Beware those bearing gifts of free exchange rate depreciation

By Matt Nolan 27/05/2013 10


I don’t like to write about other economists, unless it is to say how sexy they are.  But I can’t let this slide

Ganesh, why, why are you willing to sell soundbites that do not cover off the trade-offs you are advocating?

The Berl economist told deer farmers in Wellington the bank should become a daily trader till the exchange rate fell to “something sensible for our export sector”.

Asked if New Zealand had the resources to do this, Nana replied, “It’s called a printing press. I’m not kidding,” he said to laughter.

It would be a transfer of wealth, from the people who consume imports, “the baddies”, to the people who earn exports, “the goodies”.

I hope you are effectively saying that the dollar is well above any possible fundamentals (tis a bubble I tell ya), and the government should be willing to gamble on currency markets to try and make some capital gain with sterilized currency purchases.  This is the clearest way I can roll the argument- and I buy it, but I don’t see many benefits from such temporary policy, and I’m a bit more risk averse than you seem to be.  I have to note that you haven’t given that view as your impression in the quotes in this article.

Your willingness to say we should “run the printing presses” is strange to me.  If we print money to buy a foreign asset there is an increase the stock of high powered money, this will have an impact on monetary conditions themselves (Note: for endogenous money people, yes tis true that the money supply is determined endogenously – but shocks to the stock, for a given regime, also shift money supply – and generally the endogenous money people agree with this as well).  If we keep our inflation target, we will in turn have to lift interest rates and/or impose capital controls.  We will have to, in some way, sterlize purchases.  If we don’t sterilize purchases, we are easing monetary conditions.  Is this appropriate when we have a burgeoning rebuild?

If we then push inflation past target because we want to do this, who are the winners and losers?  A lot of people on the left asking for this policy would be among the losers, are you willing to admit that to them, or do you want to pretend that this is a magical free-lunch?  There is no silver bullet, and you are making it sound like there is one, why?

What is the real economy problem which the exchange rate, as a price, is a symptom of.  Or is it merely a result of the fact we have capital inflows, due to the rebuilding of Christchurch and a possible transfer of wealth TOO NZ – in which case the current exchange rate may not in itself be a concern.  Or is it an issue with the persistent CA deficits – which your suggested policy is virtually irrelevant with regards to, given that monetary policy doesn’t impact upon the medium-long term real exchange rate.  And remember, we can use our standard tools to analyse what is going on right now – and it is all about trade-offs, like always.

Isn’t the real question why the real exchange rate in NZ is doing what it is doing?  Why the CA deficit has been persistently elevated?  Why real interest rates are high in NZ compared to the rest of the world.  The RBNZ doesn’t set any of these things – monetary policy is the inflation target, and has no impact on medium-long term real rates or deficits.  Shouldn’t we try asking why these things are the case, instead of mixing up short and long run issues and confusing intelligent non-economists who are trying to interpret the trade-offs we are discussing?

This is all old hat, and one day if you clearly articulate your views in a paper (so not whatever this was) I’d be happy to go through and see what assumptions we differ on.  On this note, I would never have bothered posting.  But you know what makes me furious with you, this:

It would be a transfer of wealth, from the people who consume imports, “the baddies”, to the people who earn exports, “the goodies”.

I thought you were part of the end of the “left wing” section of the economics community in NZ.  I thought your concern was more about “equity” than “efficiency” as a result.  And I respect that.

But here you are calling the majority of New Zealand baddies, most of us are “net importers”.  What the frik.

And why the frik are “exporters good”, you do realise that they are simply people trading with other people overseas … New Zealanders do also trade with each other.  If we had no international trade we would be worse off (specialisation is good), but we would still make and trade goods and services with each other.

Exports and imports are things people do with people overseas!  Exports as a whole are good, as it means that we are paying for imports … which are what we actually value.  The gap exists because people are willing to loan us the income to buy more imports than export.  The persistence of that gap is an area of note, that is entirely unrelated to your point about attacking the dollar at this point in time.

The transfer you are talking about is taking wealth away from the poor, the old, and households in general to give it to exporters.  This is not about jobs, or making us a “high wage economy” – this is about temporarily cutting wages to temporarily increase exporters competitiveness … until the real exchange rate adjusts back and we have to face the same old issues again.

This is why I fight about this issue at every turn.  Economists are supposed to discuss trade-offs, and this involves making the costs to those who don’t have loud interest groups (such as the disparate interests of consumers) apparent.  You are suggesting temporary pain for NZ’s most vulnerable for no long-term gain – all to give exporters a temporary increase in their bottom line.  And if it isn’t bad enough, you don’t seem to be admitting that this is the trade-off you are pushing through – and that’s why I had to write this.


10 Responses to “Beware those bearing gifts of free exchange rate depreciation”

  • “If we had no international trade we would be worse off (specialisation is good),”

    Bollocks.

    Two reasons:
    1.) Societies don’t specialize, people do and, even then, not often. When a society specialises it stagnates and all the bright entrepreneurial people leave – exactly as what is happening to NZ.
    2.) http://robertvienneau.blogspot.co.uk/2013/03/on-loss-from-trade.html International trade actually makes the world worse off. Or, to be more precise, international trade with interest rates above zero and possibly above negative values makes the world worse off.

    BTW, one of the trade-offs of the RBNZ printing money would be that substitution would have to happen and the only way that it could would be for more product to be produced here which means more jobs and more development.

    • Egads, Draco. You can’t really believe that we’re made worse off by our ability to use international trade as a way of turning grass and water into flat-screen TVs?

      Sure, individuals specialise. But differences in resource endowments across countries mean that the choices of individuals within different countries lead to differences in output composition across countries and gains from trade.

      Thank you for the comment, though, Draco. It is always enlightening to have made very obvious the economic reasoning common among Labour’s activist base.

  • We’d be better off if we made the flat screen TVs here. Our waterways wouldn’t be so polluted, our society would be developing rather than remaining as a rural backyard, we’d be producing more of what we need and we wouldn’t have to work so hard.

    I’m not against international trade, I just think it should be minimised rather than being seen as the be all, end all to wealth which it obviously isn’t. If it was, we’d all be rich already.

    And I have no connection to Labour.

  • Draco, your claims appear to be non-substantiated non sequiturs. Perhaps if you fleshed out the ideas a bit more you may have more of a chance of persuading us?

    You act as if specialisation is bad – even though empirical evidence and the majority of theory, as well as common sense regarding how individuals respond to each other, support it.

    You link to a single (not peer reviewed or published) paper saying it refutes it – even though the paper only shows a situation of bilateral trade for two-small open economies, and assumes that prices are fixed – furthermore the result only looks at steady-states and ignores utility from transition. Their result is an artifact of these factors!! Remember, if prices are fixed the initial “autarky” eqm is still available – but in order to maximise utility the countries have adjusted their patterns of consumption and production …

    Also you say societies don’t specialise, people do – indeed, one of my points in the article was that exporters and importers are trading with people not in the countries borders, so surely on this point we already agreed. As a result, I have no idea why this makes anything bollocks.

    “BTW, one of the trade-offs of the RBNZ printing money would be that substitution would have to happen and the only way that it could would be for more product to be produced here which means more jobs and more development.”

    Lets be honest here. I have already suggested how we can have all the jobs we want:

    http://www.tvhe.co.nz/2010/05/18/compulsory-10-hours-of-unpaid-work/

    You do realise that these policies are really just suggesting we cut wages to increase returns to capitalists. It is the New Zealand left pushing these sorts of ideas – and as a result I find it incomprehensible!

    “We’d be better off if we made the flat screen TVs here. Our waterways wouldn’t be so polluted, our society would be developing rather than remaining as a rural backyard, we’d be producing more of what we need and we wouldn’t have to work so hard.”

    I’ll be honest with you – if you believe this you are living in a dream world. The same dream world that has convinced you that having people produce things they are relatively good at is actually a bad idea – even though evidence and the experience of the world over the last 300 years disagree with you.

    Saying that we can magically all be wealthier for no cost won’t make it happen – and I’m frustrated that every single part of the politicial spectrum likes to pretend that it can. Ignoring costs don’t make them go away.

  • @ Draco

    mmmm – I suspect one of NZs issues is we haven’t specialised enough. We should be shipping finished goods, not raw products. Too much of our output is still in undifferentiated primary products rather than finished stuff – timber for example should not leave here as logs, it should go preferably as furniture, framing timber, etc.

    Better environmentally too since we don’t end up shipping inevitable waste product of further processing, and our energy for processing purposes is generally “cleaner” than that used overseas.

    I’d be interested in the qualified economists view on this.

    As to the ecological impacts – that is not an issue of specialisation. Farming could easily have near 100% compliance with the green accord if compliance was strictly enforced. There appears to not be a will for this in some locations….

  • Draco. If international trade is bad, what about trade between the North and South Island? If international trade should be minimised, would the South Island be better off if it minimised its trade with the North Island? If not why not.

  • International Trade is, by definition, a zero sum game. Unless there is something somewhere pumping something magical into the system, everyone cannot win. Why are Europe’s losers losing? They kept buying stuff from the winners.

    The only thing I can think of that can take the place of magic is something dug out of a hole in the ground. (eg and only an example! – Gold). Once it is out there, the digger gets his “money”, the buyer gets his gold. If that was it then it appears that it might work.

    The killer comes when different regimes insist that their exchange system is better than yours and someone discovers that buying gold in their currency and selling it in yours might be a way of creating wealth out of nothing.

    Oh wait……

  • Ross
    “International Trade is, by definition, a zero sum game.”

    No! As any economist will tell you, After all if this were true why would anyone trade? We trade because I give up something I value less for something I value more, and so you, so we both gain. New Zealand trades sheep for cars from Japan because we value the cars more than the sheep and Japan trades cars for sheep because they value sheep more than the cars.

  • @Ashton Dempsey
    Too much of our output is still in undifferentiated primary products rather than finished stuff – timber for example should not leave here as logs, it should go preferably as furniture, framing timber, etc.

    One of the problems is Governments have been saying this since at least the 1970s. I don’t think we’re exporting logs because people are unaware of this option. I think we do it because this is one of these brute economies of scale activities that we can’t reach. Giant mills on the Yangtse can.

    I might add that we do actually export a lot of wood products as framing timber and the like. We did kind of okay during the last US housing boom, and these places will need repairing over time, so as the US economy picks up, we’ll do more of it.

  • @ Brendan Moyle

    or perhaps we do it because we lack the depth of capital to build the required plant and infrastructure? In any case, it would seem to make both economic and environmental sense to be converting commodities to finished products locally and then shipping the finished product.

    Bit o/t by now so I’ll leave it…