NZ dollar & economics

[idb]

I am not an economist.
I am a tradesman in my own business.
Can someone clever please explain the following to me;

• the NZ dollar rises against foreign currencies
• imports become cheaper
• NZers buy lots of imports
• our balance of payments suffers
• Reserve Bank tells us off for buying imports
• Reserve Bank raises interest rates so that NZers suffocate under the weight of their mortgages and can't afford imports
• overseas investors see that NZ interest rates are now among the highest in the world
• overseas investors start investing in NZ currency
• the NZ dollar rises against foreign currencies to its highest value in decades
• imports become cheaper

What's likely to happen next I wonder?

[ManDownUnder]

Good question - and after much deliberation and soul searching I've come to the following (highly educated) conclusions.

• Exporters suffer
• Someone ineffective with suitably romatic policy gets elected into our highest office and put in chanrge of fiscal policy
• Importers beat the crap out of each other cutting prices so everyone loses

Did I miss anything?

[idb]

Good question - and after much deliberation and soul searching I've come to the following (highly educated) conclusions.

• Exporters suffer
• Someone ineffective with suitably romatic policy gets elected into our highest office and put in chanrge of fiscal policy
• Importers beat the crap out of each other cutting prices so everyone loses

Did I miss anything?

What's that I hear....the sound of thundering hooves.....they're getting closer.....it's.........it's.......Winston Peters and he's on a white horse!!!!

[cowpoos]

I am not an economist.
I am a tradesman in my own business.
Can someone clever please explain the following to me;

• the NZ dollar rises against foreign currencies
• imports become cheaper
• NZers buy lots of imports
• our balance of payments suffers
• Reserve Bank tells us off for buying imports
• Reserve Bank raises interest rates so that NZers suffocate under the weight of their mortgages and can't afford imports
• overseas investors see that NZ interest rates are now among the highest in the world
• overseas investors start investing in NZ currency
• the NZ dollar rises against foreign currencies to its highest value in decades
• imports become cheaper

What's likely to happen next I wonder?

its a massive subject....involves alot of emotion and insight...and guessing...the ups and downs [the strength of the dollar being a higher value]
involves money flowing in and out of the country...there fore buying and selling NZ dollars...or investing in NZ dollars...or investing in our country...it creates a supply and demand senario...demand pushes the value of the dollar up...as the main driver is currently our higher than the average[for a western world country] interest rates...is attractive for higher returns for investers over sea's...some one here will have a better and bigger explaination than mine....especially if you get the reasons why with it...
try sending a email to a accountant...or the reserve bank...try a google search?

CP

[Yokai]

This is a pretty awesome site for those interested in Economics

http://www.bwlimited.co.nz/index.htm

yeah - I have a vested interest, and yeah, I know the archives page needs a little work

Nope - that's not me in the photo - I just do webdesign

[Lou Girardin]

It's what happens when you have a Reserve Bank with practically only one goal - to keep inflation between 1% and 3%.
Using interest rates only to achieve this is like cracking nuts with a sledgehammer.
Every other 1st world country has capital gains tax to moderate the excesses of the property market, why haven't we?

[idb]

It's what happens when you have a Reserve Bank with practically only one goal - to keep inflation between 1% and 3%.
Using interest rates only to achieve this is like cracking nuts with a sledgehammer.
Every other 1st world country has capital gains tax to moderate the excesses of the property market, why haven't we?

In reality though the property market isn't what's ruining our balance of payments surely and isn't that the BIG worry?

[TwoSeven]

I am not an economist.
I am a tradesman in my own business.
Can someone clever please explain the following to me;

• the NZ dollar rises against foreign currencies
• imports become cheaper
• NZers buy lots of imports
• our balance of payments suffers
• Reserve Bank tells us off for buying imports
• Reserve Bank raises interest rates so that NZers suffocate under the weight of their mortgages and can't afford imports
• overseas investors see that NZ interest rates are now among the highest in the world
• overseas investors start investing in NZ currency
• the NZ dollar rises against foreign currencies to its highest value in decades
• imports become cheaper

What's likely to happen next I wonder?

Its pretty simple to understand at the end of the day.

Money supply is what dictates the base value of the NZ$ - there is a fixed amount of money in circulation going around inside the country - given the demand for goods on the local market, the money has a set value (price is set by supply and demand).

Given that, when you export something, the other country must purchase new zealand dollars in order to pay for the goods. This increases the demand for NZ dollars and therefore increases its value - so the exchange rate for NZ $ increases. Thus future imports (not exports) become cheaper - future exports become more expensive.

When you import goods, you must sell NZ$ to buy foreign currency to purchase the goods. This increases the supply of NZ$ on the foreign market and reduces its value. So the NZ$ exchange rate drops and future exports become cheaper, but imports become more expensive.

To calculate the net impact on the NZ$ in local terms, just subtract the value of imports from exports. The result if positive is good for the economy as it means money coming in. If the result is negative (too many imports), then it means money going out. You dont want money going out.

When you import stuff, you have to sell NZ$ on the foreign market, which reduces the value of the NZ$. This means that things on the local market get more expensive because the dollar you are using is worth less each time.

There are two ways of fixing the problem - remove money from circulation and increase demand for it, or penalise people for using it (interest rates).

The reserve banks current account is where normal banks borrow their money from. They do so given a fixed interest rate - called the base rate. They then lend it to the consumer to purchase the house at a morgage rate (usually base rate + a profit margin).

If the bank borrows too much, then the reserve bank may increase the base rate to stop them doing so, result is your mortgage increases as the bank passes the cost along.

If too many people buy houses because the mortgage rates are too low (compared to overseas), then the reserve bank will increase its rates to such an extent that people will borrow there money from elsewhere (laws of substitution) because there is a current housing shortage (population increased by half a million recently). So overseas investers chip in to cover the demand (overseas borrowing).

The opposite is true, if the value of the NZ dollar drops in relation to the world market then overseas speculators will chip in and buy up the excess stock, raising its value - they make a profit by selling it back at a higher price (forex market).

Because of the now raised value of the NZ$ imports are now cheaper (however, note that its balanced by higher costs of living).

There is a really neat diagram in one of my economics books. I'll see if I can scan it later and upload it.

Hope I got the model right, sometimes I get it round the wrong way.

[Marmoot]

The hope of Reserve Bank to stem economic growth to a sustainable level.....hmmm...

Anyways, this is my opinion (insert disclaimer here):

The policy of "increasing interest rate to steer economic growth" is a classic concept that I believe do have the same absolute-effectiveness nowadays as it was before.

In the old days, when the interest rate goes up, people put their money in the bank and spend less. Currency exchange did not matter too much as it does today. That was before globalization and internet.

Nowadays, increased interest rate would trigger massive foreign investment, meaning a lot of money coming into NZ$. This in effect increases our currency strength, making everything overseas look cheap! Because of Internet trading and globalization, shopping becomes cheap. The increased interest rate has an opposite effect from what it was intended to be: people spend more instead of less! The increased load interest rate lose to the savings created by increased NZ$ on the imported-item prices.
Retail industry becomes more frantic and economic growth seems to increase. But this is not sustainable, as indicated by business confidence. Sooner or later, people will run out of money, and because exporters suffer (and our country relies heavily on exports) sooner or later businesses will colapse. People will get laid off, and wages will be cut. This is the CRASH! Which, in my calculation (with present rate of economy) could happen sometime mid next year.

The government is now stuck! The world economy has become something we have never seen, mainly due to Internet and Gulf war. They can't reduce the interest rate (for fear spending on property mortgage will spiral out of control and cannot stem spending which will increase inflation) and they shouldn't increase the interest rate either (for spending would increase and trigger inflation even more).

Probably the only cure would be increasing tax. But that is like getting rid of cancer pain by inducing heart attack.

Any thoughts on how accurate this is?

[idb]

Thanks TwoSeven.
So exporting is it's own enemy cos in your explanation the more we export the higher the dollar goes?
But if importing lowers the dollar then surely the dollar should be spiralling down as we speak?
And I don't understand what exactly the problem is with people buying houses. It's all within the local economy.
Could it be as simple as that there are no absolutes in economics - even that it is nothing more than a pseudo-science praps?
It's all very interesting though.

[idb]

The ...

That all seems fairly logical.
It looks like the argument for small countries to amalgamate their currencies with others is going to become stronger as the world economy changes with globalisation pressures.
I can't see what increasing tax would achieve. Wouldn't that result in less money available to contribute to producing exports which is supposedly the panacea for all that ails us economically?

[Marmoot]

That all seems fairly logical.
It looks like the argument for small countries to amalgamate their currencies with others is going to become stronger as the world economy changes with globalisation pressures.
I can't see what increasing tax would achieve. Wouldn't that result in less money available to contribute to producing exports which is supposedly the panacea for all that ails us economically?

Thank's for the thoughts.
Yes, I agree it seems more reasonable nowadays to amalgamate currencies due to globalization. It does have it's own pitfall, like in European Union where the jobs/growth/migration keeps on shifting to wherever cost is the lowest, creating unstability. But this is a whole different discussion and we'd better not go there in this thread.

Increasing tax would stem spending, of course, as people will have less money available to them. This, in turn, can offset the negative effect of imports caused by strong currency rate. Of course the government would also have to keep the export-based industry tax rates to reasonable amount (or even lower it) to promote growth.
But, anyone knows, increasing tax rate is a hugely unpopular policy. And in a country with half of the population belonging to swing-voters, it does not seem to be a plausible option.

[Brian d marge]

Thanks TwoSeven.

But if importing lowers the dollar then surely the dollar should be spiralling down as we speak?
And I don't understand what exactly the problem is with people buying houses. It's all within the local economy.

It's all very interesting though.

This thread has been a jolly good read ...The house buying thing I think is due to people not saving ( I think NZ people tend to invest in houses rather than save cash in the bank ) So the supply of local money isnt enough, and overseas money is used .

So what I would like to see ,,,is all you fellas rip into the internet shopping and buy Stacks of goodies for Xmas ,,,,, Drive that bally dollar down

Buy a fully worked GSXR engine from ebay ,,, oh and you will need new riding gear !!!
Remember you are helping drive that dollar down ,,,,so that a fellow KB er
bank account increases in value!!! ( at the mo its nearly 1 to 1 )

Stephen
down you nasty dollar !!

[idb]

Of course the government would also have to keep the export-based industry tax rates to reasonable amount (or even lower it) to promote growth.
But, anyone knows, increasing tax rate is a hugely unpopular policy. And in a country with half of the population belonging to swing-voters, it does not seem to be a plausible option.

They could lower the export-based taxes without raising the rest to strengthen the export sector in relation to the importers?

[heavenly.talker]

What's that I hear....the sound of thundering hooves.....they're getting closer.....it's.........it's.......Winston Peters and he's on a white horse!!!!

Don't you be scaring me like that!