“Ignorance is strength” was one of the three slogans of George Orwell’s Ministry of Truth in his preview of the modern welfare/police state, “1984”. The central banks of exporting countries like New Zealand might as well adopt a similar motto: “weakness is strength.”
The governor of the Reserve Bank of New Zealand, Alan Bollard, said the current exchange rate was “exceptional and unjustified in terms of the economic fundamentals”. This was a man referring to his own currency, by the way.
A strong local currency makes products more expensive overseas. For a country like New Zealand that exports a great deal of agricultural commodities across the globe, the weaker US dollar presents a bit of dilemma.
On the one hand, the gradual demise of the global US dollar standard favours tangible assets. On the other hand, as the Kiwi (and Aussie and Canadian) bucks approach parity with the greenback, exporters in each country face relative price increases for their goods in foreign markets that are also linked to the dollar.
It’s all untenable, isn’t it, dear reader? We are caught today between the end of one world monetary system and the emergence of its replacement. It’s a bit like watching a dog shed as it chases a ball in the park, or watching a glacier melt in Antarctica, via satellite. It happens incrementally, or in sudden bursts of what evolutionary biologists call punctuated equilibrium- sudden change preceded by plodding normality.
When will the punctuation come?!*%# Well, as we noted yesterday, the rise in yields on 10-year US Treasury bonds is precisely the sort of thing that tells you the dollar standard is failing. As bond markets go, the sudden rise in yields is a veritable exclamation point! At the margin, global investors are finding substitutes for US bonds in stocks or real, tangible resource projects.
But as long as the dollar is nominally the currency by which other countries set the value of their own currencies, things are likely to get more absurd and desperate. At some point, it will make more sense to use another currency-or a basket of tangible assets-as the global benchmark. That point may be pretty soon.
Markets and Money