Sorry for the delay replying – things have been exceptionally busy and so I haven’t had much of a chance (as you may have noticed with the dearth of interesting posts here lately 🙂 ).

Fred, our exchange rate is risky because it is above what the market views as its “fundamental level”, as a result, a fall in the dollar will help to reduce risk and so will reinforce whatever this believed level is. There is risk in the very short-term that we will “over-shoot”. Such over-shooting is the result of uncertain information – something our Reserve Bank will be on notice to deal with.

The trading of sub-prime mortgages turned into such a mess because the rating companies didn’t define the risk properly and so the market panicked in the face of uncertainty. I don’t think the trading of similar mortgages here would do anything. Furthermore, there is a difference between the mortgages being wrapped up in bond form and sold and what the RBNZ is offering – which is to make the assets more liquid by swapping the asset for cash (with the Bank taking a premium for risk).

Tim, the creation of credit is one of the primary factors behind inflation – as you produce more money but there are no additional goods. In order for the RBNZ (and banks) to “create credit” they need to cut interest rates. Although it is true that strong global liquidity may have adversely impacted on the RBNZ’s ability to lift interest rates – it has still increased interest rates. As a result, the driver of inflation etc has fundamentally been money demand, which has stemmed from strong demand for credit from households.

Now, the concern you hold about offshore liabilities stems from a justifiable concern that global liquidity is drying up – is that right. If that is the case then we will see domestic interest rates rise as a result of this – which in fact we have. However, the New Zealand economy is in a much better position than in was in 1990/91 when we faced similar headwinds from global investor concerns – a factor that global investors appreciate.

In the medium term our current account deficit is concerning – however it is sustainable. Methods to improve our current account situation could make an interesting post – something I’ll keep in mind when I have a little more time 🙂

I think the RBNZ really likes the idea of having NZ as a big forex operation – but when you take the ego out of it what do we have? 11th or 12th most traded currency in the world and we are only 4 million people!? An unstable exchange rate and massive debt. It’s all backed by the over-hyped property market – created in part by the lending policies of the banks (and therefore also the RBNZ).

I have argued a few years ago on my blog that the RBNZ has let the banks create this extra credit which has enabled them to effectively export domestic inflation to the finance sector (interest rates) and foreign investors (currency speculators) which has kept the economy bouyant and the higher exchange rate lets our massive trade imbalance remain less worse than it would be otherwise. Increase credit does not create domestic price inflation if the increase is held and operated outside of the domestic economy – that is my over-simplified understanding (which I conceed could be flawed). The problem is that all of these NZ dollar instruments held off-shore will want to be rolled over on favourable terms – and I don’t think we can give them that anymore. This will cause our exchange rate to plummet and make petrol esp. and inflation a lot higher than it is at present.

And to fill the slack the government keeps pumping in 50,000+ migrants every year to boost all the raw figures like GDP. If immigration falls then a recession is assured too.