The handwringing about our exchange rate wrongly describes it as "over-valued". These complaints reflect ignorance of the market economy.
In a free-floating system the exchange rate by definition is never over- or under- valued; rather like all pricing it accurately reflects the ever-changing supply and demand for New Zealand dollars at any given moment. Up until March 1985, when we floated, the constant worry in the previous 80 years was our balance of payments deficits. Consequently punitive restraints kept us with a much lower standard of living than need have been.
The New Zealand Party I led in the 1984 election had as a principal policy the introduction of a floating exchange rate. Trying to explain that it would mean the end of balance of payment worries was extraordinarily difficult. It just seemed too easy. But the fact is that after the currency was floated, reference to the balance of payments disappeared, the problem no longer existing.
Russel Norman naively called for Reserve Bank intervention. Others have proposed different measures they (wrongly) believe will lower the dollar's value.
What none say is what the "correct" rate should be.
All of this reflects the major problem of the market economy system, namely that it flies in the face of the understandable desire for certainty in life. As I observed in my 1996 book on our monetary policy, published by Canterbury University, no society has ever voted for the free market as its instability is contrary to human nature.
The market system has proven itself unquestionably as the best for our material welfare but it has a cost, namely ever-fluctuating prices in line with ever-changing supply and demand. That is salient to its functioning.
Recently The Listener ran a cover story on our perceived strong currency. It opened with an account of a small Auckland exporting manufacturer and his struggle to survive. Why don't we hear this whinging in Australia where the equivalent dollar and wage bill is a quarter higher?
The answer is that it's a tougher society, prepared to take the good with the bad, aware that all pricing constantly fluctuates.
Nations which tamper with their currency invariably come a cropper as the Euro debacle demonstrates. When Argentina fixed their peso to the dollar in the 1990s I bet $100 with their then Wellington Ambassador that it would end in tears. He duly forked out in 1999 but they've still not recovered from the damage, as in Europe today. There are exceptions, such as Singapore and Hong Kong, but they're massive international trade centres and can make a case for fixing their currency to the dollar. So too China, which has experienced a phenomenal transformation backed by a fixed exchange rate - but the gains are illusionary and it's my bet they will float in the near future.
Latvia has an interesting system. They tie their currency to the euro, thereby providing a degree of stability but periodically revalue as they think fit. This still results in angst by their exporters arguing it's too high and their importers that it's too low. Latvia's a well-run country and this system has enabled it to rapidly recover, after taking the biggest economic hit bar Iceland, in Northern Europe following the global financial meltdown five years ago. I was there when it reached the pits and, as always, life was still fizzing along despite the handwringing. Foolishly they talk of joining the euro soon.
There's a lot of ignorant chatter from the Greens proposing a financial transaction tax.
They see currency traders as responsible for our alleged high dollar. Currency traders fill a useful role but this is not the time to explain why. What can be said is that for them to drive our currency up by large-scale buying of New Zealand dollars will only work if they keep them.
If we could find people with enough billions who are also dumb enough to buy and hold our money - as the Greens believe is occurring - then we can all retire, our sole industry being a printing press. In fact these traders are playing a closed shop arbitraging game, often in and out in minutes, and don't affect our dollar's pricing.
Talking of foreigners buying our currency, I tried to persuade Mike Moore when he was Minister of Trade in the 1980s to introduce spectacular artwork $5 notes, knowing tourists would take them home as gifts. We would effectively be swapping coloured paper for money.
The Cook Islands have introduced $3 notes for this reason, ergo, free money. I've often been amused in primitive economy countries having to sign departure forms that I'm not taking any of their banknotes or coinage. The silly buggers should be encouraging people to do this.
What all of this says is that few folk understand money, which is logical as it's enormously complex.By Bob Jones