Over US$0.80 we go

So, we broke 80cents US last night, on the back of expectations that the RBNZ will increase the OCR on July 26th. This led to the Dominion post terming us the strongest-performing currency in the world

Should the government intervene here? Is this a market failure caused by speculators and Japanese housewives that don’t understand the true risks?

I’m willing to stick my neck out here and say, I don’t think a strong exchange rate is that bad. Sure, non-food manufacturing is struggling, but no matter what the exchange rate is non-food manufacturing tells me they are struggling. A strong exchange rate keeps firms costs down, which has allowed domestic firms to increase margins without increasing prices, thereby removing a hell of a lot of inflationary pressure.

I believe the strong exchange rate is built on strong economics fundamentals (such as strong or improving commodity prices, and high interest rate relative to the rest of the developed world and a weak US economy), and I don’t think the current level is the end of the world, and I’m willing to bet that the manufacturers who are telling us it is are bluffing.

However, I know a lot of people will disagree with me. If so, tell me how and why you would intervene to change the currency (bonus points to anyone that tries to say lowering the OCR will reduce inflationary pressure, that cracks me up).

Telecom separation

So Telecom is to be operationally separated. To prevent the issue of double marginalization, the commerce commission is going to regulate the price set in the access market.

Do you think this is the correct way to regulate the access network.

While I believe it will lead to more competition in the wholesale and retail markets, I can understand the argument that states that this type of regulation will lead to lower investment (as firms invest until MB=MC, if the marginal cost of investment increases in the amount of investment, then lowering the price will lower the marginal benefit, and lead to a less investment.) I hear the government has a plan to improve Telecoms incentive to invest, does anyone know what it is? If so, do you think it will work?

The Warehouse merger

So the commerce commision has released documentation on their refusal to let Foodstuffs or Progressive buy the Warehouse. They believe that the merger would not influence the general merchandise or wholesale foods market, but would negatively influence supermarket competition.

Do you think that a merger would negatively impact supermarket competition, and if so how?

It is important to note that one of the significant factors behind the increase in the value of retail sales in the past few months has been rising supermarket prices. But is this the result of a lack of competition, or a result of the success of the Warehouse grocery chain (given that the Warehouse sells their grocery products at a higher price).

Public sector Health spending

This article discusses public sector health spending in quite a damning way. Does anyone have any ideas how government spending on health could be more effective? Or does anyone think health spending is effective?

I might post on this later if anyone convinces me of their opinion 😉

Objective of the blog

The main aim of this blog is to discuss areas where government involvement makes sense. While we agree that the free and unfettered market often provides the most effective way of allocating resources, we also believe that thinking the free market can solve every economic problem is naive and even dangerous.

With our writing we wish to impress upon you the important role that the government can play in the economy. The most obvious role of government is to circumvent market failures, which are usually derived from externalities or excessive market power. Beyond this, the government has a structural role. Government regulation and investment can be used to change the structure of the game that firms compete in, to the detriment or the benefit of society.

We also believe that government failure exists. Governments may have less information then other market players, and so might make the wrong choice. Furthermore, governments may come under the control of interest groups or ideology, and may no longer follow the objective of maximizing the true social welfare function. While we may mention this type of failure, it will not be our primary focus.

It is also important to note that we do not necessarily support the current scope and role of government. We are merely stating how certain government choices could improve social outcomes. The set of policies we would support is likely to be very different then those established under any nations government.

The week in numbers

  • The NZ$ pushed through US$0.79, but couldn’t quite reach the US$0.80 mark
  • CPI inflation came in at 1.0% for the June quarter, taking annual inflation to 2.0%.
  • 11% annual growth in short-term departures from New Zealand in June. This took departures to a record 208,309
  • 4% annual growth in short-term arrivals to New Zealand indicate a lack of price responsiveness from tourists. However, they are spending a lot less once they get here.
  • There was a net migrant inflow of 590 (seasonally adjusted) in June. The year-ended net migrant inflow continued to fall, and is now at 10,078
  • Electronic Card payments were up 7.2% on a year earlier in June. This implies that retail sales will maintain the gains experienced in recent months.

The recent strength in CPI, QVNZ house price and retail sales figures will make the RBNZ feel that it has to lift rates again. It is important to note that REINZ house sales and price figures looked relatively weak.

While the market is currently pricing in a 60% chance of a rate rise in July, I think they should hold. The QES and HLFS are due out between now and September, and will give us a strong indication of whether the labour market is beginning to ease. Furthermore, two more months of house sales data could be invaluable, with the housing market at a possible tipping point.