Wednesday, January 30, 2013

Herald on the exchange rate

We're by no stretch of the imagination economists, which given Gareth Morgan's utterances over the last week is probably a good thing. But we find it hard to disagree with the Herald's editorial on the exchange rate this morning; check this out:

Times are very tough in manufacturing. The global recession has merely contributed an additional woe to a sector whose share of economic activity has been declining for more than two decades. An inquiry run by Labour, the Greens and New Zealand First has provided manufacturers with a platform to express their anguish over this state of affairs and what they see as the reasons for it. Virtually as one, they have highlighted the current high dollar. They want the Reserve Bank to be forced to focus on the exchange rate, rather than just inflation control. This is a recurring plea when the dollar is riding high. As in the past, it should go unheeded.
That will happen not only because the National Party is not part of this exercise and, indeed, blocked an official parliamentary inquiry. There are more fundamental issues related to the reality of this country's economy. The dollar has a marked tendency to rise and fall with world prices for our export commodities. When it is high, it makes non-commodity exporters, including manufacturers, and firms that compete with imports, less profitable.
But the reliance on commodities and a floating exchange rate means there will also always be periods when they also benefit from a low dollar. That situation will change, and greater currency stability will ensue, only if the economy is strengthened and substantially transformed, partly through New Zealand becoming more of an exporter of high-value products.
Despite this cyclical reality, the Greens, for one, support the call for the exchange rate to be part of the Reserve Bank's mandate. After all, they note, its Australian counterpart has multiple objectives. In practice, however, this notion is far from straightforward. Any attempt to orchestrate a lower exchange rate would be inimical to the sole focus on price stability of this country's Reserve Bank. It is extremely difficult to reduce the external value of the dollar without also lowering its domestic value, letting inflation loose.

Inflation is at historic lows. We reckon that far more people would be affected if inflation was suddenly allowed to run rampant, and that would cause far more damage to the domestic economy, especially for those on fixed incomes.

The Herald continues:

There is nothing to suggest that New Zealand's present approach is wrong. The dangers of inflation should never be under-estimated. Nor should the fact that it penalises the poor and savers most. Lowering the external value of the currency would also make New Zealand assets cheaper to overseas buyers. The consequence of these assets being for sale at bargain prices is unlikely to be relished by those listening to the manufacturers' appeals.
Those MPs also know that when Labour was in power, it initiated several reviews of the monetary policy arrangements. These included the 2001 Svensson Review and a select committee inquiry which reported in 2008. Both recommended only minor changes to the status quo. The MPs also know that the multiple objectives listed in the Reserve Bank of Australia's mandate have not prevented the Australian dollar from becoming extremely strong. Indeed, that strength, in New Zealand manufacturers' biggest market, has been a significant offset to their struggles in other areas. That situation reflects the Reserve Bank of Australia's view of where its real priorities lie.
The outlook is not all bleak for manufacturers. Many will get a boost from the expected surge in construction activity over the next few years. The positive factors supporting the dollar now - relatively high commodity prices, especially, and higher forecast growth than many developed countries - will also pass. Manufacturers need to amend their long-standing view that the working of the Reserve Bank is responsible for their plight. Other factors, not least the emergence of China, have been far more significant. They need also to recognise that a low dollar will never be the catalyst for a higher standard of living.

Whilst we are sympathetic to the plight of exporters, we agree with the Herald leader writer's assessment. It's not that long ago that the New Zealand dollar was around $0.50 to the US dollar, and exporters were making a killing. These things are cyclical in nature. And though those advocating a cut to New Zealand's exchange rate cite Australia as an example, let's not forget that the Australian dollar is at historic highs against the Greenback.

The level of our exchange rate is cyclical in nature. Sure; at the moment the cross-rate in uncomfortably high, but intervention by the Reserve Bank as proposed by Labour, the Greens and NZ First will be a stop-gap measure at best. New Zealand's economy is small-to-microscopic compared to the economies of the countries we trade with.

It is hard to see this "inquiry" as anything more than political grandstanding by the Opposition parties. In this case however, the "cures" that they advocate will cause the patient far more grief in the long term than the underlying condition. We need to accept that we are but a small fish in a large pond, and understand that the interventionist policies proposed by the Left are a relic of a bygone era, such as that presided over by the late Sir Robert Muldoon. Do we really want to go back there?

1 comment:

James Stephenson said...

While we're on the subject, here's what the UK's pension funds have told Treasury Select Committee:

QE has cost final salary pension schemes GBP90bn...that's just final salary schemes, by the way, it doesn't include the impact on individuals paying into personal salary investment schemes.

Money printing is a stealth tax on savers.