Joe Hendren

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Wednesday, June 13, 2007

Low wages are forcing the dollar higher

Hot on the heels of the decision of the Reserve Bank to intervene in the currency market, I found a fascinating comment by a Japanese currency trader.

Masafumi Yamamoto, a currency economist at the Nikko Citigroup in Tokyo
Yamamoto said Japanese investors would likely increase their buying of kiwi investments - uridashi bonds, funds investing in New Zealand and speculative currency instruments - thanks to the stronger local economy. Stable wages and a stable unemployment rate are prompting investors to put the money into higher-risk investments, such as equities and foreign currency assets.

So the refusal of New Zealand bosses to pay higher wages, despite low unemployment for some years has a cost. By hoarding the profits - bosses are inadvertently encouraging speculation on the NZ dollar.

Profit hoarding pushes up the exchange rate, hurts exports and ultimately their business, as foreign investors hunt easy profits. Short term investors are not there to help grow the business, they are there for a quick buck. Perhaps manufacturers ought to be more aware of the larger implications of paying low wages. Even Adam Smith, who is made out to be the hero by the arch capitalists, knew the economic advantage of keeping money in their local community - why don't they!

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At 9:07 am, Anonymous Anonymous said...

"By hoarding the profits - bosses are inadvertently encouraging speculation on the NZ dollar."

By looking at the published balance sheets of publically listed companies there is very little of this happening. As you point out, profits by and large go back to the shareholders as dividends (after paying company tax). Very little (and this is the major problem) is retained to grow the business and increase productivity.

Increasing wages (without increasing productivity) has an unfortunate inflationary effect. Something Cullen is desperate to keep under control till the next election.

So getting wage increases from a government edict (when they have had 7 years to bring major changes about) is highly unlikely.

Foreign owned (or for that matter locally owned) business are not volutarily going to increase their wage rates at the expense of their minimum 15% return on investment demanded by the shareholders.

So the chances of major wage hikes is about zero, without matching productivity increase.

Productivity increase wont come about because business wont reinvest, prefering to sent profits back to shareholders.

The fact that most of the shareholders are overseas based means a net outflow of money from New Zealand productive industries.

So it is a vicious circle.

Three ways to fix that. 1. Have a revolution and transfer ownership of all public and private companies to state control. 2. New Zealanders to buy the companies. 3. New Zealanders set up in competiton to the exisitng foreign owned companies (state support?).

The question of selling the New Zealand dollar is a vexed one. Bollard is speculating (betting) that the New Zealand dollar will devalue against the currency he has bought (US$?) while the person who has bought the NZ$ (your Japanese currency trader?) is speculating (betting) it will increase in value.

Either the seller is right or the buyer is right. You better hope Bollard is right or the future of New Zealand is bleaker then it already is.

The only guarenteed winner is the bank who manage and charge fees for the transfers.

At 2:25 pm, Anonymous Anonymous said...

As of today (20 June), NZ has lost control of her economy to the currency speculators. The myth of the independence of NZ is exposed by the foreign currency traders and their clients -- the Japanese housewives.


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