Lower dollar good news and bad news

The good news about the falling dollar, down to an 11 month low of US69.84c this morning, is that we get more for our exports.

However, the lower value of our currency also increases the price of imports which is particularly bad news for farmers when two of our biggest budget items – fertiliser and fuel – are already highly priced.

One reason for the dollar’s fall is the Reserve Bank’s decision to relax its guard against inflation by lowering the official cash rate.

Several commentators said this would be good for exporters, but I’m not sure how much better off we are if the gains on the swings of increased returns for our produce is countered on the roundabout of increased prices for inputs.

Nor do I think that a weak currency is a good recipe for a strong economy.

And I am definitely not relaxed about a little bit more inflation. The memory of the economic disaster which resulted when all the little bits more became a lot and led to inflation rates of more than 20% in the 1980s, and the painful process of bringing it down again, are still too fresh.

I’m with Don Brash who, when he was governor of the Reserve Bank, told a public meeting that a little bit of inflation was like being a little bit pregnant, it doesn’t stop at a little bit.

The B- I got for stage one Economics, as it was then known, doesn’t qualify me to debate this issue. But The Visible Hand in Economics and Show Me The Money  and Brian Fallow  are qualified and they all warn about the dangers of going soft on inflation too.

The falling dollar is a good news-bad news story for exporters and if it contributes to higher inflation the bad will more than outweigh the good.

3 Responses to Lower dollar good news and bad news

  1. poneke says:

    One of the main reasons for the falling dollar is that the US dollar is going up strongly. And the rise of the US is pushing down oil prices, which rose strongly when the US dollar was falling.

  2. icehawk says:

    Brash’s “little bit of inflation is like a little bit pregnant” approach certainly put him out of step with international central bankers: Alan Greenspan, for example, was happy to see a little bit of inflation and the US economy soared under his watch

    The important thing is to stop an inflationary spiral, whereby workers demand wages increases because of inflation, which leads to more inflation which. Wage inflation is the key – it’s where inflation loops back to become a spiral.

    So what Bollard’s watching is the pressure on wages. Unemployment is up. The construction industry is going to be shedding jobs as all those half-finished (and now unwanted) apartment buildings and townhouses are completed. Business confidence is low, so businesses are contracting rather then expanding. Consumer confidence is shaky and retail takes are down. So while I can’t say he made the right call (no-one can say for sure for another 6 months at least), I think he had good reasons.

  3. Matt Nolan says:

    “And the rise of the US is pushing down oil prices, which rose strongly when the US dollar was falling”

    The stronger US dollar is pushing down oil prices – in US dollars. That is an important thing to remember when we come back to looking at NZ – these lower headline numbers might not help reduce the price we face.

    Furthermore, NZ dollar weakness is more broadbased than just the US dollar – we have been easing against everyone for a while, a weak US dollar was simply hiding this fact.

    “Alan Greenspan, for example, was happy to see a little bit of inflation and the US economy soared under his watch”

    Although – Greenspan also believes that any positive rate of inflation reduces long-term growth. Implying that the best rate of inflation is zero.

    It wasn’t that he was happy to see a little bit of inflation – he believed that statistics were misreading (over-estimating) inflation, and so allowed official measures to be positive.

    “The important thing is to stop an inflationary spiral, whereby workers demand wages increases because of inflation, which leads to more inflation which”

    Indeed.

    One thing to note though is that, even if the demand side of the economy cools, if expectations of inflation are truly entrenched at high levels we end up with inflation anyway – as an inflation premium becomes part of the wage bargaining process.

    “So what Bollard’s watching is the pressure on wages”

    You are exactly right that this is what he should be most focused on – wages excl productivity.

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