The Kiwi Dollar - Is It Too Risky?
The Kiwi Dollar - Is It Too Risky?
Prebble Speech to UK/NZ Trade Council
Friday 29th Sep 2000 Richard Prebble Speech -- Economy
I thought that some observations on the debate over the kiwi dollar might be of interest to this Trade Council.
ACT is the Party of new ideas. I am the Member of Parliament who first raised the issue of whether we would be better off using another stronger currency.
I must say that Dr Cullen was very dismissive in his sarcastic way. I think Winston accused me of treason and National said it was not on the agenda!
Now everyone is discussing the proposal. As I started this bandwagon, I think I am entitled to make some observations.
What caused me to raise the issue was the curious fact that although New Zealand was enjoying less than 2% inflation, lower than the USA, our interest rates are higher û why?
A second curious fact. Why are interest rates in Arkansas, President ClintonÆs home state, the poorest state in America, the same as New York, the centre of world commerce? It seemed to me that the only reason must be the currency.
I raised the issue with both the Treasury and the Reserve Bank. They did not seem to have any answers.
Mr Alan Gibbs, one of New ZealandÆs most successful business people had raised these issues with me and pointed out that he knew of no manufacturer, except Sony, who exports more than 20% of its product base.
Those who do export, such as our producer boards, have suffered over the years huge exchange losses. State-owned Coal Corporation lost half its total worth. Fisher and Paykel, perhaps our most successful manufacturer, has lost substantially on the latest fall in currency. Research undertaken by Arthur Grimes and Sir Frank Holmes, (An Anzac Dollar? Currency Union and Business Development) commissioned by the Australian New Zealand Business Council in September 1999, has shown that there does appear to be a sovereign currency risk that is perhaps over two per cent Two per cent is a lot.
A two per cent loading on every loan means that everyone from their credit card, to their house mortgage, to business loans, to the governmentÆs own borrowing is paying extra. It is a massive amount.
The total indebtedness is estimated at $300 billion. Two per cent of $300 billion is six billion dollars. ThatÆs what the kiwi might cost us.
It may be that having a different currency has other effects. If New Zealand was to adopt say the US dollar would that make lenders in the US more likely to invest and lend in New Zealand?
We do not have to experiment. For our benefit 290 million people in Europe are doing an experiment for us now.
Our media concentrate on the EuroÆs strength viz a vie, the US dollar.
I think thatÆs a relatively minor feature. It might reflect the difficulty the new central bank is having in creating credibility. Time will resolve this.
What is far more important is, will the Euro result in more trade, investment and cross-borders activity?
Will it result in stronger growth in Europe?
What will happen to interest rates?
Will the Italians who have given up the lira for the Euro get in return German interest rates?
Will the Germans who have given up the Deutschmark get in return Italian interest rates?
Will Ireland, that has abolished the Irish pound get in return low German interest rates? The answer appears to be that Ireland and Italy have got German interest rates.
It is interesting to note that the London/Frankfurt sharemarket merger has collapsed that involves two different currencies has collapsed. The merger between stock exchanges within the Euro are apparently continuing. There have been a wave of merges and cross-border investments within the Euro zone. EuropeÆs growth and employment is at record levels.
What has caused me to stop discussing the currency is because it is not a panacea. Investors wonÆt come to New Zealand if we increase income tax, nationalise ACC, blow away the surplus on social policy black holes, legislate to break contracts and re-regulate the employment market.
Getting the policy framework right is most important. Currency is just something that looks as if it may make a difference. But itÆs not a silver bullet.
I do not believe that Helen Clark had the slightest intention of promoting a common currency with John Howard this week. I believe our PM raised the possibility of an ANZC dollar as a red herring to attract attention from the fact that of all the currencies in the world, New ZealandÆs has fallen the second farthest to the lowest point û anyway, you measure it in our history.
ItÆs risky to predict û but we in ACT are always first! I think the Euro is going to start to rise.
If the Kiwi does not follow û and I do not think it will û then Clark and Cullen will start to realise how serious a situation the country is in. At some point the coalition must do a U-turn - but back to my topic.
Most favour an ANZAC dollar. That is not going to happen. Why should Australia abandon its dollar for a weaker currency?
Why should they agree to a New Zealand influence on their Reserve Bank? They will not.
But you do not need to have seats on a Reserve Bank to use another countryÆs currency.
Panama has used the US dollar for most of this century. Critics say, that the US dollar has not done much for Panama. Is that so?
It appears to me that despite being appallingly governed, Panama has had better growth, income and lower interest rates than any other Latin American country. Why? May be itÆs the US dollar?
Over 20 countries in the world use another nationÆs currency. All we lose is seigniorage û the $150 million the government makes out of us from the fact that it costs less than a cent to make a bank note, but the bank gets its face value.
A two per cent interest currency penalty has cost the government on its own debt $720 million, while the rest of us owe $144 billion with an interest rate penalty of $2.8 billion. So $150 million is a small price to pay for lower interest rates.
Which currency? Why go with Australia? New Zealand has the smallest currency in the OECD û Australia the next. The world currency is the mighty dollar as oil prices demonstrate.
Over half of our history New Zealand did not have our own currency. We used, what was then the worldÆs strongest currency û sterling.
In relative terms, New Zealand exported more then, using sterling, than we do today.
With sterling we invented and created the frozen meat trade, founded our most successful exporter the Dairy Board and built our infrastructure on borrowed money at favourable interest rates.
I personally believe our future is as a trading nation in an open competitive global market. There is no future in fortress New Zealand. Adopting an international currency would be an important statement that we are determined to create our future as a first world nation in the global market. I think the evidence is that we should just adopt the US dollar. But not yet.
LetÆs carefully study the Euro and what a common currency does for small countries like Ireland. If it works for Ireland, maybe it will work for New Zealand.
Adopting the Greenback may be one of the ways back to prosperity. But if we do not do a U-turn from our present direction having the US dollar will just let us know more accurately how bankrupt we are.
Getting back on the right course is the first step, and what currency is further down the road.
For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at email@example.com.