KEY POINTS:
Financial markets, it has been said, are a battleground between greed and fear.
The vertiginous heights the New Zealand dollar has reached suggest that right now greed is winning hands down.
The Reserve Bank tried to inject some wariness into the market with its intervention three weeks ago, the first since the currency floated in 1985.
How much difference that has made we will never know, because we can only guess what would have happened to the exchange rate if the bank had not intervened.
But we can be sure that anyone who bought the New Zealand dollars the bank sold then and still holds them will now be sitting on a tidy profit.
The global background against which this local drama is being played out is illuminated by the recent annual report of the Bank for International Settlements, the central banks' central bank based in Basel.
It makes troubling reading.
Central bankers like to issue warnings, of course, and the BIS acknowledges that its view of the world as one where many dangers lurk is not the majority view.
The consensus view of the global outlook, arrived at by polling economists, is one of broad sunlit uplands. Recent high levels of growth will continue, inflation will remain quite subdued and the big current account imbalances which have emerged will moderate.
But the BIS observes that economists' collective track record in predicting big shocks is not good.
Virtually no one, it says, foresaw the Great Depression of the 1930s, the Great Inflation of the 1970s, or the crises that struck Japan in the early 1990s and Southeast Asia in the late 1990s.
The BIS sees a world of too-low interest rates. It sees "a growing willingness on the part of virtually all investors, including pension and mutual funds, to take on more risk as a means of raising returns".
And it sees a failure of exchange rates to adjust to correct the big external imbalances which have developed.
Technological change combined with the emergence of China and India as global economic players has driven down the cost of many goods and services.
This has allowed central banks to run loose monetary policy and get away with it in terms of consumer price inflation.
But all that cheap money has funded property booms in a number of countries including New Zealand. Such asset price inflation encourages investment in things which do little to help the country earn a living as a trading nation.
Abundant cheap money has also underpinned an extraordinary level of corporate merger and acquisition activity, almost US$4 trillion ($5.1 trillion) worth last year, overwhelmingly financed by debt not equity.
At every turn people are willing to take on more risk.
That includes New Zealand home buyers taking on bigger and bigger mortgages.
It includes the Japanese housewives and Belgian dentists attracted by high New Zealand interest rates but betting that the exchange rate will not plummet before their bonds mature.
It includes the institutions which stump up the money for the highly leveraged deals which take great companies private.
And it includes the People's Bank of China which has to buy prodigious quantities of US dollars to prevent its own currency from rising as China's massive trade and current account surpluses imply it should.
This means China is running two risks. One is that the value of its holdings of securities denominated in US dollars will decline as the dollar falls to reflect the United States' current account deficit.
But the bigger danger is probably that the Chinese authorities will be unable to adequately "sterilise" their foreign exchange intervention by mopping up equivalent liquidity within China through debt issuance.
The risk is that that will fuel ill-chosen investment in export-oriented manufacturing capacity which assumes that the rest of the world is more willing and able to consume the resulting output than turns out to be the case.
Investment spending in China amounted to an astonishing 45 per cent of GDP last year.
Premier Wen Jiabao has described China's growth as "unstable, unbalanced, unco-ordinated and unsustainable".
In fact, the BIS argues, in all three big economies the allocation of resources has been moving resolutely in the wrong direction.
In China and Japan it is largely focused on exports, despite mounting protectionist pressures in Western markets.
And in the US it has been heavily weighted towards the housing market and accompanied by a steep decline in household savings rates. Sound familiar?
What worries the BIS about all this, and ought to worry us, is the exchange rate adjustments needed to correct these imbalances are not really happening.
True, over 2006 and the first four months of this year the US dollar broadly depreciated, by about 6 per cent in trade-weighted terms.
But the Japanese yen, which should have appreciated given its improving economic growth, tightening monetary policy and a current account surplus of 4 per cent of GDP, depreciated instead.
And China's policy is still much closer to a pegged than a floating exchange rate.
Countries with big trade deficits are generally those where domestic demand has been growing fast, requiring relatively high interest rates.
"In principle such countries should also have depreciating currencies," the BIS says.
"Unfortunately in practice relatively high interest rates often induce private capital inflows of such a magnitude as to cause the exchange rate to appreciate rather than depreciate, and to raise domestic asset prices, which leads to more spending rather than less. Both of these developments will cause the trade deficit to widen further."
New Zealand is, of course, a case in point.
Underpinning the surge in the New Zealand dollar is the carry trade, where speculators borrow in a country where interest rates are low, notably Japan, and invest short-term where rates are high, like New Zealand.
Exchange rate trends have only amplified their profits.
Higher Japanese interest rates would help redress the situation. "But the underlying problem seems to be a too-firm conviction on the part of investors that the yen will not be allowed to strengthen in any significant way," the BIS says.
They should cast their minds back to 1998 when the yen jumped 10 per cent against the US dollar in two days, inflicting, it drily notes, "sizeable losses on those involved in the carry trade business".
But in the meantime what is a country like New Zealand to do?
Here the BIS is less helpful.
"Longer-term, recurrent difficulties of this sort could eventually call into question the viability of some smaller currencies," it says.
"In fact this is consistent with what happened in Europe when restrictions on international capital flows were eased in the 1980s."
In other words: Who are you kidding?
Just give up and adopt the Aussie dollar.
