Wednesday, September 26, 2012

You don’t get richer by making yourself poorer

A “DEBATE” IS SUPPOSEDLY under way about monetary policy in New Zealand. A “debate” begun by economic ignoramuses calling for the Reserve Bank to redirect its efforts from “stabilising prices” to lowering our exchange rate.

What this amounts to is a call to use the printing press to lower our exchange rate—and hence to lower real wages.

Revealingly, however, none of the politicians promoting this call to lower wages by means of the printing press give this as their method. Instead, they like to use metaphors.

Russel Norman, who has all the economic credentials of an organic termite farm, reckons "you can't be a pacifist in an international currency war."

David Cunliffe, a man never short of a desire for more “tools” in the politician’s toolbox, reckons “a broader range of tools are needed.”

Meanwhile, the bloke whose back Cunliffe has his knife in Cunliffe’s colleague David Parker talks about “pulling the levers” to get the dollar down. How? An explicit answer to that question still eludes him even after his flying trip around the globe to ask a gaggle of famous inflationists which specific levers to pull.

The most any will allow is that “the Reserve Bank should be actively considering selective intervention in currency markets.” Which, given the Reserve Bank’s size, would be roughly equivalent to pissing uphill in an attempt to reverse the flow of Niagara Falls.

It is left to alleged economists like Bernard Hickey and Rod Oram to make their case for them.  “Bernard Hickey wonders why New Zealand is not printing money and thinks we are being severely disadvantaged by not following the crowd,” says the fiscal fool’s own headline. And Oram’s column in the weekend’s Sunday Star Slime was essentially a begging letter to the Reserve Bank’s custodians to take the tarps off the printing presses and let rip.

After all, they both say, everyone else is doing it!

What a fruit loop of fucking fools!*

It appears to have escaped their notice that “doing it” has done nothing at all to effect any recovery. Anywhere.  They’ve been “doing it over there” for five years now, with nothing noticeably positive to report.

Indeed, they might observe that those who have done it--most conspicuously, the US, Britain, Europe and Japan—have only made things worse. Worse for themselves, and worse for everyone around them. (Try and analyse why Japan has now enjoyed two “lost decades” before even beginning to fall for the easy delusion peddled by monetary cranks like Hickey, Oram and Norman.) Will currency devaluation make the Eurozone, the US, Britain or Japan wealthier? Answer: No.  But it will help to impoverish them all.

Every country in the world is printing money at the moment. We are too, just not quite so fast. What all the “debate” amounts to is a demand by the fiscal fools that we catch up.

LET’S CONFRONT RIGHT off the bat here a serious delusion about the desirability of any interventions by the Reserve Bank at all.  They cite the “effectiveness” of the Bank at its job of price stabilisation, without ever bothering to notice that their policy of price stabilisation has depreciated the value of the dollar by around 35% since the policy of stabilisation was begun, and when followed in both the 192os and 2000s the policy was fully responsible for pumping up unsustainable booms that led in both cases directly to economic disaster. This should surely bring into question any demand for any intervention by the Bank at all!

Second, they reckon it should take its eyes off that ball to try having a lash at “fixing” our exchange rate. (How? Somehow. At what level? At whatever level the fools decide—up one day, down the next, sideways presumably the day after.) But even if it were successful at reversing the flow of Niagara, or of printing sufficient amounts of our currency to have an effect without blowing us all up, what would the effect of that intervention actually be?

At the moment, for no good reason other than having interest rates marginally higher than elsewhere and a government borrowing hundreds of millions of foreign currency every week, there is an avalanche of foreign money wanting to be exchanged for our paper.

The net effect has been to raise the value of said paper. And the net effect of that, if you follow the argument through, has been to raise the purchasing power of our dollar. Which means, yes, that the prices exporters get are not translated back into as many local dollars, but it does raise sky-high the ability of businesses here to buy capital goods and supplies needed for production, thus lowering their costs; and it does, when you think about  it further, mean that every worker’s wage goes that little bit further when buying any of the thousands of goods and services whose production is priced in a foreign currency.

Which means that the pleas by Labour and Green politicians to lower our exchange rate amounts to a plea to lower real wages. Yes, to lower real wages—for that is what the call to lower our dollar’s purchasing power amounts to. A ‘round the houses’ means by which one of the chief difficulties created by the rigidity of wages may be overcome. It is a kind of subtle, surreptitious, supercilious beggar-thy-selves mercantilist type of policy explained by Adam Smith more than tw0-hundred years ago, and exploded by Friedrich Hayek less than one-hundred years ago.

You would think that at least the trades union’s economist would recognise this Keynesian subterfuge for what it is. But instead, he applauds it. “Stop talking, just do it,” says CTU economist Bill Rosenberg, oblivious apparently to the fact he is calling for a reduction in his members’ wages by monetary means.

THE SO-CALLED “IMPROVED competitiveness resulting from purposeful currency depreciation is a delusion, explains Australian economist Frank Shostak.

The so-called improved competitiveness resulting from currency depreciation in fact amounts to economic impoverishment. The "improved competitiveness" means that the citizens of a country are now getting fewer real imports for a given amount of real exports. While the country is getting rich in terms of foreign currency, it is getting poor in terms of real wealth — i.e., in terms of the goods and services required for maintaining people's lives and well-being.
   
As time goes by, the effects of loose monetary policy filter through a broad spectrum of prices of goods and services and ultimately undermine exporters' profits. A rise in prices puts to an end the illusory attempt to create economic prosperity out of thin air. According to Ludwig von Mises,

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.

    Contrast the policy of currency depreciation with a conservative policy where money is not expanding. Under these conditions, when the pool of real wealth is expanding the purchasing power of money will follow suit. This, all other things being equal, leads to currency appreciation. With the expansion in the production of goods and services and the consequent falling prices and declining production costs, local producers can improve their profitability and their competitiveness in overseas markets while the currency is actually appreciating. Note that while within the framework of loose monetary policy exporters' temporary gains are at the expense of other activities in the economy, within the framework of a tight monetary stance gains come not at any one's expense but are just the outcome of the overall real-wealth expansion.
   
It must be appreciated that, contrary to popular thinking, both tight fiscal and monetary policies provide support to wealth generators while undermining non-wealth-generating activities. [Hickey, Oran, Norman, Uncle Tom Cunliffe and all], by pleading for looser policies, are in fact asking to strengthen wealth-destructive activities and thereby recommending a prolonged economic slump.

That conclusion should hardly surprise you.

THE FACT IS, WE are still an economy in depression. The fact is, a reduction in costs would help businesses recover, while a reduction in wages would help reduce costs and help produce full employment.

That none of the politicians is honest enough to admit that’s what they’re after, a reduction in wages, tells you all you need to know about either their honesty (if they intend a fall in real wages) or their competence (if they don’t). That neither Oram nor Hickey—nor even Bill Rosenberg—even recognises that’s what’s afoot tells you they’ve never actually read all those Keynesian tracts they claim to be using in their playbooks.

The fact is, we have two basic choices regarding exchange rates. We can either work to the exchange rate we have. Or we can tell this irresponsible government presiding over our decline to stop borrowing $300 million of foreign currency a week, and to start living within its means. 

That is really the message given to this irresponsible over-spending government through the price signal of foreign exchange rates.

That is the real fiscal message given through the monetary discipline effected by foreign exchange markets.

That would do more to produce our real exchange rate than all the lunatic pulling on random levers would ever do.

That would help more effectively to bring about the recovery I’m sure we do all want far more successfully than will continuing to borrow and hope.

Good luck ever getting a politician interested only in buying votes to understand that.

* * * * *

* “fruit loop” = the collective noun for fiscal fucking fools.

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9 Comments:

Blogger Mark Hubbard said...

The Left always miss the immorality they're advocating also, by which I don't mean how such interventions increase the power of state and distort free markets - they don't see that as immoral - but rather, when I see it on Twitter now, I simply say why don't they just go spit on old people, as what they are advocating is destroying their savings and interest income (and this is precisely the group that no longer has options to 'catch up' again).

9/26/2012 02:40:00 pm  
Anonymous alwyn said...

It is a bit tough of you to blame the Reserve Bank for an excessive creation in the 1920s.
The Bank was only started in 1934.

9/26/2012 03:04:00 pm  
Anonymous alwyn said...

Sorry. Should have been credit creation not just creation.

9/26/2012 03:07:00 pm  
Blogger Peter Cresswell said...

Hi Alwyn, Indeed. I was blaming the policy in both instances, not the bank. I intended to say that the policy of price stability itself (as followed by the US Federal Reserve in the 1929s under the tutelage of Irving Fisher and the management of Benjamin Strong, and as followed in the "Great Moderation" of the 2000s by virtually everybody to the wild enthusiasm of all) in both of those eras pumped up unsustainable booms which led directly to economic disaster.

Maybe I should make that clearer in the text?

9/26/2012 03:19:00 pm  
Anonymous alwyn said...

I did wonder whether you were conflating material on the Federal Reserve and the Reserve Bank in what you wrote.
In general I agree with most of what you have written. I enjoyed your description of Norman's economic knowledge.
Would the fact that we are running a deficit, and having to borrow overseas not force down, rather than up, the value of the dollar?If we were running a surplus on the current account we would tend to appreciate on our exchange rate. As we are running a deficit it will tend to lower the rate.

9/26/2012 03:50:00 pm  
Anonymous Mike said...

Good post Peter. I thoroughly enjoyed it. Pity that nothing this good will ever see the light of day in the quackery that masquerades as a mainstream media in this country.

9/26/2012 07:28:00 pm  
Blogger libertyscott said...

Labour and the Greens, wanting the Reserve Bank to price poor people out of holidays overseas and new home electronics goods.

That's what it means.

Some may also remind people that the NZ$ had parity with the US$ until the mid 1970s, and was roughly at this level with sterling, and few complained.

9/26/2012 08:27:00 pm  
Blogger Peter Cresswell said...

@Alwyn: The govt borrows around $240 million every week to fund its deficits, borrowed offshore to "buy" NZ dollars, i.e. to converting new foreign currency into NZ currency. The process tends to raise the value of our dollar, just as it does every time someone buys NZ currency with foreign currency.

9/27/2012 09:16:00 am  
Anonymous Pro-Capitalist said...

David Cuntliffe is an economics' illiterate, the same as his colleague David Parker, except that Mr Parker's face doesn't look like a power socket as David Cuntliffe.

9/27/2012 01:23:00 pm  

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