Plain English on exchange rate

Labour’s David Parker thinks the government should meddle with the exchange rate:

Finance Minister Bill English has a much better strategy:

We are focused strongly on the competitiveness of our businesses. It is difficult, if not impossible, to manage our exchange rate to a significantly lower level, so we are focusing on helping our exporters to be profitable, regardless of what the exchange rate is.

Parker had another go later in Question Time:

4. Hon DAVID PARKER (Labour) to the Minister of Finance: How many export and import substitution jobs does he estimate have been destroyed in 2012 as a result of the exchange rate, which has been at 70 or above on the Trade Weighted Index for every month of this year?

Hon BILL ENGLISH (Minister of Finance): There is no officially accepted measure for what the member is asking for. What I can tell him is that total goods and services export receipts have increased 15 percent, from $52.9 billion in the year to March 2010 to $60.9 billion in the year to March 2012, and a net 57,000 more people have jobs than 2 years ago. The economy is dynamic, and jobs are constantly shifting as innovation, investment, and demand change. I would be suspicious of any measure that attempted to pick out one factor, when there are many factors in a company making a decision to export or to hire another worker.

Hon David Parker: Does he agree with the Prime Minister’s statement of January 2012: “We are concerned at the level of the exchange rate because we think that above $0.75 [U.S.]it’s very difficult for our export sector.”?

Hon BILL ENGLISH: Yes, I do agree with that. The export sector has shown itself to be very resilient and capable of increasing exports and production when it is backed by stronger policies on competitiveness. If the member is suggesting that there is some way to choose an exchange rate, then I would be keen to hear from him on that, but of course he needs to keep in mind that even if he could choose the exchange rate, reducing it would reduce the standard of living of all New Zealand households.

Hon David Parker: Does he agree with the Prime Minister’s statement of August 2012 that continued currency appreciation would make the economy at some point “splutter and stutter and probably stop”?

Hon BILL ENGLISH: It is possible that that could happen. As it has turned out in New Zealand, although we have had a high exchange rate now for a number of years, a relatively high exchange rate, our export sector has continued to expand. I think the member is getting at the issue of whether we can choose an exchange rate. It would be nice if we could, but there is no known method for picking the right exchange rate in the first place, and, secondly, there simply are not the tools to hold the exchange rate at whatever desirable level there is.

Hon David Parker: If China is running a programme of competitive devaluation of its currency, as are the US, the UK, and the EU, if Switzerland is defending a cap on its currency, which is the opposite of what the Minister just said could be achieved, if Singapore is managing within a range, if Brazil and Chile are intervening in capital flows, and if Japan is printing money too to protect its exporters, why should New Zealand exporters be slain and New Zealanders lose their jobs because his Government refuses to move on the primacy given to inflation targeting? [Interruption]

Mr SPEAKER: Order! It is a serious question.

Hon BILL ENGLISH: The member’s analysis is simply wrong. We could go through all those countries, but the countries that are actually defending a fixed rate, Singapore and Switzerland, both have very large reserves, and, in the case of Switzerland, they are building up huge imbalances in defending that rate, and one has yet to see whether the experiment is going to work. In the case of the UK and the US, they are printing money because they have zero interest rates. The fact that they are printing money is a sign of deep distress in their economies, not success. I would not like to be in that position. It would be bad for New Zealanders, bad for their incomes, and bad for their job prospects.

Rt Hon Winston Peters: Given his professed concern and that of his Prime Minister about real employment and real growth, has he asked Treasury and the Reserve Bank to calculate the damage, as the primary question asked, in terms of jobs and exports from an overvalued exchange rate; if he has not, why is he giving answers that say that nothing can be done about it or nothing can be quantified?

Hon BILL ENGLISH: Well, the calculations on damage would depend entirely on your assumption about what the alternative was. Would the alternative be, you know, the Zimbabwe exchange rate, or the Japanese exchange rate, or the Aussie dollar exchange rate? I mean, it is a meaningless calculation. I mean, members of the Opposition are—

Rt Hon Winston Peters: I raise a point of order, Mr Speaker. The question asked him as to why he has not asked the Reserve Bank or Treasury to do these calculations. I am not interested in his ideological views; I am interested—

Mr SPEAKER: No, no. Order! I have heard the member’s point of order. He is now going on to debate it. The Minister is answering the member’s question absolutely explicitly. The member asked why he has not asked Treasury to carry out these calculations. The Minister is explaining why he has not—that he believes such calculations are meaningless because of the difficulty in establishing the base level for the dollar to commence the calculation. That is his answer as to why he has not asked Treasury to do that. [Interruption] Order! He has answered the question. Does the member wish to ask a further supplementary question?

Rt Hon Winston Peters: Well, whilst most other Ministers of Finance in the developed world, in countries doing far better than New Zealand, are implementing policies to manage their exchange rates—policies endorsed by the IMF and leading international economists—why do he and his colleagues keep on saying again in the House today, as they have for months, that they can do nothing?

Hon BILL ENGLISH: We have not said we can do nothing. What we have said is that we can use the tool that is likely to be effective and sustainable for New Zealand, and that is to improve the competitiveness of our exporters. There is no free lunch around the exchange rate. Any attempt to move it comes with large costs and large risks. New Zealand has been down that path before. It found that it was not sustainable, and for the last 25 years it has maintained a policy of a floating exchange rate, with the capacity to intervene in extreme circumstances. We do not intend to change that policy, because we have not yet seen from the members a viable alternative way of managing an exchange rate.

Hon David Parker: Does he agree that the—[Interruption]

Mr SPEAKER: Order! I want to hear the Hon David Parker.

Hon David Parker: Does he agree that the current policy settings, which give primacy to inflation targeting over the exchange rate, are not working, and is he ready to conclude, after a four decade- long current account deficit, that inflation is not the pressing problem for growing jobs in the economy—it is the exchange rate?

Hon BILL ENGLISH: No, I am not going to agree with that. The challenge here would be that even if you could change the Reserve Bank of New Zealand Act to tell the Reserve Bank to target the exchange rate, no one knows how it could do that in a sustainable manner that would significantly shift the exchange rate track. Oh, it is all in the book the member is waving about; it is all in the little red book. The fact is if the member looks at those countries which say they are doing it, such as Chile, Brazil, and Japan, it is highly arguable whether they are making any headway at all, given the large risks they are taking.

That’s the plain English answer and it’s also good economics.

New Zealand used to have a managed exchange rate and the people it benefitted most were currency traders who gambled on it.

Those calling for the government to meddle are showing their economic ignorance.

Businesses should treat the value of the dollar like the weather. Sensible ones take account of it but put their energy into factors they can control.

3 Responses to Plain English on exchange rate

  1. Gravedodger says:

    Pity the number of supplementary Questions is proscribed.
    Mr Speaker could have taken a couple from the Rt Hon Member for Tamaki and even The Rt Hon Peter Frazer Member for Brooklyn.
    Oh that is right we have moved on or at least some of us have.

  2. JC says:

    Oh, for the good old days a half century ago when we had a much more benign rate for exporters of.. er, $1.40 to the USD.

    Yep, that was the rate for the early to mid 1960s, it fell when the wool check failed in 1967 but by 1974 it was back up to $1.40 again.

    However, the rate then dropped like a stone over the next decade to about $0.45 in the 80s. So of course exporters and farmers really raked in the dough on the cheaper dollar,, right?

    Yeah right.. as our dollar plummeted so did our ranking on the OECD ladder, from top third to bottom third.. so maybe there were other factors at work than just the exchange rate!

    Its those pesky “other factors” that are also driving our dollar up at the moment.. too big a Govt, too much regulation, high land prices etc.. basic stuff that we need to fix before we play around with the exchange rate.


  3. Derek Rankin says:

    So true JC, couldn’t put it better myself.

    History has shown that floating exchnage rates are the “safety value” that adjusts when needed. Countries and politicians meddle with the level at their peril.

    No one has suceeded in holding an fx rate high or low without costing enormous sums of money. Money that is wasted in the end.

    Just look at Japan and the UK. Billions lost to no avail!!

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