I’d never really understood or cared much about exchange rates before I started working for an exporter. All I knew was that when I was last in Europe my dollar didn’t go far at all and that wasn’t cool.
Working inside an international business that relies on the ability of the New Zealand dollar to be competitive with its major trading partners has meant I have began to learn a little more about the way exchange rates work, the factors that influence their movements, and how countries can manipulate exchange rates to grow their own domestic economies, stimulate demand for their goods and screw their neighbours.
The New Zealand dollar is currently at historic highs against its major trading partners, especially the USD.
While this is awesome for those of us lucky enough to have money to spend overseas or online, as a whole it is rubbish for our entire country. Why?
Well going back to the exporter thing.
Our economy is heavily reliant on exporting. This means that we make most of our money by selling stuff to people in other countries. If you were in the market for some lamb or dairy products, or sleep apnea devices, you’d probably consider buying from New Zealand because of the quality of the goods and ease of transaction.
However, the high value of the New Zealand dollar (its strength in comparison to the other exchange rates) if sustained can mean two things:
Domestically companies find it difficult to sustain reduced profit margins and remain competitive internationally. This can lead to job losses and company closures, which can then lead to the slowing down of the economy domestically, with less people able and willing to spend.
Alternatively, exporters may decide to raise their prices to combat high exchange rates, meaning that purchasers of goods from New Zealand will think more carefully when considering buying goods from New Zealand as opposed to other countries. This slows the demand for New Zealand made goods, which internally means less need for the things that go into producing goods, i.e people.
Now. What does this mean for us as New Zealanders?
We’ve just had a recession, but we are yet to recover proper economic activity. This is apparent in a couple of economic indicators:
We have a very low official cash rate of 2.5% as opposed to 8.25% in January 2008 (the OCR is the rate of interest earned on cash set by the Reserve Bank to influence economic activity in New Zealand; when it is high we are incentivised to save, when it is low we are incentivised to spend).
Our unemployment levels are high, likely due to factors like low domestic economic activity (i.e people are saving, not spending and there is less of a demand for things like houses), and the high exchange rate (influencing in the ways I explained above).
Add to this the fact that Treasury estimated in 2011 that we need billions of dollars to rebuild Christchurch, and something needs to be done to stimulate the economy, create jobs, create demand for our products and pay for the rebuild of Christchurch.
Now, to the exchange rate. If we hold that a high exchange rate is detrimental to our export economy (and I have done my research on Statistics New Zealand, finding negative correlations between exports and exchange rates, and positive correlations between imports and the exchange rate), then what makes it high, and why is it high? The exchange rate is high because the other currencies we trade with have devalued their own currencies by printing more money into circulation. Over the past four years the US, UK, China, Japan and the Euro zone have printed some US$10 trillion between them.Why on earth would they do this? Well if you have been paying attention above it should be clear… to remain competitive internationally, stimulate demand for their exports, grow their own economies, and employ their citizens… to our detriment.
Printing money (quantitative easing if you want to get technical) is not something that should be done often. Google “Hyperinflation in Zimbabwe” for an example of how not to do it, but as shown by our trading partners it is possible for developed economies to use it carefully. (And don’t forget that in 2011 New Zealand was ranked as the least corrupt country in the world in terms of transparency and accountability, so we have pretty good street cred internationally to be able do the same).
The rebuild of Christchurch (when it happens) will improve our unemployment figures. But it isn’t going to stimulate demand for our exports unless something is done about the high exchange rate. And currently it is going to mean that as a nation we have to borrow from banks overseas to fund the rebuild, paying them interest and seeing our tax money sent overseas.
Why not print money (with strict regulations and rules) for a particular purpose (to rebuild Christchurch) and a positive economic effect (lowered exchange rates and unemployment levels, increased demand for our products and lower rates of interest than could be found internationally)?
As a tax payer and citizen I know what I’d choose.
(I’ve yet to hear a reasoned, non-political, without agenda, common sense argument against this, and I welcome any).