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Wednesday, October 13, 2010


It's 1:17am NZDT as I write this post. I'm nervous about the international financial markets today so I want to get this on the record ASAP before anything happens - if anything happens. October and Tuesdays are never happy ones historically - from what I recall - maybe it's nothing more than superstition, but the way the global depression has been unfolding these last few weeks and the unilateral currency devaluations via "QEII" (A second round of Quantitative Easing) liquidity pumping going on across the world in particular do not auger well when we shovel austerity budgets and weak demand into the pit on top of them. It's a monetary swamp of quicksand with the fiscal hard ground of state tax revenues and wages eroding away into the morass. The credit collapse of 2008 was the earthquake and the liquefaction that resulted across the economic landscape that toppled the weaker houses may still prove to be unstable as more tremors arrive.

I'm watching MSNBC's (US Tuesday morning) coverage and nothing seems amiss at this point, but it doesn't feel right. If the 2008 event was our generation's 1929 crash then 2010 is still only 1931 and we may have some way to go yet to unwind from the previous decade's bubble. In the early 30s the gold standard was abandoned and the NZ government created our own currency and immediately devalued it by 20% to stay competitive with the UK (our biggest trading partner) inside the Sterling zone. We basically followed suit with Australia and joined the dollar zone and effectively devalued again (by half) against Sterling in the late 60s which kept their Pound strong when they decimalised in 1971 - when the US finally abandoned the gold standard (on account of not having any) and we pegged ourselves to them and their inflation until floating in the mid 1980s where the currency traders and the RBNZ have decided to make it the 11th most traded currency in the world and the value in that market is somewhere between 39c (as it was under Clinton and a strong dollar policy) and where we are now - at 75c.

My concern is that the NZD-USD is at 0.75c and it was at 74c when the RBNZ started buying last time around in order to keep our dollar down. That was OK then because the RBNZ could sell it back when it receded into the 60s and they could make a profit on the trade; but that would be even more reckless now if they attempted to put a ceiling on it at that level. The NZ Treasury keep forecasting - wishing really - that our dollar is only worth 50c US. That's fantasyland - the greenback and their Federal 13 trillion in debt and fuck-only-knows-how-much trillions in total 'M3' US denominated instruments etc. are on a trajectory towards monopoly money and everyone knows it. Gold has gone from $35 to the oz in the early 70s to about $280 at the turn of the century to $1350 this week - that does speak to the real value of the USD. China has been making strong signals since Christmas that it will move to displace the USD as a reserve and has implemented Yuan settlement in some of its markets. That move by China fundamentally undermines the long-term value of USD. Even with our weak ballast we are at least backed by Australia in many ways and they remain relatively strong. My fear is that the RBNZ will try the same trick again and start selling NZD at 75c on the basis that it is the ceiling, but that it will act as the floor because the NZD is stronger than that - or should I say the USD is weaker than that. The UK has tried several times to defend its currency when it is under pressure and the Bank of England loses. We don't want our version of that - we are Icelandically small and couldn't afford to take a bad punt.

What would John Key, mercenary currency trader, do? What would John Key, steward of NZ's national interest and economic well-being, do?

UPDATE | 1:30PM: From RNZ re: RBNZ:But is the NZD "junk bond status" relative to the USD? That's the equation to keep in mind. Against the Euro - for example - the NZD is probably over-valued at the moment and undervalued against the Aussie (who are nearing USD parity) who have higher interest rates to attract currency speculators, a strong economy backed from mineral demand from China and of course all that gold.

But more to the point of this morning's post:



At 13/10/10 1:30 pm, Blogger dave said...

You mean NZs 'Nactional' interest? JK has already said I have seen the future and its China - by which he menas big bonuses for his speculator mates. As for the rest of us stop worrying about a global meldown and learn Chinese so we can participate in the new world that Chinese workers will seize some day soon.


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