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.