KEY POINTS:
The dollar has been nudging US80c during the week. This should be a milestone to celebrate but we are supposed to be worried. Exporters are worried, the Reserve Bank is tormented, the Finance Minister is suddenly sounding flaky, but we should be so lucky.
As problems go it certainly beats the alternative. We lived with a declining currency for a long time, a depressing time of import restrictions, exchange controls, inflation, industrial disputes, unemployment. Under 40s, ask your parents.
The problem as I read it now is that we are too reliable, too attractive to foreign investors, or "speculators" if you prefer. They are not fools. There wouldn't be a "carry trade" on interest rate differentials if they didn't trust our determination to keep inflation down.
They keep holding the Kiwi for its high interest rates despite the extraordinary efforts of the bank to undermine its own currency. It is bizarre. Governor Alan Bollard even travelled to Japan to tell bond-holders they were likely to get burned. They didn't believe him.
Then the bank tried selling dollars into the market, probably at below value. It has done so three times in the past month. We don't yet know how many hundreds of millions it threw into the fire but it has not brought the dollar down.
Last week, Bollard announced the bank would no longer hedge its international currency reserves. He said this would "give the bank a more effective means of responding to crisis situations involving sharp falls in the NZ dollar".
If preparing for a fall is intended to convince markets it will happen, it has not convinced them yet. This week, as the Kiwi ascended new heights and the latest inflation figure made another interest rate increase imminent, Michael Cullen weighed in.
He told Parliament he "would not rule out" using his statutory power to change the Reserve Bank's counter-inflation brief. He said it several times. He was bluffing, I think, I hope.
Cullen's smart. He obviously wants to prick financiers' confidence in him a little. But confidence is a delicate commodity. It doesn't come in degrees. You keep it or you don't. He is playing with fire.
An economy as I picture it is like an automotive engine that needs to be kept in tune. The exchange rate is a pressure release valve. If some part of the economy is not operating efficiently the strains will be vented in a floating dollar. But the problem is not there, it is within.
Countries that try to control their exchange rates, or give up their sovereign currency, lose their economic valve and the tension will be released elsewhere, usually in cost-price inflation, labour disputes and lay-offs.
We know which part of our economy is out of tune at present; Bollard keeps telling us - house prices and consequentially excessive household spending.
The housing sector could be easily fixed with the sort of taxation that similar countries make of property investments. But if that is too hard for our political parties they could use tenancy law. When my son was renting in Auckland he was having to shift house about every six to eight months. It would seem reasonable that people setting up a home are given a guarantee of, say, two years' tenure provided they keep up the rent and do not wreck the place.
Something as simple as that would reduce the attraction of investment houses quickly. It would allow the bank to ease interest rates and allow the dollar to fall gently.
The method the Finance Minister would not rule out this week would bring the dollar down with a thump. If he ordered the bank to act on something other than inflation control, all bets on this economy are off.
Bond-holders would unload as quickly as they could. The dollar would plummet, prices would rise, consumption fall, jobs would be lost.
Exporters would get a boost when they converted their foreign earnings to NZ dollars but our most lucrative exports, dairy products, don't need a boost right now. They are promised booming world prices next season, a prospect which already adds to forecast inflation here.
The last time the dollar dropped abruptly, when this Government came to power, it was a stimulant to a newly competitive, recovering economy without inflationary pressures and still with much capacity to grow. Conditions are quite different today.
The value of our money at present reflects confidence abroad in our commitment to principles of economic management that have given the world's leading economies stable growth for a remarkably long period now.
Fortunately, financiers do not pay too much attention to what people say, they watch what people do. They will note with more than usual care what Bollard does with interest rates on Thursday. Cullen has left him little choice but to lift them another notch now, for our credibility.
