High dollar – who cares?

This week the New Zealand dollar reached post float highs on the TWI due to strong appreciations against both the Yen and US Dollar. These trends are very threatening for exporters say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “Well, the dollar is at yet another high, post float high on the TWI and close on the US$. Does it matter? Is it good? Is it bad? Inevitable questions; the knee jerk answer depends on where you stand.

“Where the currency is at a particular point in time has a headline impact but the deep psychology is based on trend and impact over time. If you are an exporter selling largely in US$, a 1% change in the currency has an impact of maybe 10% on profit.

“If the impacts are adverse, imagine what that does to business viability, employment and the readiness of business owners to invest. At a first cut approximation on $60b worth of annual exports a 7% change in currency (80 to 86 US$) is $4.2b or 84,000 jobs at $50k.”

 “If you work in the internal economy and consume why worry, imported stuff and holidays offshore are cheap. The problem is sustainability; an economy overly biased to consumption will hit the wall at some point. The wall for New Zealand is balance of payments; we consume more than we can pay for and the difference is covered by ever increasing offshore debt.”

“It is pretty well agreed that our economy has a small set of high level problems, a structural current account deficit, poor productivity, low productive investment, and poor savings. We know the problems but there is no coherent narrative, let alone the policy to deal with them.

“These problems stem from the deep bias towards consumption in our policy framework. Consumers love the high currency but the same high currency drives producers away from investment.

“Low investment equals poor productivity and low wages. The inescapable evidence of this consumption bias is all around us, the four problems continue to get worse.

“We go on ignoring these problems at our peril, dismissive comments such as ‘there is no magic printing press in the sky’ show a lack of understanding how the money supply operates and what our trading partners are doing, or ‘we don’t have the money to intervene in currency markets’ ,failing to recognise the structural difference between trying to hold up a currency where foreign currency is required, compared to lowering the value of a currency where the central bank has an infinite capacity to intervene.

“Other regulars ‘get efficient and sell on value’ or ‘imported raw materials are cheaper’, ‘the cross rate with Australia is good’ all demonstrate the absence of practical experience and an ignorance of arithmetic.”

 “We have a choice; persist with the course we are on, towards an ever worse balance of payments, or start to develop a narrative that can properly inform a policy framework to deal with our four problems and balance our economy.”

 

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