John Walley: Printing money another useful part of economic tool kit

Lowering the currency will enforce austerity measures by increasing the prices of imported goods. Photo /  Kenny Rodger
Lowering the currency will enforce austerity measures by increasing the prices of imported goods. Photo / Kenny Rodger

Last week Damien Grant detailed reasons why measures such as quantitative easing wouldn't work and promoting Budget cuts as the answer to massive Government deficits.

However, this view misunderstands the reasons for measures such as quantitative easing.

These are not tools designed to shy away from what must necessarily be a hard landing for our economy, but rather a set of tools to reduce our overvalued exchange rate and to allow the productive economy to earn more in the future - this earning capacity of course underpins our long-term living standards.

In fact lowering the currency will enforce the austerity Grant desires by increasing the prices of imported goods - petrol, TVs and overseas holidays will cost more.

On the flipside of this, a lower exchange rate also allows businesses in the traded sector (exporters and firms competing with imports) to earn New Zealand a living. Profitable export firms do create jobs, do create growth and do address the Government's deficit via increased tax revenue.

This graph shows the real reason for our deficit. Since 2004 the amount we have earned in the traded sector has declined, while spending in the domestic economy has continued to increase.

As you can see from the graph, that decline in the traded sector coincided with a major upturn in the exchange rate. While the exchange rate remains elevated the deficit problem will continue.

Without export growth New Zealand will borrow more, sell more assets and disinvest in the productive economy; all trends that reduce our capacity to sustain a trade surplus and erode our ability to service our international debt.

Any credible plan to rebalance our economy must deal with those policies that persistently overvalue our currency; if we persist on our current path we can only expect more of the same.

Exchange rates are a policy objective in other jurisdictions and their policies are designed to keep their exports competitive through quantitative easing in the United States and the United Kingdom, capital controls in Canada and Brazil or direct currency management in Switzerland, China and Singapore.

Our policy makers need to take their lead if our economy is to rebalance; like Grant says, small cuts here and there won't solve the problem.

John Walley is chief executive of NZ Manufacturers and Exporters Association.

- Herald on Sunday

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