.75, although it was above US$0.80 within six weeks.

It is fanciful that the little old RBNZ could intervene in the market to materially drive down the New Zealand dollar – which in reality means pushing up the Australian dollar, renminbi, US dollar, yen, won and euro – especially if those major powers are trying to push their currencies down.  Perhaps Mr Parker thinks all currencies could fall at once.

$1US.12 kiwi
Mr Parker might argue he advocates neither abandoning monetary independence nor introducing capital controls nor risking billions of dollars on interventions.

Instead, he says, it is just about “broadening” the RBNZ’s objectives.

The problem with that is that, since 1999, the RBNZ’s policy targets agreement has demanded “the bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.”  It has always positioned monetary policy in a broader economic and social context, and uses tools other than just the official cash rate.

Mr Parker also appears ignorant of the massive intellectual resources devoted by the bank to try to solve the problem of how to reduce currency peaks while avoiding price rises for petrol, milk and so forth.  So have central bankers and academics globally.

These are smart people with a Nobel Prize as an incentive, along with the eternal gratitude of both consumers and exporters.

Alas, they have all failed and despite the different strategies of central banks, all major currencies seem to move around, from peak to trough, by about 30-50%.  New Zealand’s currency moves from peak to trough a tiny bit more than the Australian or US dollars, the euro or the pound.  But it moves less from peak to trough than the Canadian dollar or yen, despite the Bank of Japan’s interventions.

Historically, New Zealand exporters lived comfortably with a dollar as high as US$1.12.  West Germany became the manufacturing powerhouse of the world while taking pride in the strength of the deutschmark.

Such reflections would serve Mr Parker far better than fantasies about RBNZ domination of global financial markets.

More by Matthew Hooton

Comments and questions
37

The way you switch off demand for the NZ dollar is to reduce the OCR to close to zero. This does not necessarily increase the price of food or fuel, it just removes the incentive for inflow of foreign capital.

Of course, to do this would mean the Reserve Bank taking an independent decision as it is not controlled in any way by the National Government (stop laughing at the back!)

Putting aside the rather drastic consequences of a near-zero OCR, If the NZD drops, then the price of food, and fuel, and many many other things, goes up. It's really very simple logic. Wishing that it won't happen will have no effect.

You can offset fuel increases up to about 20% through reducing excise duty. That has a feed-through effect on food and other pricing that depends on fuel.

The bet is that you gain back more in tax payments from exporters who grow with a lower dollar. Conditions are actually right for this now as the recent credit crunch has turned down demand for consumer goods

Excuse me ? Reduce excise duty ? This is becoming more of a fairy tale. Why not set a flat income tax rate at the same time ? Oh, hold on, that was Roget Douglas' plan - and he floated the exchange rate !!!

The problem with that is that you create internal inflationary pressure - and then the RB has no further room to move if needed later in the event of low growth. Then you end up like the US.
Further - in regards to Labour's comments about quantitative easing ; when has printing money ever been a good solution? Look what happened to Germany in the 1920-30s.

You don't really get the whole interest rates, OCR, currency thing do you?

Just saying .....

Oh, how I wish all governments could agree to not interfere with the value of any medium used in trading. The value should be set by the traders.
But, sadly Governments just can't seem to help themselves.
They call it "sovereignty"! I call it ,"an attempt to disguise their failures at governing".

some politicians really step up when showing us how flakey they can be.

US1.12? I used to be close to US2. That's why the old 'half a crown' was known as 'half a dollar'.

I don't think people advocating intervention to bring down the dollar have really thought through the consequences of our dollar moving, say, from US$80 to US$60. A litre of petrol at NZ$3? What would that do to goods reliant upon road transport for delivery and to inflation generally? Good for exporters, yes. For the consumer, no. It would need a hard sell to the voter.

Matthew,

Could you provide a reference for your statement that the BoE lost British taxpayers NZ$10.5 billion. You should also note that the BoE was required, under the terms of the Maastricht Treaty, to keep its currency within the limits defined by the ERM.

Your article fails to discuss the underlying problem, namely the current account deficit. The reason our current account deficit continues to accumulate is that we are unable to repay it, other than improving our trade balance or selling assets (which may then have an income leakage). The idea that the currency should be lower just so exporters can make higher profits is misleading. The currency needs to be lower in order to lower our current account deficit. It is as simple as that. Along with asset price inflation, this has been ignored by successive governments to the detriment of the general economy.

One could argue that the exchange rate reflects all these concerns and so there is nothing to worry about. That's true in a theoretical context. However, if a government purports to be interested in a stable and prosperous economy, plus price stability (a slippery term), it would be taking action to deal with a severely imbalanced situation.

You also state "massive intellectual resources" have been devoted to solving this problem. Really? Where do you get that idea from? More to the point, why do you assume the "smartest guys in the room" always have the correct answers? Like Enron? Like the Big Five Us Investment Banks? Like LTCM (Long Term Capital Management), where the Nobel Prize winning team was regarded as having created the "finest finance faculty in the world"? You may wish to re-examine your assumptions here.

Central banks all over the world have been making poor and wrong decision for a long time. The Bank of Japan recently engaged in another round of huge "monetary stimulus"....20 years after it started the process. The US Federal Reserve just announced a $40b a month purchase of MBS, otherwise known as QE3 or QE2I (to infinity). This is all just the shuffling of numbers around bank's balance sheets. Is this smart?

I agree there are huge intellectual resources, around the world, devoted to the study of money, finance and currency. However. not many are working for governments. As you constantly remind us, government structures don't tend to encourage innovative, enlightened or creative thinking.

The reality is that there are solutions to the problem and they should be explored. Of course, one must admit that there is a problem in the first place. That, often, is the hardest step to take.

Re fuel, when the Govt takes over half the price of a litre it has plenty of flexibility to offset a 20% difference... BTW exporters actually earn this country the money, not importers so they can wait for a bit.

You damned fool.
1. Roads need maintenance and policing.
2. As savers need borrowers, exporters need importers.
Follow me; one and one make two. Two and two make four. Three and three .......................

Hey Anonymous, when you put you name to what you say I'll take you more seriously.... so roads, we are only building them to the absrd 12 billion cost to accommodate all the trucks whose chief lobbyists are of course ex Nat & ACT members of Parliament and if we had any sense it'd pretty well all be on a rail anyway but that's another story. No we can ease up on the road spending a bit if it means we can have a true export lead recovery in earnings, you and your mates make it sound like all these positions are locked in via Moses like commandments on tablets of stone... they are not, so lift your head a bit and broaden your horizon, in these times you have to do what you have to do... so relax.

The smartest thing to do would be for treasury to create some debt free money out of thin air this would devalue the $kiwi. The new money should then be distributed evenly to every NZ citizen with the condition that it goes to pay any debt outstanding first. This way the whole point of devaluing, lessen the debt load, would be achieved. But as we have a gang of thieves running the show this will never happen and devaluing will be sold to us as more debt .

Cough cough ... inflation! .... cough cough

If Parker is the answer then it had to be a stupid question.

haha - he shoots...he scores!

Yep - where Labour are part of the equation, the answer will always come out questionable and barely credible, some might say corrupt even.... especially in citizenship for sale matters.

Parker would be far better to spent his energies helping his Meat Worker Union affiliates sort out their 6 years of overdue financial reporting they were supposed to file annually.

How embarrassing for Parker and the Labour Party to have their funding source and affiliates found to be operating illegally for over 6 years... and Parker wants NZ to believe him to & Labour to be credible?

If Parker doesn't know anything about this - i'm sure Rodney will help him with a stear in the right direction...and hopefully not far behind him, will be the authorities looking into these very, very curious goings on... it does seem to have a wafting stench of corruption with it...

I see this Is "independent" commentary. The facts are this debate is mainstream an economist all over the world have modified there view on the primacy of inflation targeting. If its a stupid debate "open it up" and expose the stupidity. The attempts to shut it down speak volumes and suggests fear at validity of the counter argument.

Economic fantasies and magical thinking see to be the stock in trade of the New Zealand Labour Party and its supporters. Well, that's life on Labour's magic Planet. Tune in next week for more stories from Labour's magic planet, this time from the Gulags of the Green zone..........

You misrepresent the FX risk. The Bank of England lost money buying sterling to SUPPORT its unsustainably high value, a very different scenario from selling NZ dollars that you are printing in order to FORCE DOWN its value. The 'we'll print them if you buy them' scenario is much more like a one way bet in the RB's favour, which is why those with positions in the Kiwi hate the idea.

You must be the smart twin of the Matthew that wrote that dreadful Christchurch CBD piece about a month ago. Well done, a timely take-down of the foolish notions sparking away randomly in the heads of the Left and Bernard Hickey.

If Fuel prices will increase under a decreased Kiwi,then the inverse would hold as say in 2008 both the Oil price was around 30% greater then today's price,and the currency was around 10% less at the peak,how come the pump price is around the same allowing for the stealth taxes? a problematic argument at least.

Secondly if we use the widely quoted argument of around 10b$ in lost earnings over the last 3 yrs due to an appreciating TWI,could the increased cash in the NZ economy,increased say farm debt by 3b,decreased tax revenue,and decreased employment? as we have seen.

Your Nobel prize diversion is at best tacky, the underlying problem is that the Quants (qualitative analysts) have little theory to bind the statistical models to.

An argument that is often overlooked by media commentators such as yourself ( read maths problem) is that the so called models are very primitive and risk adverse a point made by Robert May.( 2008) May and Haldane 2011 eg

In the run-up to the recent financial crisis, an increasingly elaborate set of financial instruments emerged, intended to optimize returns to individual institutions with seemingly minimal risk. Essentially no attention was given to their possible effects on the stability of the system as a whole. Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, we explore the interplay between complexity and stability in deliberately simplified models of financial networks. We suggest some policy lessons that can be drawn from such models, with the explicit aim of minimizing systemic risk.

It took a generation for ecological models to adapt The same is likely to be true of banking and finance.

Andrew Lo summarized it best

“The problem is not that there are too many physicists on Wall Street, but that there are not enough.” He recalled one investment banker telling him that Wall Street was not looking for Ph.D.s, but rather P.S.D.s—poor, smart, and a deep desire to get rich.

Sorry Matthew Hooton is now an expert economist now? wow .

As far as increases in fuel cost following a big devaluation. The actual cost of fuel is under 40% of the cost. The rest is tax and not affected by currency.
Fuel companies should display all the costs that make up the retail price. This would get the public off their backs and show where the real costs come from.

How is that the Americans, Swiss and others can engineer lower exchange rates but NZ can't? This is not about currency intervention it's about supporting the parasitic government and non-traded sector (as usual). The views expressed by the writer are discredited 1980s economic propaganda perpetuated to benefit the unproductive parts of the economy (where all the inflationary pressures are generated).

A fairly poor article economically; its hard to know where to start. At least you've joined the debate.
The Brits in 92 were trying to keep the pound up, massive difference to getting it down.
The Swiss, Japanese and others have naturally appreciating currencies because they have massive current account surpluses. They know they will make paper losses on their purchases of foreign assets, but they've printed the money to do so, so are quids in, and have helped their industries in the meantime.
To move the NZD down you do not need to move every other currency up. Like sailing away from an island, you move the boat, not the island.
But yes, to fix the current account, relative prices of imported goods will need to be more expensive than domestically produced ones. There are though plenty of levers to pull to encourage consumption into domestically produced, rather than foreign produced, goods and services. That will help employment, manufacturers, tourism; and lead in the end to an ability to buy more foreign stuff if we want. Borrowing $200 million a week for cheaper petrol is a mugs game.

Idiot: "To move the NZD down you do not need to move every other currency up."
Of course you do. Currencies only have value relative to one another. To get the NZD down against the USD you have to "print" NZDs and buy USDs with them. That is the only way.

The author writes:
"It is fanciful that the little old RBNZ could intervene in the market to materially drive down the New Zealand dollar – which in reality means pushing up the Australian dollar, renminbi, US dollar, yen, won and euro – especially if those major powers are trying to push their currencies down. ".
He implies that we would need to make a difference to the USD relative to every other country, which would be fanciful. We only need to engineer a change to the NZD. Suppose our relevant money supply is US$100 billion equivalent, then the equivalent US$ money supply would be roughly US$10 trillion. Suppose we bought $10 billion of foreign reserves with printed NZ money, that would have the equivalent effect on our currency, as the US printing $1 trillion of their currency. As it happens they have recently printed $2 trillion. The point is our relative intervention required is relative to our money supply. The US frankly won't care what we do, but if they did, they wouldn't print $1 trillion just to make life difficult for us.

If every year you where increasing the mortgage on your house to sustain basics would you be worried? That's New Zealand's position. The arguments above are like children in a house "but we want" . It makes me sick to hear this bleating while our countries balance sheet gets weaker by the day.

If we don't support exporters (income) then we have to reduce spending (costs). Make up your mind but either will cause pain in the economy eventually.

We already have one of the lowest net crown debts to GDP in the OECD thanks to Labour and Cullen fund. Private borrowing, largely for speculative behavior and consumption is our problem. That doesn't get fixed with more of the same behavior.

Only a fool keeps doing the same thing and expects a different outcome. 40 years of going backwards on the ballance sheet so your not going to fix it with tinkering around the edges.

I want to hand over a country to my grandkids at least in a similar state to the one I inherited. Right now that's a huge ask. Decreasing ownership of New Zealands wealth creating assets / businesses means increased interest bills which behaves no differently to a tax from a foreign country. Ie you pay it and get no survices i return. So it might feel good at the time you sell an asett but the pain goes on for ever.

So look after exporters, lower your standard of living, or sell off your assets. The latter just delays the impact, it doesn't address the cause. Your choice New Zealand!

For laissez faire's sake, Selwyn, take your beret off, and read some Austrian school economics.

I am actually quite happy with the current level of the exchange rate as prices of imported goods, and that is the marjority of what households need, including capital, are more affordable - it will hopefull also stimulate business investment, as imports of capital goods become cheaper, which will hopefully improve NZ productivity in the long run and make NZ businesses more competitive. The devaluation for competitive reasons is not sustainable.

"Pulling all the levers"...for some reason I thought of Homer Simpson

Please - a Lawyer AND a Labour party Minister trying to advocate economic policy! Laughable.

Hedgehog, your comment typifies the average Kiwi understanding of economics. Wow, a high exchange rate against the USD means we can import goods really cheap! Have you ever considered if your expenses (imports, etc) exceed your income (exports) then you can either borrow to fund the loses or stop spending!!! ......."it will hopefully stimulate business investment......hopefully improve NZ productivity..." Are you serious??? You have a lot of hope but nothing else. For an economy to flourish goods must be grown, manufactured, processed and sold= export dollars into our economy. (INCOME). All can't be financial power houses such as Singapore. Our manufacturing sector has been knocked around by cheap and nasty goods from Asia...whilst a section of our community; factory and process workers have gone onto the dole. Labours mantra was; we will upskill our labour force...tell a factory worker "you are now to become an accountant"......"we are will ride the knowledge wave"; tell that to the factory worker now on the dole. Manufacturers in China receive government rebates for all exports....as a NZ manufacturer exporting into Europe, UK and Australia I get zero help from my government in any form.

From Michael Pento, a multi-billion $ fund manager in the USA:
The U.S. dollar peaked at 160 on the Dollar Index back in 1985--the USD Index is comprised from a basket of our 6 largest trading partners. This index has lost 50% of its value since that time and stands at just 79 today. According to the economics of today’s central bankers, this should have engendered a U.S. manufacturing renaissance, a huge trade surplus and a vibrant economy.
You just cannot ignore the fact that governments and central banks are engaged in a global currency war. But we already know who the losers are in this battle; they will be the middle classes and the economies of the developed world. There will be no sustained economic growth until central bankers make peace with their currencies and put aside the notion that prosperity can come from inflation.

From my own personal experience:
The NZD was 420 yen in 1973, now 64. So devaluation over the years has made us prosperous relative to Japan ??

The first comment from Dr don brash was to acknowledge that the dollar was overvalued. The argument was then put that we could not do anything about it. To support this argument comments have put foward the argument that we don't actually want equlibrium that for x y z reason we prefer the dollar to be over valued. The main reason seems to be "I'm not an economist and never studied monetary policy, but I'm with that fella over there."