What should the exchange rate be?

Bob Jones isn’t impressed with Labour’s monetary policy, with good reason:

The uncritical way the media have treated Labour’s ridiculous monetary policy proposal reflects its mood change. Despite its alluring symmetry, the concept is naive in the extreme. David Parker should be asked exactly what should the exchange rate be? That would be fun. Let us assume he succeeded in lowering the exchange rate drastically, for if not drastically, then why bother?

The effect: happy farmers and exporters (that is until they wanted to buy a new tractor, car and other spending), a reduced income for all houseowners other than the minority with floating-rate mortgages who stay neutral, and the return of inflation as virtually everything and not just imported goods leaps in cost. Ergo: back to the days of wage-costs cyclical increases and an end to stability.

A fall in the value of the dollar is not without costs – and for many people those costs could well be higher than those of a higher exchange rate.

Reducing the value of the dollar, reduces earning power in effect reducing the real value of wages.

But here’s the irony. For Labour to get up this year, they acknowledge they must capture the 30 per cent non-voting sector comprising mainly low-income people. Reducing their already tight incomes and adding to their consumption cost is an odd way to achieve that. . .

If Labour thinks they can sell a policy which would reduce people’s take-home pay by increasing Kiwisaver contributions while bemoaning the plight of the poor, they really don’t understand the people to whom they’re tying to appeal.

Exporters Irked by Nat’s Monetary Policy Stance

The NZ Manufacturers and Exporters Association is not impressed by National’s support for the current monetary policy.

The party’s defence of the current system failed to acknowledge the damage the policy had caused to New Zealand’s tradeable sector, association chief executive John Walley said.

The approach used interest rates dictated by the Reserve Bank’s official cash rate to curb demand and influence inflation.

That approach had seen exports dropping from 33% of GDP in 2001 to 22% in 2007.

“What we are seeing at the moment is increasing fuel and commodity prices driving inflation which in turn is holding up interest rates and exchange rates.

“These forces are unlikely to stop any time soon so we need to break the link between inflation and the exchange rate,” he said.

He’s right about the problems but I’m not convinced playing politics with monetary policy is the solution.

Associate Finance Minister Trevor Mallard last week announced that the Government was open to looking at alternative monetary policy settings.

National finance spokesman Bill English said now was not the time to start tinkering with a monetary framework.

The Reserve Bank recognised the effect that international oil and food prices were having and the central bank was not going to strangle the economy because of imported inflation.

“It has been well recognised by government officials and commentators that increases in government spending, poor quality spending and increases in government charges are also stoking inflation domestically,” Mr English said.

“Trevor Mallard would be well advised to focus on these inflation factors, rather than signalling a drastic rethink on monetary policy,” Mr English said.

Quite. I have never been able to understand Labour’s belief that their spending of public money is not inflationary but allowing us to keep more of what we earn would be.

Mr Walley hoped National was making a typical election-year response.

Unless policy changes were made, all that could be expected was more of the same as the trade balance deteriorated and the economic situation worsened, he said.

A more responsible approach to the spending of public money might make a difference without the need to make monetary policy a party political issue.

Politicising the Apolitical

Some policy areas are supposed to be kept clear of party politics.

Labour trampled all over the convention that consitutional matters were in that category with the Electoral Finance Act. Now they look set to do it again with monetary policy. 

The Government is signalling a change in the way the Reserve Bank fights inflation in what could mark the first major shift away from the bank’s focus on interest rates as its sole weapon.

 It is understood the Government has decided to give up on seeking consensus with National over possible changes and will go it alone.

That could see it campaigning on changes to the policy targets agreement between the finance minister and the governor of the bank – or even changes as radical as amendments to the Reserve Bank Act itself.

I am concerned because Labour: 

          * is abandoning a bi-partisan approach to monetary policy;

           * has not learned from the EFA debacle that they should not play politics with matters which need to have at least bipartisan and preferably cross-party support.

           * has made no effort to cut back their own profligate spending of taxpayers’ money which has made  a significant contribution to inflation.

           * is prepared to put short term politics before the long term interest of the country by abandoning the fight against inflation.

Inflation is theft which hits the poorest hardest.

There may be better ways to fight it than interest rates – but that should be determined by cross-party concensus not by petty party politics in a desperate bid to turn the polls around.

The Visible Hand In Ecnomics is troubled by this and is calling for submissions on it.

Hat Tip: Adam Smith