Still not sure you’ve explained yourself clearly. As far as i know the reserve bank doesn’t have much foreign denominated debt, this is largely held by private banks. In fact the reserve bank has a net “long” exposure to foreign currencies of $3.8B as of July(http://www.rbnz.govt.nz/statistics/rbnz/f5/data.html)

Are you talking about selling the NZ$ high and then buying it back low, i.e. speculating? I suppose once the deal is closed out then there would be no increase in supply, and assuming the trade makes a profit we should have that profit to help domestic funding. However while you hold the trade open (i.e. hold US dollars) it will be increasing the money supply, the NZ$ have to come from somewhere. Not sure how it would impact inflation. Plus it’s a bit hedge fund like for a Reserve bank isn’t it?

Is this similar to what China do to hold the Yuan down?

P.S. If you want to domesticate the debt the central bank can just lend directly to banks, but that definately increases the money supply.

There really isn’t a way to “domesticate debt” if we spend more than we earn. You either create more money or borrow overseas.

Thoughts?

Neil.

No I don’t have any research to show this has been done before. However, the Bank of Japan (BOJ) have been running an interventionist policy for years on both sides of the currency range. They have printed so many Yen that it’s hard to calculate the numbers.

It’s important to note that this proposal is not specifically about weakening the NZ$ though when we look at the Terms of Trade numbers yesterday (-9.0%), we are in serious trouble on the trade front.

This is about an opportunity, whilst the NZ$ is in demand, to gather $ reserves (which is what most of our overseas debt is denominated in) and then use that as a pool to pay back overseas debt.

In terms of the impact on the money supply the net effect is designed to be zero. It’s simply a huge currency swap, designed to domesticate our debt.

So the intervention would be sterilised in that respect. We haven’t quite reached the QE point yet but that may come further down the track.

That’s certainly an interesting idea. I’m not sure I understand why there isn’t a change in the money supply. Surely M1 is increased there will be extra NZ dollars sitting in an FX traders call account that didn’t exist before.

I also don’t understand why NZ’s debt will change if the NZ government starts buying US$. Wouldn’t that only change if the NZ government started funding the banks through quantitative easing?

Also do you have any examples where this has been tried in the past and what the concequences were?

Neil.