Sound as the pound

8:57 Jun 12, 2007 14

Public Address got on the phone yesterday and asked the disgraced World Bank chief Paul Wolfowitz if he could shine some big brain power on the problem of New Zealand's high dollar. The interview began with a little rancour.

Wolfowitz. But it's 3am. Are you insane?

Public Address. Sorry about that, it's just that our Reserve Bank governor has intervened in the market, and we can't help wondering if George Soros and his friends might not be about to get mediaeval on his ass.

W. Oh, well that's different. As you may know, imbalances in the mediaeval money markets were in many ways the precursor to the problems of tyranny in the Ottoman Empire, which

PA. [Interrupting] Yes. We were wondering if the markets might just beat up Alan Bollard like they did Norman Lamont in 1992.

W. Oh yeah, that was spectacular. That guy had balls. He blew 6 billion pounds trying to beat the market. What's this guy Bollard like? Is he staunch? Is he resolute? Do you think he might need some help? I'm between contracts at the moment, you know.

PA. Don't know. To be honest, you might be a bit too much of a zealot for his blood.

W. Zealot? In what way? Who says?

PA. Well some people say that when you were getting the Iraq War on the launching pad you inflated the myth of a dangerous enemy, and that many people died because of it.

W. And your point?

PA. Well, is it possible that you can get obsessed with a theory and end up doing more harm than good?

W. I have no idea what you're talking about. Look, do you have Bollard's number?

14 responses to this post

Marcus Neiman, 10:49 Jun 12, 2007

To be fair, I suspect that it would be much easier to ease down the NZ dollar in 2007 that it was to try and prop up the Pound in 1992, given the relative states of those two economies...
It does seem though that the RBNZ aren't sparing any expense in doing this though. Surely it would have been much cheaper for Bollard and Cullen to make public statements describing NZ as a banana republic, with a massive current account deficit, ever increasing private debt being used on consumption rather than purchasing productive assets, and a gaping lack of savings.

Sydney • Since Feb 2007 • 107 posts Report
Nobody Important, 13:41 Jun 12, 2007

Thank you! I thought I was the only one who remembered this. I've mentioned it in RB's blog so I won't repeat myself here. Suffice to say anyone who wants to know how these things work (fail) should wiki either Soros or Black Wednesday.
Currency speculators love this sort of thing, esp if they risking clients money.

expat • Since Mar 2007 • 319 posts Report
Neil Smart, 14:42 Jun 12, 2007

Obviously not the most interesting subject given the number of responses?
Surely the answer is to fly in the face of economic orthodoxy. Is this not the time for a new Keynes or Friedman to appear?
Surely the problem is caused by the US exporting its inflation to the rest of the world. It is a supply side problem not a demand side problem. I seem to remember that if a large exporter subsidises a product i.e. EEC props up corn prices the world price drops by the value of the intervention (subsidy). Surely the US is the largest supplier of money? So when the market drops as it surely must NZ will have devalued our currency?
Housing inflation is a problem, suffered by most western democracies. The Reserve Bank Gov is an economist who thinks the problem is a demand for cash. The real problem is an oversupply of money looking for high returns , which NZ provides.
Inflation will increase if there is too much money in the economy so trying to fix a worldwide problem in the niche market of housing by raising the price in NZ is useless.
So turn the problem round. Make it unattractive for the borrowers to lend to Kiwis! Lower the cash rate too below a level where it is attractive to lend in the NZ market.
The money will look for a better return (perhaps Australia) the dollar will drop as the lenders chase the higher returns and pull their cash out of NZ. The net effect of this would be to take away the oversupply of cash available to the housing market and allow exporters to go about their business.
As you can gather I am not an economist but short of tinkering like the Reserve Bank is doing or legislating against property speculators it is about all that is left without sending the rest of the economy into a tailspin!!

Since Nov 2006 • 71 posts Report
Nobody Important, 14:59 Jun 12, 2007

Yeah, I'm starting to think lowering the rate (not raising it) is the answer too. But then the problem will be that with 6% mortgages everyone will run out and buy a property. If you're a low income family and then suddenly you can afford a house .... well, you'll grab one.
And I'd hate to be the property developer/seller with the last properties to sell when everyone has bought what they want. That's when the crash will start.
What pisses me off most is that the banks get their profits handed to them on a plate. It's like a casino - they can't lose. Which is why I bought bank share 24 months ago. I've done rather well ...

expat • Since Mar 2007 • 319 posts Report
Marcus Neiman, 15:02 Jun 12, 2007

As has been noted by all-too-many, interest rates are a very blunt instrument. The high NZD has not been driven by our exporting success - far from it - but rather a willingness of NZers to pay any price in a frenzy for housing, and the ready supply of overseas savers willing to indulge us.
If the problem is at core, an overheated housing market, it should be dealt with with a targeted solution to that problem - an increase in housing supply - that doesn't needlessly affect the rest of the economy.

Sydney • Since Feb 2007 • 107 posts Report
Neil Smart, 16:20 Jun 12, 2007

Sorry guys read the post again.
The problem is oversupply. NZ is a small market and money is coming here because we pay the best rate of interest in the OECD. If you reduce the cash rate and lower interest rates the oversupply will dissappear so you will not get an inflationary spiral in our Housing market. Do not use economic orthodoxy.

Since Nov 2006 • 71 posts Report
Rich of Observationz, 17:27 Jun 12, 2007

I think a lot of people think that when they hear the Reserve Bank spent $1bln intervening in the markets then that's money out the door?
Actually, if they sold (e.g.) 1bln NZ dollars for USD at 0.760, then they now hold 760 million (extra) US dollars. At the present rate of 0.755 that equates to 1007 million NZ. So we're 7 million or so ahead.
Even if things had gone the other way, the amounts would have been in millions, not billions.
Neil: you may think that, but if the OCR was reduced in that fashion, all that would happen would be that the banks would be able to finance cheap mortgages domestically and wouldn't need to go to overseas lenders.

Back in Wellington • Since Nov 2006 • 5550 posts Report
Raf Manji, 22:28 Jun 12, 2007

Actually Neil is spot on. The problem we have now is an enormous supply of cash, or more correctly debt in the form of money, sloshing around the global economy.
The Japanese have been printing yen for 10 years flat out and the money supply of all major nations has been expanded at a rate not often seen before.
Does no one wonder how house prices can increase 143% in the last 8 years when inflation has been 20%? Well the money supply has expanded 100%!
So much for price stability.
Globally there is major asset inflation and consumer goods deflation. CPI numbers in all the major nations are being measured incorrectly.
So in terms of managing the currency the intervention is all very well but really nothing more than a warning shot for people to be careful.
To do that and then in your next speech talk about inflationary pressures is mind boggling.
Cutting rates is a much better idea and then restrain the actual money supply by reining in bank lending. Suddenly banks might start looking more closely at property valuations.

Christchurch • Since Jun 2007 • 14 posts Report
Neil Smart, 16:08 Jun 13, 2007

I think a lot of people think that when they hear the Reserve Bank spent $1bln intervening in the markets then that's money out the door?
I don't object to the tinkering but do not believe it will solve the problem. I also believe you cannot solve the problem in NZ by applying economic orthodoxy. Milton Friedman is dead and so may be some of his ideas. They may still apply for an econmy the size of Europe or the United States but not for NZ.
would be that the banks would be able to finance cheap mortgages domestically and wouldn't need to go to overseas lenders.
This is where I think economic orthodoxy is wrong. The extra money is coming in because we offer a high return. Stop it and you stop the problem.

Since Nov 2006 • 71 posts Report
Rob Stowell, 16:27 Jun 13, 2007

It would sure be radical. And as long as everyone else stayed on course, it might just work. But then so might Bollard's "warning shot"- in the short term.
I'd like to see more controls/restrictions on bank lending either way. "The West" has a credit addiction and (in a strange reversal of the "opium wars") China is feeding it.
Not sure about hanging onto much US$ for more than the short term tho. Anyone else heard the "wild theory" that China is playing nice with the US dollar til after the '08 Olympics- which they are determined will put them centre stage?
After that: if the US keeps hassling them to float the yuan, they can pull the rug out from under the US dollar any day of the week.

Whakaraupo • Since Nov 2006 • 2120 posts Report
Ian Hickling, 08:56 Jun 19, 2007

I think you're right Neil, this is primarily a supply-side issue - too much credit available in the world, all looking for a home, and the RBNZ says it is moving the rate up to control Kiwis' spending habits. It seems there is a lack of balance in this that wasn't there a decade ago. A lot of private cash looking for high returns at the same time as the US govt has an insatiable appetite for credit. We're just caught in the middle of it. Bollard's got balls, but I think he's a small guy in a global game

Barbados • Since Nov 2006 • 25 posts Report
Craig Ranapia, 09:12 Jun 19, 2007

Hey, blame those slitty-eyed hausfraus in Japland - again! Serious question: Do these currency-speculating Japanese housewives actually exist, or is it more Asian Angst where there's a lot less to the story than meets the eye?

North Shore, Auckland • Since Nov 2006 • 12370 posts Report
Stephen Judd, 09:32 Jun 19, 2007

My understanding is that they do exist Craig, although I can't speak as to their ocular configuration. They (and their evil partners, the Belgian Dentists) are not necessarily consciously speculating in the currency. They buy local bonds that "wrap" NZ fixed interest bonds, and the detail is all in the fine print as far as they know. Neither Mrs Suzuki nor Dr Huygens are consciously trying to root the NZ economy - they just want a better return than they can get at home. As we all do.
It's a consumer-level form of carry trade.
I don't believe there is any racist animus in the term Japanese Housewife. Traditionally, Japanese women do control the household finances, and it is a fact that Japanese retail investors are (indirectly) buying our bonds, so personifying that business as Mrs Suzuki and her mates is a convenient shorthand for a real phenomenon rather than an alarmist dig.

Wellington • Since Nov 2006 • 3122 posts Report
Craig Ranapia, 09:51 Jun 19, 2007

Stephen:
While the thought of Doctor Bollard getting stomped by a fiscal Lady Snowblood, before she wandered off for a love hotel tryst with the Kiwi, was mildly titillating you were much more informative. :)
And I think you made a fair point: Sure, I don't think James Weir was motivated by any kind of 'racist animus', but t doesn't hurt to remember The Dominion Post isn't a specialist business publication, and a little more context to the jargon/shorthand is always useful. Especially on a subject as intensely political - and heated - as this. I'm mildly disturbed, to be honest, at some causual links being drawn by various parties between immigration and 'housing affordability' in recent days - which is a legitimate, if highly debatable, area to explore. But not superficially, as seems to be happening.

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