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.
Don’t Be Wimps!
“Don’t be wimps,” seems to be the advice on offer to exporters groaning under the burden of the overvalued dollar. “Lie back and enjoy it,” advises one sage. “Get on with it – there’s nothing you can do about it anyway,” says another.
Such wrong-headedness would matter little if it involved only a handful of disaffected exporters. But it affects us all – as it has done for decades now, and will do for the foreseeable future.
But surely there is nothing we can do about it? The rate for our currency – floating as it is – will be decided by the foreign exchange markets, and not by the policy-makers? The answer to that is a resounding “No!”
There is no such thing as a clean float. The view that foreign exchange markets take of our currency will be influenced by many factors, most of them inevitably within the control of our policy-makers.
The legendary Japanese housewife or Belgian dentist knows nothing of our economy; if they knew about our slide down the OECD tables and our perennial trade deficits and record overseas borrowing, they might have been less keen to buy our dollars.
But what persuades them to buy our currency is the virtual guarantee that we will go on, as we have done for decades, paying them an interest rate premium. And, because so many are attracted by that risk-free windfall , and the demand for and price of the dollar therefore go up, short-term investors can usually expect a capital gain as well.
To top it all off, they are confident – after nearly thirty years’ experience – that we will not change our willingness to keep on doing it, even though it is plain by now that the more we borrow, the higher the interest rates we have to pay, and the higher rates we pay, the further the dollar’s value rises, and the further the dollar rises, the less we are able to produce and export, and the less productive we are, the more we have to borrow.
But isn’t the dollar’s recent rise (except against the Aussie – they have their own similar but more manageable problems) the result of high commodity prices? Yes, high commodity prices have helped to fan the flames, but the baseline was already established at an overvalued rate, where it has been for most of the past three decades. High dairy prices have simply exacerbated the long-term problem, making life even more difficult for other producers.
But what about the up-side of a high dollar – the cheap holidays and the low-priced imports? Aren’t they worth having?
Yes, there has always been an argument in the short term for overvaluation. Politicians are particularly fond of it, because it means that every overvalued dollar will buy more imports (or foreign holidays) than it should, so that people have the temporary illusion that they enjoy a higher living standard than they can really afford, at least until election day.
But the price we pay for that illusion in the longer term – in jobs, services and living standards – is a heavy one, particularly if governments (with our three-year terms) try to maintain it from one election to the next.
The high dollar means that our producers get less for everything they sell into international markets, including our own. Even our most successful enterprises and exporters find it harder to penetrate international markets, and when they do, their margins are decimated.
With smaller market share and lower profits, they find they have less capital to re-invest in new technology, new capacity, new product development, new skill training, new sales promotion, new export support – all the bases covered by their successful competitors from overseas. So, job growth is held back, service levels fall behind, the living standard gap with Australia widens still further.
Even our most successful exporters – currently our dairy farmers – find that the cream is blown off the top by the overvalued dollar, so that even in the goods times they have less to spend and invest in our economy than they would otherwise have.
If the over-valuation, or the threat of it, persists for any length time, there is then a second-order range of consequences. Bright graduates cease to go into productive industry; they prefer to try their luck in asset speculation, finance and retailing – anywhere that is protected from foreign competition. People look to non-productive assets like housing as the place to make their fortune. Capital moves to wherever it is possible to make a quick buck. Our successful businesses move overseas or are sold to overseas buyers. Corporate headquarters move to Sydney or Shanghai. Does any of this sound familiar?
In the longer run – a generation or more – the culture itself changes. Borrowing – in the belief that the word owes us a living – becomes a way of life. We lose faith in saving, investing, and producing goods and services for sale as a way of providing for ourselves.
It was Einstein who said “Insanity is doing the same things over and over again and expecting different results”. Our results are not about to change any time soon.
Bryan Gould
21 June 2011