Getting the Dollar Down
That dwindling band who continue to deny that our economy is being hurt by an overvalued currency will usually – in the face of the indisputable evidence – take refuge as a last resort in the assertion that “there is nothing much we can do anyway – we just have to live with it.”
Nothing is further from the truth. We have an overvalued dollar – which continues to destroy jobs, weaken our industry, worsen our balance of trade, and increase our indebtedness – because that is what our policymakers choose.
The usual assertion that there is nothing that can be done usually focuses on – and then dismisses – the possibility of intervening in the foreign exchange markets, as though this is the only option. But intervention is the least effective measure that could be taken; it is quite true the Reserve Bank, and its (comparatively) puny resources, would be quite unable to offset the huge flows of hot money that determine the value of our dollar. Intervention is merely a straw man that can be conveniently knocked down so as to distract attention from more effective options.
That is not to say that the occasional selling of New Zealand dollars (as the Reserve Bank has done recently) would not be helpful in inducing a little doubt in the minds of speculators who are usually confident of a guaranteed interest rate premium and probably a capital gain as well, while the Governor’s unequivocal description of the dollar as “overvalued” was also a useful signal; but there are much more effective measures that can and should be taken.
The first and most obvious step is to change the policies that inevitably force up the dollar’s value. We persist in paying an interest rate premium to overseas lenders to persuade them to lend us money; and the more we do that, we more we push up the dollar and weaken our economy, and – as a consequence – the more we have to borrow and therefore to offer high interest rates to persuade them to go on lending to us.
We insist on creating this vicious circle, despite all the obvious downsides, because we assert that controlling inflation – not sustainable growth, not competitiveness, and not full employment – is the only goal of policy, and that raising interest rates is the only way of doing it. If we identified wider goals of policy, and stopped using interest rates and the exchange rate for literally counter-productive purposes (when we should be focusing directly on the actual causes of inflation, such as unrestrained bank lending for non-productive purposes), we could avoid repeatedly shooting ourselves in the foot.
Other countries are rapidly learning these lessons; even the Governor-in-waiting of the Bank of England has signalled that he is ready to abandon inflation as the sole focus of policy. Sadly, so committed are our leaders to an increasingly discredited orthodoxy that they will not even contemplate any change. And our government has compounded this stubbornness by opposing policies that would help recovery from recession – and bring the exchange rate down at the same time.
By identifying the reduction in its own deficit as the principal goal of policy, the government has signalled that its priority is the financial rather than the real economy in which most people live and work. This concern for the short-term value of financial assets ensures that foreign lenders will go on buying dollars, secure in the knowledge that nothing will be done to jeopardise “confidence” amongst financial institutions and that the dollar will go on rising.
Other countries, by contrast, now know better. They know that the only way to escape recession is to get the economy moving again by improving competitiveness. They have increasingly turned to quantitative easing (or printing money) – as in the US and the US – or, even more interestingly and much more effectively, to fiscal stimulus – as in the case of Shinzo Abe’s new Japanese government. The effect of these measures is not only to encourage growth and recovery, and – interestingly – to get government deficits down, but also to devalue the currency; in the case of Japan, that goal is quite overt.
These measures show that not only that these countries understand the importance of improving competitiveness by bringing down the value of their currencies but at the same time how easy it is to do so – just check out what has happened and is happening to the US dollar, the pound and the yen.
We remain stubbornly in that dwindling group of countries whose priority is maintaining the value of the currency and who are willing to sacrifice everything, including recovery from recession, to that end. While others reduce the value of their currencies, we say we know better and continue to push up the value of our dollar.
We have an overvalued dollar, in other words, because we choose to. When bankers, stockbrokers and other holders of financial assets assure us, in other words, that we “just have to live with it”, they are just putting their own sectional interest ahead of the rest of the economy.
Bryan Gould
2 February 2013
This article was published in the NZ Herald on 6 February.