It's official. We now know that John Key and Alan Bollard secretly love our high dollar.

It helps them do two things: get elected and keep inflation under control in that order.

Reserve Bank Governor Alan Bollard has just given the biggest nod and a wink to currency traders to allow the currency to stay up at these export-crushing levels.

This morning he left the Official Cash Rate at 2.5 per cent and commented that if the dollar stays high he won't need to increase the OCR much in the short term.


Bollard made no comment about currency intervention and most expect him to stay on the sidelines.

He was effectively saying to currency traders: thanks for pushing the New Zealand dollar up because it helps me deal with this inflation problem that's building.

This is part of a theme now developing globally of what experts call 'financial repression'.

This is where central banks artificially hold short term interest rates (and in some cases long term interest rates) low or near zero.

This helps heavily indebted consumers and businesses dig themselves out from under the debt by allowing inflation to eat away at the real value of the debt.

Central bankers and governments essentially punish savers in the future for the sins of the borrowers in the past.

The added complication for New Zealand is that because our financial repression is not as heavy as that being practiced in America, China, Japan and Europe, we are also seeing our currency rise as investors look currencies with returns higher than 0 per cent.

A rising currency is fantastic news for consumers, who of course outnumber producers and exporters as voters.


It's great in the short term for the Reserve Bank because it helps it meet its inflation target.

The longer term problem is that all this financial repression with free movements of capital simply punishes savers, producers and exporters at the expense of borrowers, spenders and importers.

This does nothing to accelerate the transformation we need into an export-led high wage economy that will keep our children here.

But it's great for those who want to fill the petrol tank tomorrow or get re-elected on November 26.

It's the sort of short term thinking with a lack of long term strategy that has put New Zealand in the vulnerable and hollowed out state it is now in.

Short term focus

The Reserve Bank governor can't really be blamed for this. He is simply operating within a short term and inflation-focused framework given to him by politicians and ultimately voters.

The problem is this inflation-targeting regime with a free floating currency and free movements of capital has gutted the export sector of the economy and loaded our kids with crippling debts. There was a glimmer of hope in late 2008 that our economy might transform itself when the currency dropped below 50 cents.

But what hope now it's headed for 90 cents?

Bollard and Key continue to sleep walk towards their short term targets and pretend that squeezing more milk out of the land will make us rich. It won't. Dairying produces hardly any high paid jobs and, surprise, surprise, not everyone wants to work on dairy farms.

Meanwhile, yet more high value exporters give up on long term investments and higher paid jobs for the long term. And New Zealand's people make long term decisions to take their skills elsewhere.

When are we going to have an open debate about changing these targets from short term to long term?

When are we going to make life harder for consumers and borrowers and send signals that we actually want more savers, investors, producers, exporters and highly paid workers?