Time to wake up from the neolib nightmare

Written By: - Date published: 9:20 am, October 8th, 2009 - 18 comments
Categories: economy - Tags:

Back in the 1980s, some people who had read too much Milton Friedman and had drunk too much whiskey at Backbone Club meetings, thought adopting the neoliberal economic model, that had never been proven to work outside textbooks, was the way forward for New Zealand. Slash government, slash taxes (for the rich), slash wages, slash benefits, institute a ‘natural’ level of unemployment, (distract people by making the resulting crime a central political issue), float the dollar, drop all our tariffs even if no-one else would, and make controlling inflation an overriding priority. currency oscillation We know how wrong a lot of that went but I reckon the most underappreciated failing of the Right’s neoliberal agenda has been the floating currency.

Here’s a wee graph of the average percentage change each month in the exchange rate between New Zealand and United States Dollars for each year since the currency was floated in 1985. It’s an interesting pattern.

Quite a high amount of variability at first but after the 1980s generation of high-roll gamblers financiers lost their shirts in 1987, the exchange rate became quite steady. Good times for exporters. As they often say, the predictably of the exchange is as important, if not more so than the actual rate.

Then look at what happened as the credit bubble developed, hot money moving in and out of New Zealand at the speed of light, the currency slamming up, then crashing down. New Zealand, with our tiny economy has one of the top ten traded currencies in the world. It’s only gotten worse with the financial crisis as the smartest men in the room first bet it all on the US dollar, then changed their minds. In that last year, the exchange rate has changed an average of 5% a month.

The graph uses data up to September 30. Since then, in just one week, the currency has climbed another 3%.

How is any exporter meant to trade with such a volatile currency? You agree a sell at one price, three months later when the money comes through the currency may have worsened 10% making the deal uneconomical. Hedging isn’t free and even the experts seem as likely to bet in the wrong direction as not these days.

Hell, John Key can’t get close to predicting where the exchange rate will go next and we’re all supposedly in awe of his currency trading skills (although they saw he was more of a salesman than an analyst back then too). Just ten months ago, he was predicting he would see the Kiwi “with a 4 in front”. Just ten months later the currency is 50% higher than Key thought. Treasury’s Budget predictions, just five months old, are nearly 50% out and were already 20% by the time they were made public (their oil price projections are way out too).

No wonder exporting has been in trouble for a long time. And things are only getting worse as the world economic system continues to lurch between irrational optimism (the financiers’ natural state) and the reality that the system is still have fundamental problems, along with the resources and environment that support it. Our currency is bobbing around in this sea of uncertainty and it’s hurting us badly.

The neoliberal model has failed. The floating currency has failed, the Reserve Bank Act has failed. If we are to have a sustainable recovery these two outdated ideological barriers must be taken down and a more sensible, less absolutist solution put in their place.

18 comments on “Time to wake up from the neolib nightmare ”

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  1. RedLogix 1
    8 October 2009 at 9:32 am

    Simple answer. Single global trading currency… bit like the Euro was for some years. I know this has a whole lot of other implications, but ultimately I believe they all point in the same direction… the relative failure to develop an authentic and effective global governance.

    As for the neo-liberal/classical failure… Keen nailed it back here.

    • Bill 1.1
      8 October 2009 at 10:27 am

      You seen this piece from the Independent about China, Russia, Japan, France and Gulf States looking to replace the US dollar with a basket of currencies plus gold and dump the dollar/oil relationship?

      Interesting read and gets even more so if read in conjunction with Escobars Pipelinestan pieces….latest one here . (If you haven’t read the first two, then I’d suggest linking through to them too.)

      • IrishBill 1.1.1
        8 October 2009 at 8:39 pm

        I like Keynes’ idea of the bancor. Whether I’d trust the IMF to act as the reserve for it is another question.

        • Bill 1.1.1.1
          8 October 2009 at 10:37 pm

          IMF and China doesn’t equate….if this new benchmark comes to be, the IMF will have S.F.A. to do with it.

          anti-spam = graves…..that would be the final resting place of all those who constituted the ‘Washington Consensus’?

  3. roger nome 3
    8 October 2009 at 10:14 am

    My fave part is John Banks faking a punch to Ruth Richardson’s face at 06:15, what the hell?

  4. Bill 4
    8 October 2009 at 10:15 am

    Marty. I don’t think the distraction came in the shape of a focus on crime.

    In the political sphere there were advances. These, I’d say acted as a fig leaf for what was happening in the economic sphere and helped confuse people insofar as liberal in the social or political sphere is usually associated with something good….

    Anyway.

  5. TightyRighty 5
    8 October 2009 at 10:39 am

    you say that the neo-liberal and floating exchange rate model has failed, which is debatable, but anyway. what do you suggest to replace it marty?

  6. Tom M 6
    8 October 2009 at 10:48 am

    Speaking of ignoring empirical evidence, I’m surprised that you would write a whole post on floating the dollar without even referring to this…

    http://www.nzherald.co.nz/tracking-the-nz-dollar/news/article.cfm?c_id=1501185&objectid=10599524

    • Victor 6.1
      8 October 2009 at 12:01 pm

      Tom M, Really good comment. The NZ dollar does insulate NZ from the worst of the global shocks, as in 1998, 2000/01 and last year. The floating currency does work.

      We are also moving into a new era where China will be dominant economically, and unlike the US, will allow NZ to export primary products without the chronic protection that the US, UK and EU have imposed on NZ in the last 35 years. That is why the NZ dollar is so strong right now.

      So, while the floating currency hurts at times, over the the cycle the evidence is that it helps more than it hurts.

      The key failure of neoliberalism in NZ is not the RBNZ Act, or the floating of the NZ dollar, but the privatisation program. We had one of the most extreme government asset sell-offs outside of Russia. Telecom, BNZ, ECNZ, NZ Rail, even the Government Printer were all sold at ‘mate’s rates”.

      This has left the NZ economy with a permanent disability, in that we cannot accumulate and compound wealth. It all stems from the neoliberal view that these assets were better off in private sector’s hands, no matter the sale price or whether the new owner was local or foreign.

      Bet you Brash’s 2025 Commission does not highlight that.

  7. RascallyRabbit 7
    8 October 2009 at 11:54 am

    The main problem with that article unfortunately is that its fine if you are exporting low-value bulk commodities but problematic for niche manufacturing and other “knowledge” exporters – check out this weeks listener –

    http://www.listener.co.nz/issue/3622/features/14137/house_of_pain.html

    • Victor 7.1
      8 October 2009 at 12:02 pm

      But manufactured exports mainly to Australia, and that NZ dollar is cheap against the Aussie right now

  8. RascallyRabbit 8
    8 October 2009 at 8:12 pm

    Not the few companies that I’m familar with personally that export from here in Christchurch to pretty much every where in the world except Australia – they are what that crowd up at I think it was Icehouse believed could be some of the about 500 companies here in New Zealand that could potentially grow to become large internationally effective companies if given the chance.

    These companies constantly have to reneg on deals because of the volatile exchange rate a problem I’m sure not too many real-estate agents suffer from…(as they are the punching-bag at the moment!)

    Exchange rate policy isn’t the problem New Zealand’s large overseas liabilities and some non-ideal policy settings are a much bigger problem…

  9. ben 9
    8 October 2009 at 10:17 pm

    Marty, the glaring omission from your article, the elephant in the room in fact, is that trading countries have an unavoidable choice of controlling either their foreign exchange rate or their money supply. You can’t control both in a trading economy unless a country’s terms of trade is constant, which of course is impossible. Do you really want to cede monetary policy to foreigners?

    The second elephant in the room is that fixed exchange rates prior to the currency floating showed about the same volatility as they did once floated.

    So your point is what, exactly? That compared to your impossible dream the status quo fails?

  10. gomango 10
    9 October 2009 at 12:27 am

    Quote from the G30

    “there has been much talk in recent years about the decline of the dollar as an international currency. Some say that it was the inevitable consequence of the decline in the international role of the United States – the end to American hegemony.”

  11. gomango 11
    9 October 2009 at 10:19 am

    Peter B. Kenen in a paper titled “The Role of the Dollar as an International Currency.”

    Published in 1983…….

    Reports of the death of the dollar are greatly exaggerated. It is doing what it is supposed to do right now – adjust in response to economic changes in the economy.

    Fisk’s breathless reporting about an alternative currency is just a beat up. It won’t happen for two reasons. The US will still be an integral and the major part of the global economy for the foreseeable future, continuing to drive innovation and investment in every market imaginable. And more importantly it is not in China, Asias’ or the Middle Eaasts’ interests to promote the long term marginalisation of the USD – they own so many USD assets relative to all other currencies, they would be destroying their own wealth. This might be a pipe dream of the madmen that run Iran but thats about it

  12. Hobbo 12
    9 October 2009 at 1:10 pm

    “Just ten months ago, he was predicting he would see the Kiwi “with a 4 in front’.

    Umm – we did see the Kiwi with a “4” in front of it – we hit 0.4890 lows in March – just 3 months after Key had called the Bird lower. Say what you want about his skills as a trader (“although they saw he was more of a salesman than an analyst back then too”) but the fact is that the man was and is highly regarded in the markets as a price maker and trader (he was never a salesman but ran risk on his own book)

    Snide personal sneers detract from your (largely hollow) arguement. In fact economists at Westpac have recently put out a piece showing that the floating ccy had actually cushioned vols – the inverse of this unthinking piece of quasi analysis

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