By Bruce Wills
Since February 2009, the Kiwi dollar has strolled through fifties, jogged in the sixties and did a Usain Bolt on the seventies. The dollar now has an eight implanted on its front and some say parity with the United States may be on the cards.
This is of course great news for importers, those after an iPhone 5 and for eBay shoppers. As for exporters, the high Kiwi dollar hurts and with jobs being lost right now, it will bite everybody eventually.
Politicians say they have ‘the answer’ and it generally involves taking an axe to monetary policy or printing five-dollar notes.
Printing five-dollar notes would set off an inflationary bomb and we’ve been there before. I still recall overnight Interbank cash rates hitting a jaw-dropping 232 percent on 11 March 1985.
Our dollar’s recent strength is based on an economy ‘less bad’ than many others, plus high levels of government borrowing. This week, our dollar dropped off the back of improved U.S. jobs figures. Better news from other countries will help to drive it lower still.
It is why quantitative easing, cranking up those currency printing presses, is a ‘break glass in case of fire’ policy option.
But we are nowhere near desperate measures for desperate times. Our Official Cash Rate is 2.5 percent versus 0.5 percent in the United Kingdom, 0.25 percent in the United States and 0.10 percent in Japan. Who do you think has the healthier economy?
As an export-led economy, we need to keep a strong lid on our inflation because we import a fair slice of it from those we trade with. Low global inflation won’t last forever and if we stoke domestic inflation by printing dollars, we will be hammered by importing more from overseas. That is bad for savers, retirees and the poor. It is bad for businesses and doubly bad for the people those businesses employ.
We are not alone with a strong dollar because the Canadian is up 60 percent against the greenback. One comment could easily apply to New Zealand, “the strength of the economy in Great White North, which has in abundance what the rest of the world needs more and more of: commodities such as oil, basic materials and agriculture”.
As for direct intervention, does anyone seriously believe our Reserve Bank can set then defend an exchange rate against all comers?
Our solution is to ask if each dollar being spent by Government is the best use for that dollar. The dollar is being kept artificially high because of borrowing ‘to smooth the rough edges’ of recession.
Let us start by reducing what is really keeping the dollar so high, a holy of holies called fiscal policy; the size and spending choices made by the government. Each dollar spent by government is not perfect, so why are politicians reluctant to look in the mirror?
In 2000, core government expenditure was $34 billion but eleven years on that became $73 billion. So imagine, for one moment, if central government spending by Helen Clark’s government and that of John Key had grown by the rate of inflation plus population growth instead?
First, it means Bill English would have announced $56 billion in spending last year instead of $73 billion. Second, over the past decade, $100 billion would have been left in the wider economy creating businesses, jobs and wealth. Who knows, maybe even a Kiwi Google or two. That is money left in the economy creating real jobs and off the back of these, a bigger tax take for schools, hospitals and the like.
National knows it ought to rein in government spending but frets over the political fall out. Labour ought to be the responsible government in waiting, but is backing one spendthrift policy after another. As for NZ First, we hope they will back the Public Finance Fiscal Responsibility Amendment Bill. There is another party missing here, I will allow you to draw your own conclusions as to why.
The Public Finance Fiscal Responsibility Amendment Bill languishes on the order paper for want of a first reading. It carries unglamorous but important amendments, such as the impact public finances have upon monetary policy; the very thing blamed right now for the high dollar. There is also a desperate need to change the culture of government at all levels. In this regards, a Regulatory Standards Bill with real teeth is needed to deliver realism over rose-tinted idealism.
Ronald Reagan’s advice also rings true about the ten most dangerous words in the English language, "Hi, I'm from the government and I'm here to help".
If you want to blame something for the high dollar then start with imprudent spending and poor regulation rather than the Reserve Bank Act. If we do that and still find issues abound, then, by all means, get stuck into monetary policy. That makes it the third cab off the rank, not the first.
Bruce Wills is the President of Federated Farmers