Thursday, 29 October 2009

NOT PJ: Dollars and Sense

This week, Bernard Darnton peers through the looking-glass at claims we can devalue our way to prosperity.

_BernardDarnton Fashionable worry number 373 is that the New Zealand dollar is worth too much. Over the last six months the rising dollar has made my impending trip to the UK look cheaper and cheaper.

If I sold milk, which thankfully I don’t, I might be even more upset by the exchange rate than by the early starts and hard work.

The flip side of the milk price is that a high dollar is a good thing if you want to buy anything made overseas, which is pretty much everything. Adam Smith pointed out that exports aren’t the be-all-and-end-all of an economy; they’re simply the price we pay to get shiny tat from China.

The simple fact is that you can’t make yourself rich by making your money worth less. If you could, Zimbabwe would be the richest country in the world. Austrian economists would tell you that paper money is worth nothing, but enterprising Zimbabweans have shown that if you change a billion dollars for a hundred ten million dollar bills you can wipe your arse on Mugabe’s smiling visage for less than the cost of standard two-ply.

A valuable currency is often a sign of a strong economy. In our case it’s more that the Federal Reserve and the Bank of England have faster printing presses than we do. Calls to halt the rise of our currency are really calls to destroy our economy faster than the rest of the world.

In any case, Alan Bollard and Bill English have admitted that there’s nothing they can do about it. If the Reserve Bank was going to intervene in the currency markets it would be more efficient just to give George Soros all of New Zealand’s money and then take the weekend off.

Our rising dollar is really America’s falling dollar. America’s rolling presses and staggering deficits are pushing their currency off a cliff. Holders of foreign reserves are already looking round for alternatives. One that’s been mentioned is the International Monetary Fund’s Special Drawing Rights. From what I can make out these are just tarted up thin air. They share all of paper money’s susceptibility to governments’ destructive shenanigans but without the Zimbabwean dollar’s more practical benefits.

If the government actually cared about increasing the size of the economy, rather than the size of its share of the economy, it would stop its continuous dilution of the currency. Even better, it could back the currency with gold. It would be stable, it would retain its value, and that would help the country prosper.

There are plenty of criticisms of the gold standard: it’s susceptible to fluctuations in the supply of gold; there’s nothing like enough gold around to cover the amount of paper money in circulation, so transition would be difficult. Bimetallic systems are even worse. However, they’re better than what we’ve got for one simple reason. Governments haven’t discovered the secret of alchemy. And if they can’t print gold, they can’t bugger it up.

* * Read Bernard Darnton’s NOT PJ column every Thursday here at NOT PC * *


  1. I agree. A devalued dollar leaves us all poorer and if the farmers benefit in the short-term, it's only robbing Peter to pay Paul. Eventually even farmers have to purchase imports like tractors and drench.

    I'm not convinced a return to the gold standard is necessary - all governments need to do is to also stop spending money that is not backed by productive activity. Money is simply a representation of the productive activity that generated it - and if you increase the money supply with no increase in productivity, the obvious happens - as in Zimbabwe. It's the one thing almost all economists agree on.

  2. The gold standard is a half-way house. If the government's going to run the money supply, I'd prefer it was something that they couldn't meddle with so easily.

    Even better would be for the government to bugger off into the monetary policy sunset - a free market in money is the real answer. Gold may or may not spontaneously remonetise in that case.

  3. Worth noting the Zimbabwean dollar is no longer used, except that it is now a collectable on Ebay worth far more than its face value ever was - because some people like giving the gift of a trillion dollar bill

  4. Vis a vis gold standard, I agree with Bernard, the most important thing is to take control of the money supply away from the politicians, alongside, of course, dumping the Reserve Bank, because, for example, our artificially low interest rates are now simply threatening to start the next asset bubbles, to wipe our the next store of savings. Such expansion of cheap credit is an increase in the money supply, and was the root cause of the Credit Crunch.

    It doesn't have to be a gold standard, it could be a basket of commodities.

    Although, my latest reading would have me heading toward 'free banking' which revised histories are showing worked pretty well in the US over the nineteenth century.

  5. Mark: It could be argued that our asset bubbles in the housing and farming markets are not due to low interest rates but of high interest rates as compared to those in Japan and the US, that is where a lot of the credit comes from to fuel the bubbles in New Zealand.


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