There’s optimistic and there’s just wrong

Written By: - Date published: 1:11 pm, April 23rd, 2009 - 14 comments
Categories: economy, john key - Tags:

John Key has a habit of speaking much more bluntly to foreign media than he does to us. In his interview with the Financial Times published this week he stated unequivocally that there will be no stimulus package for New Zealand. He hadn’t told us.

It was this, though, that caught my attention: “he is betting that a falling Kiwi dollar will naturally allow the current account deficit to correct itself over the next one to two years”

Why does John Key think that the dollar will fall as the economy recovers?

Look at some recent news reports on the currency:
“Kiwi slides, NZX falls as world markets tumble”, “the NZ dollar was hit hard as risk appetites retreated and commodities fell sharply. The kiwi had been caught up in growing optimism that global financials”, “Kiwi strengthens as risk appetite recovers”, “NZ dollar falls as investors get jitters”, “NZ dollar slumps with equity markets”

The currency goes down when the news is bad, up when it’s good.

The currency moves not because of the balance between imports and exports, like your high school economics textbook said, but because of investors and speculators moving their money in and out of the country based on confidence and interest rate differentials. We’re in a world economic crisis. Investors are scared. So there has been a ‘flight to quality’, they’ve got out of peripheral economies like New Zealand and put their money in the the safest of safe ports – US government debt. To do that, they’ve had to sell New Zealand dollars and buy USD. Fear about the world economy drives our dollar down.

When things appear to be getting better, our dollar recovers. Investors are less fearful and our relatively high interest rates make us attractive for the ‘carry trade’. They have to buy more New Zealand dollars and that pumps up the exchange rate.

Key’s got it backwards. When (if?) the New Zealand and world economies recover the dollar will rise, not fall, and we’ll be back in the with same problem we had before the world economy went to hell – relatively high interest rates, bringing in speculators, driving our currency too high, making imports cheap and export returns poor, leaving us with a current account deficit that’s too big for comfort.

It’s concerning that Key doesn’t foresee that problem but, then, he does like to look on the bright side. That’s working out great so far, eh?

– the mathemagician

14 comments on “There’s optimistic and there’s just wrong ”

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  1. infused 1
    23 April 2009 at 1:22 pm

    There is no point throwing money around. Look at the US. It’s not doing shit. Ride it out I say, instead of artificially moving things along.

    • BLiP 1.1
      23 April 2009 at 2:43 pm

      As usual, Infused, you’re confused. Unless, of course, you know more than the IMF.

      The economic depression is upon us and what’s you mate John Key doing about it? Giving tax cuts to the rich, sacking government workers, and telling the world he won’t be doing anything else.

      What a leader!

  2. Pascal's bookie 2
    23 April 2009 at 1:30 pm

    What do you mean exactly by ‘ride it out’? What is artificial about government doing things? Does the economy know the difference?

  3. gingercrush 3
    23 April 2009 at 1:43 pm

    Whoever the mathemagician is what are your qualifications when it comes to money trading? At least we know Key made 50 million off money trading.

    • Pascal's bookie 3.1
      23 April 2009 at 2:03 pm

      That was salary and bonuses weren’t it? In the last couple of years lots of people have made enormous amounts of money, losing billions. It’s a type of genius I grant you…

    • BLiP 3.2
      23 April 2009 at 2:45 pm

      Surprising, isn’t it, that someone could amass such a fortune without creating one new or useful thing. Bit like being a gangster, I suppose,

  4. Quoth the Raven 4
    23 April 2009 at 2:25 pm

    And then there’s this: Australian, NZ dollars buoyed by Toshin talk

  5. Irascible 5
    23 April 2009 at 2:51 pm

    It merely demonstrates the proof that money speculators operate on rumour and hearsay – hence the current mess the world economy is in – hardly a credential for a person pretending to be a Prime Minister while his deputy wields the axe.
    N.Z was sold a con job in the 1980s by Roger Nosferatu Douglas and his bride Ruth and then were persuaded to do it again in 2008.

  6. jarbury 6
    23 April 2009 at 3:00 pm

    ‘Ride it out’ like Herbert Hoover did to the US in the early 1930s? Yeah that worked a charm.

    If we agree with the IMF that this recession is or may be a depression, then aren’t debt levels less of a concern than ensuring our economy doesn’t lock up and become a perpetuating cycle of increasing unemployment, reduced tax take, reduced services, reduced spending, increased unemployment and so forth.

    Herbert Hoover was obsessed with balancing the USA budget when the 1929 stock market crash happened, and that move is widely considered to have turned that event into the Great Depression of the 1930s. Whilst FDR’s policies (borrow and spend) certainly didn’t immediately drag the USA out of that situation, his “New Deal’, combined with WW2 eventually got the US economy going again. At the end of WW2 the USA had absolutely huge debt level compared with their GDP (the highest in their history when compared with their GDP), but that debt had got the economy going again, and was a huge factor in the decades of economic growth the USA (and NZ) experienced in the late 1940s, the 1950s and the 1960s.

    Of course it’s not particularly good to increase debt levels in the long term. However, when you compare that option with the downward spiral of what an obsession with balancing a budget can do, I’d take the borrow option. The main issue then becomes ensuring that government spending is actually helping create jobs and keeps the economy going. I don’t really see much evidence of that in recent months, except for the possibility of the home-insulation deal with the Greens. But National has had to be dragged kicking and screaming into that deal anyway.

    Regarding economic stimulus, Bill English said he had set aside $5 billion for it. We got 10% of that allocated a couple of months ago on things like the Kopu Bridge and a few new schools. Apart from the Vic Park tunnel, where’s the other 90%?

  7. anonnymouse 7
    23 April 2009 at 5:26 pm

    50 mill? I heard he made 30 during the election campaign.
    and as far as I can make out – it is Other Peoples money.
    woah.
    A bit like what he’s pretending to do now.
    A trans-national cycleway? suggested by Tourism Minister and Prime Minister.
    Does’nt go ahead.
    Sounds great though.
    Result? John Key – the scoundrel – gives himself (and his ilk) an extra hundred odd dollars a week.
    Again, Other Peoples money.
    You wouldn’t read about it

    captcha: foist lives

  8. Greg 8
    23 April 2009 at 7:32 pm

    Seriously?

    You make your proposition under the assumption that the worst of the recession has passed (dubious at best). If the recession worsens (as most expect) then the kiwi dollar will fall and therefore exports will increase and the current account defict will reduce. Making the statement :

    “he is betting that a falling Kiwi dollar will naturally allow the current account deficit to correct itself over the next one to two years'”

    absolutely correct.

    • Kaplan 8.1
      23 April 2009 at 8:08 pm

      I would really like to think the PM would do more than just ‘bet’ on our futures.

  9. slightlydrunkyngchristians 9
    23 April 2009 at 9:06 pm

    bollickybollocks?

    captcha: react hard