OPENING SALVO 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 could s
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.
