How to Fix this Exchange Rate Thing
27 September 2007
Its not the Reserve Bank’s problem, its not the government’s, its not dairy farmers and its not money hungry (just like you) house owners.
It’s your problem!
Yes, we all know about hedging but right now the problem is that you pay your bills in NZD at prices inflating on average (at the mill) by 10% p.a. yet you get paid (as an exporter) in another currency altogether.
BUT … IT IS NOT COMPULSORY TO PAY ALL YOUR BILLS IN NEW ZEALAND DOLLARS NOR IS IT COMPULSORY TO INVOICE YOUR EXPORTS IN USD.
For a start you could leave altogether and produce offshore — as many companies are already doing. But what’s to stop you negotiating a USD price with your suppliers.
I know the monopolies you face won’t have a bar of it for a moment (like IRD, the Council and your power supplier).
But what about fixing a USD price with your log supplier — they sell most of their output in USD already.
Work out a USD price that works for you.
Your workers—as long as it is above the minimum wage and it is set out in their contract it is perfectly legal; providing the money they actually take home is in NZD.
It’s a great theory you say but the workers will walk somewhere else if you start fiddling around with their pay.
But think it through. Some, maybe not all, might be able or have to accept that what they earn should fluctuate with what the company earns.
A bit messy for the wage clerk, but computers are a great thing.
Of course with the dollar at US81¢ this may not be a brilliant time to fix but think about it when the currency stablises at a more comfortable level.
WHY CAN'T WE COMPETE?
At today’s exchange rate most exporters really struggle to earn an attractive reward on their capital and risk taking.
And if you price a dairy farmer’s assets at replacement cost (revalued according to the latest dairy farm sales) then they too mightn’t be looking that flash.
Whether we like it or not the exchange rate is a fundamental which we have been moaning about now for the last five years.
But again maybe we might be getting a bit outdated—like the Governor of the Reserve Bank.
We were brought up in an era when exporters were the lifeblood of the economy. When exporters choked we would all go hungry. Well, a lot of exporters are turning purple but you don’t see many skinny New Zealanders.
In fact household balance sheets in world currency (USD) terms are in outstanding shape.
The ugly fact might be that in this new global economy you are not really competitive.
And seeking the shelter of a benign exchange rate, even if it were doable, might just be a long lost dream.
A number of producers in New Zealand have already worked it out and pulled up stakes to manufacture closer to big markets in a more cost and compliance friendly environment.
Let’s look then at domestic costs — what we have to put up with for investing in New Zealand.
THE CARRY TRADE
The over quoted reason for our strong currency.
Yes, Japanese housewives can borrow at 1/2% and invest in New Zealand’s 90 day wholesale market at 8% plus
But the number of wholesalers borrowers willing to pay 8% is finite.
Courtesy of the Reserve Bank ,our short term interest rates have been pushed upwards. Dent that willingness to borrow and pay those interest rates and you will smash those speculators who will disappear like rats down a drainpipe taking the currency with them.