Want to hear another, true, horror story about our low dollar? Last week a man had his credit card at first refused in China because it had the words “New Zealand” on it.
Once upon a time we thought of China as coolies in poverty. Now the Chinese think of us as unbankable.
How did we get to this “kiwifruit republic” state?
By investing in low-return activities over several decades. And then by deciding to live off others’ savings.
As a result our asset values are low. The dollar is at last reflecting that after defying gravity for decades.
This is not just a matter of the past few weeks. The last plunge has been along with the whole of the rest of the world as investors have scrambled for a slice of the greenback wonder economy. When that madness stops we can expect a rise of some sort.
But not back to the illusory levels of the 1980s and 1990s. We have run out of tricks.
For 20 years from the late-1970s (at least) the dollar floated above reality.
First Sir Robert Muldoon – subject of a detailed and instructive new biography by Barry Gustafson – waged a battle of will against the world and lost. His pig-headed defiance of economic fact and laws left a disastrous legacy of debt and distortion.
Then Rogernomics put off the day of reckoning. It made us a darling of economic theorists and a place of plunder for smart money as cold-turkey structural adjustment forced interest rates sky-high, stoked a boom and crash and put state and corporate assets on the block at fire-sale prices.
Then, after a temporary post-crash recession, we became for a moment the new Asian tiger, with growth rates of 5-6 per cent in the mid-1990s – and lofty interest rates to counter a housing boom, with, as a result, an equally airy dollar.
So from 1979 to 1997 the exchange rate was overvalued. That hurt exporters and enticed us to buy imports and to holiday abroad on credit.
The plunge in Asian immigration in 1996 and then the Asian financial crisis in 1997-98 pricked the illusion. We are left with a balance of payments deficit and foreign debt not too far short of third-world basket-case proportions.
Through the past 15 years the Reserve Bank used to dismiss my amateurish misgivings that the exchange rate was higher than our real competitive economic strength justified with lectures that it was at an “equilibrium” level for the dollar, determined by economic forces. The actual level cycled around that equilibrium, sometimes higher and sometimes lower, but over time it averaged out at the equilibrium.
But in what may be the most important passage in its August quarterly statement, the bank shifted tack. It said the drop in the dollar since the Asian crisis might be a structural adjustment to a lower equilibrium level, not just a cyclical low exacerbated by the might of the greenback.
If so, the dollar will not go back to 1980s and 1990s levels.
So now we are what we are. We are no longer an illusion on a screen somewhere in cyberspace. We must live off what we can actually make and do and there is not much we make and do well enough to earn the handsome living to which our spending and debt habits have accustomed us.
Of course, a low dollar does not make us rich. It marks our poverty. Exports will not automatically all boom. Any exporter with a significant import content will struggle. Manufacturers are yelping, especially those selling in Australia where competition from Asians and others is fierce. As Gareth Morgan points out, if a low currency makes a nation rich, the Mexicans would be in luxury.
But Morgan thereby begs another question. We also cannot pretend to be rich by having a high dollar. We are either rich or not rich. The level of our dollar will over time reflect how rich we are. It will not determine how rich we are.
What are the politics of this? Helen Clark and Michael Cullen are squirming because what counts in elections is household wellbeing. A lower dollar lowers that wellbeing.
They thought they were taking over with money in the kitty to spend. Instead it is on their watch we must restart the long haul back up the snakes-and-ladders board of economic advance and setback – only this time there are no ladders of illusion to smuggle us back to the top of the board.