One girl’s take on exchange rates, taxes, yadda, yadda zzzzzzzzz

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).

11 thoughts on “One girl’s take on exchange rates, taxes, yadda, yadda zzzzzzzzz

  1. Printing money dramatically devalues currency. Like adding water to fresh up. Eventually you end up with a currency no one wants to invest in. No investment = no growth.
    No growth = no OCR increase.

    And NZ feels like 1990’s Japan.

    Or we print more money, and people lose hope. NZ feels like USA/Europe.

    The only way up and out of this is confidence. Strangely enough the people of NZ have it. But the RBNZ and Allan Bollard haven’t woken up to the fact. They seem to think that keeping the OCR low will allow people to control their debt – but hello! what happens if people are offered low interest debt? Thats right – shopping spree’s.

    We need high OCR to encourage investment. And vice versa. Printing money simply dilutes the problem, leaving it unresolved.

    1. Good points, but what about when everybody else is printing and we are the last one’s left holding the high exchange rate? I think there are some pretty good reasons why (and how!) we could use QE to alleviate some of our problems. As I mention in the post, you don’t print like radicals, you use a measured approach to devalue the currency on purpose and with restraint. We will just have to agree to disagree 🙂

  2. If we print any amount of money it will be another excus……sorry “reason” why Mr Bollard won’t raise the OCR.
    Likewise printing money can be quite a mental thing. The USA and Europe are not printing like mad-men – but ask the people on the street and they will say things like “Look how bad our economy is down the gurgler – they have to print money now”.

    While I would love for us to simply devalue the currency and get on with it – the consequences of adding even a small amount of cash to the pot in NZ could be quite far reaching.

    As mentioned earlier, as soon as the RBNZ and RBA wake up to the fact that the economies have moved on and now everyone one has a flat screen tv…….the sooner people will have an incentive to invest rather that buy the twilight trilogy from Amazon. haha

  3. It has worked to our advantage in the past in a crisis, so why wouldn’t it work again?

    It was used in the late 30s to combat high levels of sub-standard housing and help pull NZ out of the Great Depression, with both the National govt devaluing the currency in the early 30s, and the Labour govt committing to the state houses legislation. It’s not a case of emotion on the street or pointing the finger, but looking at the actual real life problems the country faces and finding ways to combat them.

    Seen that ad with Betty White where the guy goes “Confidence is the best form of defence” (or something along these lines), then Betty says “yeah well stand there while I shoot this bow and arrow at you, and we’ll see how useful confidence is then.”

    1. This was right after the point where there was state operated “tent cities” in the late 1920’s no? Don’t forget the primary reason why the state housing department was established…….people didn’t have a roof over their heads.
      😉
      There was lots of emotion at the time, unfortunately people were too poor to express it.

      Also due to the State Housing scheme prices dropped. The state housing scheme gave Architects parameters to build to aka “You must build a 3 bedroom house at half the price you used to”. This was fantastic for NZ as architects had to throw out all their crap colonial designs and think about how to be frugal with money.
      Because thats what us kiwi’s are good at – solving problems ingeniously rather than taking shortcuts ‘and see what happens’.

      Also while we like to think of NZ as an exporter we import at a rate of 1:1 (http://www.tradingeconomics.com/new-zealand/balance-of-trade)……which fluctuates often.
      So should we sacrifice 50% of NZ economy to save the other?
      Are we at the point where a large percentage of the populations are living in tents?
      Or have we learnt a few things since the 1930’s and are better off now than we were then?

    2. It’s respect, not confidence. Sheesh! 😉

      But anyway, a serious reply…

      First of all, I don’t know the history exactly, but you must mean the United/Liberal parties in the early 30’s as the first actual National govt was in 1949. Labour was in power from 1935 on.

      Anyway, the issue I have with printing money, or quantitative easing, is that it’s really just a sly way of making everyone in the country poorer and giving that wealth back to the government to do with as they see necessary. I’m not necessarily saying that’s a bad thing, it’s just not an entirely honest thing. It’s effectively a tax, not in dollar terms, but in general wealth and standard of life.

      Suppose you had $50k in the bank and you were about to go out and buy that new Ford whatsit or whatever, and all of a sudden the price of that whatsit rises, whether made in NZ or imported from overseas, you will pay more, hence your wealth has been reduced – not by natural market fluctuation, but forcibly by government decision.

      I do agree that it has worked to our advantage (“our” being as a country, not necessarily as individuals) and it could do so again, but I just see it as the government collectively tightening our belts for us, forcibly making us invest in our future, without most of us realising it.

      1. Hey Chris, thanks for the comment, and I agree, without strict regulation it gives governments a lot of power. But, (to address Stewart as well), we do have a need (ChCh) to address and the alternative is to send money offshore in overseas debt which does none of us any good. Or are there other alternatives?

    3. Well I’m not smart enough to get into a discussion of whether overseas debt is a better or worse option…

      But, really I think that if it was just about growing the economy then some of the real net effects of doing it are:
      – Undermining and basically reversing any increases that have been made ot the minimum wage (and everyone else, but at that wage is legislated, so to go and undermine it really means something)
      – Lying to all the exporters about what they are really selling their goods for. And what I mean by that is that a farmer might get $100 for n kg of lamb meat, and he is fixated on getting that $100, and won’t except $90, so let’s just artificially alter the exchange rate so that the $100 he’s getting is actually only worth $90. After all, he’ll only figure it out later when he goes to spend his $100, probably to fix some farm machinery that was made overseas and imported…
      – I thought of something else but now I forgot – probably quantitative easing of my brain cells, it’s Friday afternoon after all…

  4. Hmmm, devaluing our currency will never work as we do not have the financial strength to stop speculators. The Reserve Bank has an intervention fund of around $9bn.$10bn NZD are traded everyday around the world and there are several speculators that have access to these amounts and more. The RB’s $9bn would change things for a day at best. It should be noted that the easing that the USA undertook was a lazy $600bn, or four times NZ’s GDP. I think that puts things in perspective.

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