Hard News by Russell Brown

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Hard News: Death Spiral!

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  • Craig Ranapia,

    All these spirals are making me sick...

    North Shore, Auckland • Since Nov 2006 • 12370 posts Report Reply

  • Idiot Savant,

    Pegging againstthe US dollar? But that's the half of the problem that people are steadfastly ignoring. Yes, we do have a nasty positive feedback loop between interest rates and the exchange rate. But if you look at the cross rates, we're not appreciating much against e.g. the $AU - it's all about the $US. Why? Because the $US is currently weakening against all other currencies due to Bush's poor economic policies. And that is not something our reserve bank can do anything at all about.

    Palmerston North • Since Nov 2006 • 1716 posts Report Reply

  • Rob Stowell,

    I/S- yeah, that's the elephant in the room. We (indirectly) import from a firm in taiwan, and they are now trading in euros. I don't know how common this is, but it seems increasingly inevitable. While there are some advantages to the US in the dollar lowering, it's uncomfortably vulnerable. The Chinese hold approx a trillion; they can afford to "peg" the yuan. But how long will they be happy to sit on it?

    Whakaraupo • Since Nov 2006 • 2108 posts Report Reply

  • BenWilson,

    He definitely is trying to talk it down and it definitely won't work. It is a dangerous game to play poker with the kind of money floating around that could run on our currency in a flash. Even a really good poker player loses a lot of the time. I don't know of any evidence that Cullen is a good poker player in this game. He's up against billionaires, and multibillion fund managers who have been doing it for decades.

    I'm not the least bit convinced we're in a crisis. The dollar is very high against the US because the US is incredibly low. Otherwise it's only a little bit high. Interest rates are rising and that will cool the property market all by itself, already is. Commodities are cheap, which is great. Exporters are hurting, importers are booming. There's always this flipside. Anyone in property has been doing well for years. Everyone not in property couldn't give a crap about interest rates, except maybe on their credit cards. And I guess everyone has to learn the hard way about what a fucked idea having one of those is.

    The only real negative is that when you're at the top of a wave you can only go down. Most likely the government will go down with it. At least they put Kiwisaver in place, the first serious attempt to address our pitiful savings and retirement planning. The impact will not really be felt for a decade or two, certainly not soon enough to save Labour now.

    Perhaps a bitter fight in which Key really puts his cards on the table could lead to a closer race, but his strategy of basically withholding information on all National policy has been working for him and I can't see him changing that. He'll just talk empty rhetoric and pick holes in the real policy that Labour is forced to implement simply by virtue of actually being the government. Then we will see his true nature and find out if National really have left their bad old ideas behind them.

    In a battle about currency speculation, I would back Key over Cullen any day. But it should be obvious that I hope we don't start doing that with our currency, because I back Soros and his ilk over Key any day, too.

    Auckland • Since Nov 2006 • 10650 posts Report Reply

  • BenWilson,

    I'm an exporter myself, and years ago made what is in retrospect a very wise, if novel decision. I pegged my charges to the *NZ* dollar. Why noone else ever thought of such a thing I don't know.

    Auckland • Since Nov 2006 • 10650 posts Report Reply

  • Paul Campbell,

    I consult for a company in the US - my income goes down every month - it's gone down 20% in the past year - but my mortgage goes up ... can't win. I've bitched about that here before, but it's life I know I have to live with it ....

    What I've been wondering more recently is why the imported stuff I buy hasn't gone down by 20% - in particular why aren't CDs 20% cheaper? (or iTunes or ...) I bought the new White Stripes CD in Amoeba in Berkeley last month for $US9.99 - Real Groovy (who seem to get some of their cheapo 2nd hand CDs from Amoeba if I believe the stickers) still charge NZ$30+ - admittedly that was a special price - normally I'd expect to pay US$13-15 which would be OK back when a NZ$ was US50c but it's not now - that $15 ought to map to NZ$19

    Someone's making out really well somewhere

    Dunedin • Since Nov 2006 • 2622 posts Report Reply

  • David Slack,

    We (indirectly) import from a firm in taiwan, and they are now trading in euros.

    I run my website in US dollars. It might be time to change that to Euro for traffic outside the US.

    Devonport • Since Nov 2006 • 599 posts Report Reply

  • Graeme Edgeler,

    Double ouch. Still, this is form for New Zealand First. As Holden Republic and others pointed out last year, Barbara Stewart's failed bill to reduce the number of MPs in Parliament didn't make much sense either.

    It made perfect sense. It was suitably drafted. If reduction in the number of MPs is sought, then reducing the number of list MPs is a perfectly valid way of going about it - particularly if you don't like MMP, and prefer giving the electorate the opportunity to vote out people.

    It was just a bad idea.

    This potentially encompasses a good idea. It's just poorly executed.

    Wellington, New Zealand • Since Nov 2006 • 3207 posts Report Reply

  • Rob Stowell,

    What I've been wondering more recently is why the imported stuff I buy hasn't gone down by 20%

    The other side of the "death spiral" is what would happen if the NZ sank rapidly to a "comfortable" US$0.65.
    We'd see some very uncomfortable price inflation- fuel being the one that would do the most damage. Bollard could ignore it as a "one-off"- but for most people it'd probably hurt more than the interest rates are starting to- and fuel wage inflation and then...

    Whakaraupo • Since Nov 2006 • 2108 posts Report Reply

  • James Clark,

    Because the $US is currently weakening against all other currencies due to Bush's poor economic policies. And that is not something our reserve bank can do anything at all about.

    But surely it is NZ's interest rates that are the primary driver for the high currency. The TWI is peaking, there has been 30% appreciation against the Euro and similar rises against most currencies.

    http://www.nbnz.co.nz/economics/exchange/nzdtwi.htm

    If NZ's central bank rate was 5% then the weak USD would not really pose such a problem.

    exile • Since Nov 2006 • 18 posts Report Reply

  • Paul Campbell,

    right - but it would also make Bollard happy as it would cool the economy.

    One of the things I've always wondered about - raising interest rates cools the economy by slowing down the housing market ... but it also heats it up by making imported good cheaper (despite my annoyed comments above) - what I don't know and don't know how to find out is how does that balance work out? are there situations where dropping interest rates suddenly actually cool the economy more than raising them?

    OTOH maybe the reserve bank could do better with the housing market simply by using their money to pay the TV channels to stop running those "buy a house, do it up and make millions" shows

    Dunedin • Since Nov 2006 • 2622 posts Report Reply

  • Don Christie,

    Roger Kerr has never cared about the transition cost of journeying to the small-government nirvana he preaches.

    Damn straight. He is also pretty good at ignoring the cost to NZ of effective monopoly in telecommunications, going so far as to argue that it is a good thing.

    I don't think the BRT gives much of a fig about businesses in NZ.

    Pegging export prices in NZ$s is what we try to do as well but it is not always accepted. A few weeks ago we put in a proposal for some work in Australia, I had not made it clear which currency the pricing was using.

    A phone call to clarify had me torn with doubt AU$ or NZ$. In the end I plumbed for AU$. "Great", came the reply "just what we hoped". Clients like certainty as well.

    Wellington • Since Nov 2006 • 1645 posts Report Reply

  • Don Christie,

    By the way, I also feel a hell of a lot less poor these days compared to friends overseas.

    Wellington • Since Nov 2006 • 1645 posts Report Reply

  • Gary Hutchings,

    But surely it is NZ's interest rates that are the primary driver for the high currency. The TWI is peaking, there has been 30% appreciation against the Euro and similar rises against most currencies.

    If it was just a NZ Dollar story, then yes we could do something about it, but with the Pound, Canadian and Australian Dollars, all at 25-30 yr highs against the US dollars, then it becomes more than just "our problem",

    We remain at around 90 against the Aussie, which while high is nowhere near the peak of a few years ago,

    One big concern is if the NZ dollar falls significantly we will see rampent rises in Fuel prices, which will flow through to all parts of the economy,

    The Reserve Bank needed to jump on the housing market last year, it sat on its hands, and when the big rise in Dairy came through this year, they had no where to hid,

    wellington • Since Nov 2006 • 108 posts Report Reply

  • Idiot Savant,

    I've been looking at the RBNZ's exchange-rate/TWI time-series here:

    http://www.rbnz.govt.nz/statistics/exandint/b1/download.html

    Since the most recent trough in our exchange rates in Apr - Jun 2006, the NZ$ has appreciated 8.5% against the AU$, 14% against the Pound, 16% against the Euro, and 22% against the US$. But the others are all within their usual parameters - it's the US which is well out of step.

    If you go back to the big slump in 2001, its even worse - the NZ$ has increased 19% against the AU$, 20% against the Euro and 38% agains tthe Pound. But its almost doubled against the US (and looks likely to sometime in the next few days).

    There's a curious myopia in the media that the value of our currency is about what we do. It is, but it is also (and sometimes much more) about what other, larger economies do. And in current circumstances, all I can say is that if you are a farmer or other person being screwed by the US$, you'd best get used to it. Because our Reserve bank can't halt the fall of their currency.

    Palmerston North • Since Nov 2006 • 1716 posts Report Reply

  • Judi Lapsley Miller,

    Ben said:

    I'm an exporter myself, and years ago made what is in retrospect a very wise, if novel decision. I pegged my charges to the *NZ* dollar. Why noone else ever thought of such a thing I don't know.

    Nice if you can do it - my main US client works from a very fixed budget so would not cope at all well if the amount I billed each month was not fixed too. But the flip side is that if you're in the game long enough, eventually the dollar drops and you get a nice pay rise. I felt physical pain banking some USD checks this week.

    Judi

    Wellington • Since Nov 2006 • 106 posts Report Reply

  • Russell Brown,

    Pegging against the US dollar? But that's the half of the problem that people are steadfastly ignoring. Yes, we do have a nasty positive feedback loop between interest rates and the exchange rate. But if you look at the cross rates, we're not appreciating much against e.g. the $AU - it's all about the $US. Why? Because the $US is currently weakening against all other currencies due to Bush's poor economic policies. And that is not something our reserve bank can do anything at all about.

    Surely not. After all, William Kristol's column in Time last week said:

    We've had 5 1/2 years of robust economic growth, low unemployment and a stock-market recovery ... It may well be that no other country has ever been stronger than the U.S. today--and it may well be that no other people in human history have ever had it quite so good.

    His next published work was a WaPo column headed Why Bush Will Be A Winner.

    Gotta love those neocons.

    Auckland • Since Nov 2006 • 22830 posts Report Reply

  • Rich of Observationz,

    Even at the current parity, prices and wages in NZ are much lower than in most other developed countries.

    I/S is right that a lot of the headline exchange rate is the US dollar being weak - and we can do nothing about them trying to build an imperium on borrowed money.

    I'd also point out that countries such as Switzerland have strong export industries despite a very unfavourable parity - firms like Novartis, ABB or UBS seem to be able to export and grow despite having expenses out of line with overseas competitors.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Neil Smart,

    The problem with economic theory is there are so many variables. The monetary supply theory which says that raising the price (interest rate) stifles supply only works if supply is limited. It works fine for the US $ and for the Euro in Europe but NZ is the size of a small town in either of the large conglomerate countries.There was a paper I did that said that if a large country subsidies a commodity (money in this case) the world price drops. The same effect applies if someone floods the world with money. The US is flooding the world with its riches.

    By raising our price (interest rate) to higher than the rest of the world we encourage the oversupply of global money supply to come into NZ. This oversupply is caused by the US leaking its weatlth (overspending). The only answer must surely be reduce interest rates to a level that discourages investors from putting their money in NZ. It probably does not need to be much below. I am not going to try guess how much. Then the oversupply will disappear and the price (interest rate) will come down. But it takes politaical courage and we have not seen much of that .

    Since Nov 2006 • 71 posts Report Reply

  • WH,

    The point about the fall of the US dollar is a good one. Still, if our own currency is "significantly overvalued" (especially against the yen) then it is our interest rates that are to blame. I take it that Cullen gets his advice on this point from Treasury?

    Moreover, high interest rates themselves hurt our economy by making productive investment more expensive. They also effectively lower the standard of living of people with mortgages. High interest rates and an overvalued currency will hurt us in long run ways that cheap TV's can't compensate us for.

    Otherwise Cullen has been an outstanding Finance Minister. We are lucky to have him I think.

    Since Nov 2006 • 797 posts Report Reply

  • WH,

    Russell,

    The WaPo published a rebuttal piece yesterday:
    Why Bush is a loser

    Since Nov 2006 • 797 posts Report Reply

  • Idiot Savant,

    Weston: its the same story with the Yen as it is with the US. Check out the long-term trend on the Euro-Yen exchange rate from the European Central Bank's time-series:

    http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-jpy.en.html

    (Hey! We can play at being John Key for a day! :)

    High interest rates are indeed bad, and there is a death spiral. But it ain't the only problem. And at the end of the day, the farmers are just going to have to wear those high exchange rates, because I don't see Bush changing his policies for them.

    Palmerston North • Since Nov 2006 • 1716 posts Report Reply

  • stephen walker,

    why do you all ignore the yen? this situation is overwhelmingly driven by the yen carry trade. and contrary to the pathetic NZ media, that doesn't mean japanese housewives buying nz dollar retail bonds. how glib. no, the yen carry trade involves US-based hedge funds borrowing billions of yen from japanese banks at ultralow interest rates, selling the yen and buying nz dollars, Aus dollars or other high-yielding currencies. this money coming in is what fuels our housing "boom" (bubble).

    in 12 months the nz dollar has appreciated MORE against the yen than against the US dollar--up 35%.

    Even at the current parity, prices and wages in NZ are much lower than in most other developed countries.

    wages, yes. prices, no.
    prices in NZ are out of control at the current exchange rate. most things are cheaper in japan. basics: food, rent, transport, etc. a direct reversal of five years ago.

    nagano • Since Nov 2006 • 645 posts Report Reply

  • Idiot Savant,

    Post (with graph and links) here

    Palmerston North • Since Nov 2006 • 1716 posts Report Reply

  • Russell Brown,

    Here's a question: where's the American anguish about their plummeting exchange rate?

    In a massively importing economy, shouldn't households be feeling the squeeze? Yet I can't recall reading any commentary of that nature.

    Auckland • Since Nov 2006 • 22830 posts Report Reply

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