KEY POINTS:
Snoozing on the crowded beach at Valencia on the Louis Vuitton layday, I awoke to hear the group nearest me discussing house prices in Browns Bay. Some of us were there on the strength of house prices, perhaps; all of us were there on the strength of the dollar.
About a week later New Zealand made news on CNN and the financial pages of European papers with the Reserve Bank's intervention in the foreign exchange market. My heart sank.
For the past five or six years I've been pinching myself almost daily in disbelief that our ship goes right on sailing so well.
I'm not talking about the grounds for disbelief that worry economists - the national and household debt levels and the low value of our exports, which has been the bugbear for as long as I can remember. The thing that has astounded me has been the quality of government.
Twenty-three years ago this week, as it happens, Sir Robert Muldoon called the snap election that brought about his demise and the beginning of a recipe for government that was going to be very hard to sustain. Politics is biased to action, not necessarily advisable action but any act that assuages pressure for something to be done.
The government recipe introduced to much of the developed world by 1984, and belatedly here that year, suggested the wisdom of markets was usually better than that of committees with political power.
The reason was simple. Markets are the aggregate of decisions by people who stand to lose materially if they are wrong. Politicians and public servants, and most of the media who pass judgment on them, live on fairly safe salaries.
They can sit in committees and decide the dollar is overvalued on some arcane formula of their own devising, and go home happily at 5pm. But for investors such as the managers of Japanese pension funds the strength of the kiwi is not a theoretical discussion. If they are wrong about it they will sweat.
They seem to think they are not wrong. They look at the interest rates New Zealand is offering, assess the risk of the dollar going down, and decide to buy it. They are not fools, they know why those interest rates are available.
Our central bank, like most, remains worried that rising property values are giving most of us such illusions of wealth that we will borrow and spend beyond the capacity of the economy to supply us and inflation will break out of the bank's control.
The limited capacity of this little first-world economy requires close inflation control and we have it. But it is not really surprising that we need to offer the highest interest rates in the developed world to keep that control.
Now it is surprising that foreign funds grab those rates and buy our dollar. They are really buying our inflation control, our economic management, its sturdy consistency and stability. They are really buying the quality of our government.
That is what made my heart sink. When the Reserve Bank blinked, having just raised interest rates another notch to 8 per cent, I feared the dollar would plunge.
But despite a second discount sale of dollars since then, the kiwi has finished the week at its pre-intervention level. The bank has succeeded only in handing out hundreds of millions of dollars at below market value to institutions abroad so that we can pay them the world's highest interest rates.
This must seem delightfully odd on the forex screens of London, New York and Tokyo but, incredibly, they have not lost faith in us.
More to the point in financial markets, they have not succumbed to the fear that everyone else in the market might lose faith in us.
Confidence is a delicate commodity and we must have been lucky so far. The dollar sales have been as ineffective as commentators abroad predicted but they have taken a benign view of the effort.
Nobody can really blame the bank for its desperation. It knows the exchange rate is only ever a symptom of something wrong with the economy, and the real ailment lies beyond its jurisdiction.
Not long ago I gave a Korean tennis companion a ride to a distant match and he told me, in tones of surprise and delight, how remarkably kind our property taxation was by comparison with any other place he knew.
The Reserve Bank Governor, Alan Bollard, even as he splashed dollars into the market this month, urged tougher taxation of capital gains, and Finance Minister Michael Cullen now wants to limit reductions for rental losses.
If someone finally grasps this nettle we will not be celebrating house prices on Mediterranean beaches next winter. But if it is not done, and the dollar has to take the fall, we will not be going anywhere.
