KEY POINTS:
There are two main reasons the kiwi dollar has climbed to these stratospheric heights.
One is something we can't do anything about, and wouldn't want to if we could.
The other is something we can collectively do something about, but evidently don't want to.
The first is the terms of trade, the relative value of the kinds of things we export relative to the kinds of things we import. It is a measure of the international purchasing power of a standardised basket of New Zealand exports.
It is the best it has been since 1974, primarily because world prices for dairy products have doubled over the past year.
Because the markets categorise the kiwi dollar as a commodity currency, the global commodity boom underpins the exchange rate.
Other commodity currencies such as the Australian and Canadian dollars have risen too, and the US dollar has fallen.
But that is only part of the story. Even on a trade-weighted basis the kiwi dollar is at post-float highs.
The other main factor is high New Zealand interest rates which in turn reflect stubbornly high non-tradeables inflation.
Roughly half of the 685 items in the consumers price index come from the domestic parts of the economy and include such things as rents, government charges and the charges of a plumber or hairdresser. These prices are not affected by world prices or the exchange rate.
Non-tradeables inflation has been stuck around 4 per cent for nigh on four years now.
Over that period Reserve Bank Governor Alan Bollard has raised the official cash rate 12 times, from 5 per cent to 8 per cent, and issued verbal warnings until his jaw aches.
Domestic price-setters have taken no notice.
That was apparent in this week's inflation data. It showed non-tradeables' prices rising 1.1 per cent in the June quarter, making 4.1 per cent for the year. In the March quarter the increases had been 1.2 and 4.1 per cent respectively.
Not much to show for three OCR rises or the increasingly menacing Reserve Bank statements which preceded them.
Clearly the thousands of firms, and government agencies, which set the hundreds of prices involved reckon they can get away with these increases. And so far they have been right.
It is about sentiment: confidence, uncertainty and fear.
They have too little reason to fear losing customers and their customers have too little fear of unemployment or having to sell their homes into a falling market.
Apart from a brief and mild recession in 1998 in the wake of the Asian crisis, and a drought, you have to go back to the early 1990s for the last experience of hard times.
For an awful lot of borrowers, and even a lot of middle managers, that might as well be prehistoric.
Both business and consumer confidence have been falling but not to the level that on past performance would point to the kind of slowdown that the central bank needs to see.
Incomes, and consumer confidence, are underpinned by a structurally tight labour market and measures like the Working for Families tax credits.
In rural areas a tsunami of additional cash from the dairy payout is coming their way.
With house price inflation still at double-digit rates the wealth effect, especially among owner-occupiers who have paid of their mortgages, provides an offset for the sobering effect of looming mortgage rate increases as fixed-rate loans come up for repricing.
And the high dollar, by making imported goods relatively cheap, leaves people with more money to spend on other things.
Likewise the surveys of business sentiment are not foretelling disaster.
NZIER's quarterly survey of business opinion's measure of firms own activity outlook - and chief executives are more authoritative about that than about the prospects for the economy as a whole - is pointing to economic growth slowing from the March quarter's rip-roaring 1 per cent increase to something like half that for the rest of the year.
That is despite extraordinarily tight monetary conditions and a squeeze on profits.
In such conditions it is imperative that price-setters believe that the Reserve Bank Governor is unswervingly committed to getting on top of inflation and that he will keep raising interest rates until he succeeds.
Only when it is clear that he has done enough, and that the next move in interest rates will be down, will yield-chasing carry-traders start to lose interest in the kiwi dollar and exporters get sustained relief.
Bollard has tended to muffle his central message by talking about the need for supplementary instruments and by intervening in the currency market to sell the kiwi, something the bank itself has in the past said makes little sense if it may yet have to raise interest rates.
But now there are worrying signs that the Government and Parliament might be thinking of messing about with the very foundation of the monetary policy framework: its price stability objective.
To describe such a course as counterproductive would be an understatement akin to calling the Southern Alps a speed bump in the road to the West Coast.
Yet Finance Minister Michael Cullen in question time on Tuesday reminded MPs of section 12 of the Reserve Bank Act.
It allows the Government to override the provision that price stability is to be the objective of monetary policy, suspend the policy targets agreement and direct the bank to pursue some other objective instead.
Yesterday he refused to rule out doing so, while saying he had given the matter "no specific consideration".
Cullen's intentions in raising this can only be guessed at.
It may just be a case of a minority Government being prepared to give a friendly pat to Winston Peters' hobby horse.
Maybe it was a tease, an attempt to unsettle the foreign exchange markets.
But after all it was only six weeks ago that he reappointed Bollard and reaffirmed the existing policy targets agreement.
This is no subject about which to make idle threats.
The same message that might, if he was lucky, give the foreign exchange markets pause would utterly undermine the bank's credibility in its battle of wills with businesses negotiating wages and setting prices.
"Don't worry about inflation, that's not the name of the game any more" is the worst possible signal to give them when non-tradeables inflation - the kind that is supposed to be interest rate sensitive - is stuck at 4 per cent.
The same applies to New Zealand First's attempt to introduce a bill amending the Reserve Bank Act to change the bank's primary function.
The interests of exporters are best served if the Governor is seen as implacable, relentless and scary, willing to tip the economy into recession if need be to keep inflation within bounds.
The best thing politicians can do is stand back and let him do the job they have given him.