There is a very interesting article carried by today’s Dom post from Edmund Conway at the Telegraph: “Lurching between extremes at epoch’s end”
Conway argues that the failure of the recent G20 meeting to resolve the current impasse on currency imbalances might be seen as an important marker point of the century -a moment when the global financial system tipped from order to instability.
Underlying this are several crucial factors:
- US and Chinese inability to see a middle path on quantitative easing (“QEII” -driving down the value of the dollar to rebalance the US economy away from its yawning trade deficit) vs Chinese determination to hold the value of the yuan down to maintain export competitiveness (and the resulting buildup of surpluses available for reinvestment in Western assets).
- The increasing strain faced by the largely (but not entirely) free floating exchange rate system as more countries explore altrernatives. Conway likens this to the end of the Bretton Woods system – a once-in-50-year-shift.
- The underlying shift in economic power from West to East, from the US toChina.
- The increasing polarisation in US politics as it tries to cope with adjustment – notably the anti-free trade positioning of the Republican Right “Tea Party”.
He predicts two possible endgames;
- another financial crisis leading global leaders to forge a new economic concensus (a ‘coherent international monetary system”).
- or a period of chaos as “hegemonic stability”underpinned by the US breaks down. That would indeed make the GFC look like a tea party.
If Conway is right, and there is a non-zero chance that he is, then New Zelanders must ask the question “what is our plan B” on international finance? What if the assumptions of normality no longer hold?
Labour has already proposed a moderate but definitive programme of monetary reform, including a rewrite of the Reserve Bank Act, complementary monetary policy tools and more tactical exchange rate intervention (a “dirty float”). This is predicated on continuity of something like current international conditions.
If chaos breaks out and the tradeability of our dollar is in jeopardy, or if there were huge capital flows into NZ (as a safe haven or a punt outside the USD), or of capital flight as risk averse traders retreat to the greenback or gold, what forward planning has been done to anticipate this? I would guess, none in the Beehive and not much at the RB. At the very least some transparency would be helpful.
Once again it looks like it is left to Labour to ask the tough questions and come up with some answers.
So why are the RB anticipating increasing interest rates?
Cycles David -
Back in 18?? (cant remember exactly 73? 90?) The UK drop its status as world reserve currency, to drop the value of the pound and reset their BOP deficit to the US (wood, crops, steel etc). The Europeans had just had a property crash which ground their domestic demand to a halt. The US govt had a positive bank balance that they farmed out to expanding west, steel, rail etc, based on the income from Europe made from profits in US.
Long story short the US retaliated trying to shore up their market (Europe) by buying gold, to up the price, and sending loans to Europe with printed money. The up shot was that as Europe came out of depression in 3 years the US took 10 years.
All of this is from memory (no time to google), but when I first read about this crash I was reminded that it looked less like the great depression and more like the last time the worlds reserve currency decided to break from this role to balance their own books. The important difference this time is that the china is not willing yet, or seen as willing to take on this role and neither is any of the other great economies (Germany excepted).
Huh, what anti-free trade positioning was this..?
David you commented re “Labour has already proposed a moderate but definitive programme of monetary reform, including a rewrite of the Reserve Bank Act, complementary monetary policy tools and more tactical exchange rate intervention (a “dirty float”).” Yet I have not seen any thing regarding what costs, outcomes you expect and what if things don’t work out how you will put in place mechanisms to mininse the damage, what costs are we expected to suffer and are they worthy of the supposedly theoritical benefits?
re ” A dirty float” how this is to be managed what happens if there is no med-long term effects i.e. peeing into the wind. The ability for currency speculators to take any gains from good NZ citizens, as the RB uses its available funds ($50b) there is a reduced ability for further action, and then what a forced purchase of NZ$ after the sell down and what would that do to an export led economy?
What gets me is where is the detail?
These great theoritical experiments have damaged NZ (previously under a lab govt) how do we know that yet another experiment will not cripple us?
Huh, what anti-free trade positioning was this..?
I guess it depends on whether ‘tea party’ means the smattering of elected officials or the, ahem, grassroots movement, but googling ( tea party free trade) tells me a pretty consistent story.
Polling data:
http://people-press.org/report/673/
emph mine
Interesting, many of the Tea Partiers campaigners are libertarians, the most pro-free trade people I know…
And who better to be in charge of the nation at such a moment than a very senior international market player? Based on Key’s proven instinct and performance, he’s a winner if this happens.
The currency wars however could make or break this country, depending who wins and that will be China.
A lot depends on whether Russia gets behind either protagonist.
But is China that stable? Isn’t there great disquiet in the areas that are as poor as anywhere in the world? The China we see may just be a chimera.
I’m not saying it’s a good thing Adrian, I’m saying it’s going to happen.
Correct me if I am wrong but didn’t Dr. Cullen try to influence our dollar when he was in the chair – with disastrous results and great hilarity as the world laughed at him.
I will stick with John Key thanks.