Politics and reality on the manufacturing inquiry

Excellent commentary on the opposition’s manufacturing inquiry, but not from the Mike Smith at The Standard in his post – Minister Tin-Ears – he’s an employee in David Shearer’s office so unsurprisingly is attacking National and promoting standard Labour lines:

New Zealand’s remaining world-class manufacturers are sick of being told by politicians that they need to work harder when they have been doing that for years, but face a huge headwind from an over-valued dollar.

We can only hope that National’s lack of action or ideas does not do too much more damage to the productive economy before then.

Trying to dutifully reinforce the idea that National runs a ‘do nothing’ government. But this ignores the reality – the exchange rate is mainly governed by international financial influences and there is little we can do about it in New Zealand.

Nick Tuffley (chief economist at ASB) has just spoken about it on Firstline.

The challenge with monetary policy is there is very little the Reserve Bank can do.

I don’t think there’s a free lunch.

We need to fix the UK, fix Europe, fix the US, and then we might have a lower currency.

By far the best at The Standard came from down the thread in a comment by ‘Tiresias’, who spells out the reality

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar.

And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. Most of it is via the banks and therefore funded from overseas in the almighty dollar.

Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So why is the opposition having a parliamentary inquiry on this? It’s hard to see it as anything but political grandstanding.

Full comment by Tiresias:

“I am optimistic that the Enquiry will produce some action no later than 2014.” – Mike Smith

I fear I’m not. Much as I loath this present Government I have to say that if there was a magic wand that could be waved to help exporters and manufacturers, Key et al would be waving it furiously. After all the MDs and CEOs and Directors of these businesses are National’s through and through, and I’m sure they’ve been demanding something for their money from the Government privately at parties and golf-courses and business breakfasts since before the last election.

The only way you’re going to bring the exchange rate down is to sabotage the economy so it looks as shaky as Spain’s or Italy’s. The Reserve Bank Governor set it out in a speech last October:

“So there are clear limits to what monetary policy and exchange rate intervention can do to lower the New Zealand dollar. In order to achieve a sustained reduction in the New Zealand dollar it would be necessary to alter the overall level and pattern of saving and investment in the economy. In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment. This dependency means that we have persistently needed interest rates above those in most developed economies to maintain inflation at target levels similar to those being followed elsewhere. Policies that increase domestic savings, including reducing the government’s fiscal deficit, and to reduce the flow of resources into the public sector and other non-tradables sectors, would help to achieve a sustainable reduction in the exchange rate.”

“http://www.rbnz.govt.nz/speeches/5005204.html”

Trouble is, to increase domestic savings you have to increase interest rates which puts up mortgates, both of which dries up High Street consumption which may help exporters but hurts all the rest of New Zealand’s businesses and retailers. Also, New Zealand’s Government fiscal deficit isn’t all that bad compared with the countries in trouble. It’s private sector overseas debt that’s causing the concern in the ratings agencies and the Govt. can’t do much about that except ask businesses to stop borrowing:

union.org.nz/sites/union.org.nz/files/Working%20Through%20the%20Issues%20-%20Debt%20(Revised).pdf

Plus “reducing the Government’s fiscal deficit &tc” is banker-speak for austerity which is just Graeme Wheeler toeing the official line.

Politicians – including Shearer in his State of the Nation speech – dream big dreams of other people coming up with better mouse-traps that are going to take the world by storm. Well, it might happen just as I might win Lotto. (Actually I’ll never win Lotto as I don’t buy a ticket, so make that “just as you might win Lotto”.)

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar. And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. (see union.org.nz above). Most of it is via the banks and therefore funded from overseas in the almighty dollar. Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So are you going to subsidise New Zealand’s world-class manufacturers just like you didn’t support New Zealand’s world-class wind-turbine manufacturer Windflow in Christchurch so that it’s had to lay off most of its staff – including world-class engineers and designers – and is now looking to sell its world-leading, New Zealand developed technology to a foreign competitor for a mess of pottage? http://www.nbr.co.nz/article/windflow-dream-fades-shares-plunge-ch-96636

Sorry Mike. All the hot air your inquiry will produce over the next few months might have generated a few kw electricity from a Windflow gen set had there been one available – but for the rest it’s just another charade of politicians forming a committee to look at all the ways you might get other people to reshuffle the deckchairs on the Titanic.

Yes, it is difficult to see the inquiry producing anything but hot air.

The inquiry seems to be a futile exercise that may do little more than give manufacturers false hope and waste their time.

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