No, We Do Not Need a Cheaper Canadian Dollar

Garth Turner has made a veritable industry these past few weeks out of calling for the Harper Government to do something to lower the international value of the Canadian dollar (although actually, to be fair, he puts it in the context of its value relative to the US dollar — it’s just that one entails the other). This, he believes, would help keep the manufacturing lights on in Ontario, maybe even in Québec.

Well it might — but at a horrific set of prices to be paid.

We Did The Right Things: Learn to Deal with That

I will unsay none of the nasty things I have previously said about our new Governor of the Bank of Canada, Mark Carney, who seemed, earlier this year, determined to follow in the Alan Greenspan/Ben Bernacke footsteps of currency debasement. Fortunately, at the last rate-setting opportunity, he held off on stepping further into that cesspool of national economic destruction — and a good thing, too.

Mulroney’s Governments licked the operational deficit inherited from Trudeau; Chrétien’s licked the interest-related deficit by slashing further and restoring surpluses. Since the mid-1990s, Canada has been the only major OECD-class economy to run a budgetary surplus each and every year. (Certainly, in recent years, the sheer size of those surpluses indicated that federal tax receipts were damagingly high; still, no one else has managed to come close.)

Add to that the peaking conditions in various commodity markets, and the size of Canadian production — not promise, current production — of those assets, and Canada’s dollar ought to have risen relative to other world currencies, and declined less relative to other “real” measures, such as gold, than others. Until a year ago, that is precisely what was going on. It is why, for instance, oil could rise on world markets to triple digit per barrel levels while our pump prices were steady: the rising Canadian dollar offset the rise in a commodity priced in US dollars (which are increasingly becoming so much waste-paper with US deficits and money creation running at 18%+ per year. Thank you, credit bubble and bailout of the boys in the Hamptons.)

It is important to recognise, moreover, that Canada’s dollar is a very minor part of the world system. Australia’s looms larger. There is a price we pay to be the geographic neighbour of the US market, and enfolded in NAFTA, which can be boiled down to “to invest in North American assets, look to the US dollar”. What this means is that the market, all on its own, presses downward on Canada’s dollar out of benign neglect (or the international expatriation of profits from branch plants or formerly Canadian companies) until a US “crisis” erupts, at which point US investments are traded in for Canadian ones.

How Bad Do You Want Things to Be?

In any event, it would take extraordinary currency debasement — and a dropping of interest rates far below a real return of zero — to “crash” the dollar to the US$0.80 range needed to “reawaken” Central Canadian manufacturing. Branch plants are not managed for long term success, merely short term profitability — international firms open and close them as variable costs, without regard to the community. Only a significant sustained discount keeps them open through normal variability of demand.

So what would an “80-cent dollar” mean? Well, for openers, that’s another 25% price increase on everything imported. Good heavens, we have yet to shame Canadian retailers into adjusting prices to reflect a dollar essentially running at par with the US — there are a legion of “reasons” why this can’t be done — but you can count on the fact that, overnight, prices would reflect the change (since, for inventory on hand, it’s pure profit, and for new inventory, it’s essential to deal with changed import prices).

Even Ontarians would pay this. Another 30¢ a litre for gasoline, Toronto? Grocery bills that go from $200.00 at Loblaws to $250.00 for the same basket of “stuff”? Even most products labelled as “Made in Canada” are 50%+ ingredients imported.

Be Careful What You Wish For

No, Garth Turner’s “solution” is another massive slash in the Canadian standard of living, hard on the heels of the slash we’ve already experienced in the past year as our dollar stopped rising and commodity prices have started to pass through.

Of course, for commodities sold from Canada, life carries on, but with a 20-25% increase in terms of their Canadian dollar value. So these exporters simply do better. We won’t mention the likelihood of “softwood lumber war ∞+1 (yes, I know, that’s not mathematically correct, but there have been so many I’ve lost count) as Canadian softwood suddenly has a price advantage again in the shrunken US market. We also won’t mention the further unbalancing of the Federation, as the West gets much richer and the rest doesn’t (with the possible exception of Atlantic oil).

It’s time Canadian companies, and Canadian citizens, recognised reality. We have very different economic needs in different parts of the country. Central Canada, having failed to anticipate the days of parity (and the potential to, Euro-like, jump well above the US dollar — the Euro zone having gone from US$0.84 to US$1.59 as we went from US$0.63 to parity, so these countries’ companies must deal with an even steeper differential), now (and in this Garth Turner isn’t on the wrong track) needs a slack currency — one that would depreciate significantly relative to the West, which needs and benefits from a strong one.

Of course, to achieve that, you’d have to break up the country. But giving the East the slackness it now needs will lead in that direction anyway.

So here’s reality: suffering, innovating, investing and solving the problems in the weaker areas of Canada is a challenge those places must face and solve in the current matrix of currency values. Any other course of action just makes things worse.

Redistribution, Then?

The other answer, of course, is redistribution. We made this a Constitutional priority via locking in Equalisation, and many, many Federal programmes carry this further in specific ways. Indeed, Dion’s Green Shift(™appropriated) is yet more redistribution of wealth — take from the producers to give to the consumers.

In a Confederated nation, there comes a point where the nation falls apart if it does not do something to “bring up” its weaker areas. But handing out money taken from other parts of the country is seldom the most effective answer. Making it easier to make good use of the resources available in the country is usually a better long-term answer. So, too, is delivering on infrastructure to help these areas develop appropriately. (Given our energy issues — first of price, second of sheer availability, as supply continues to fall behind demand globally — we’d be smart to build electrified rail-based trams and trolleys, interurbans, and heavy rail, and fairly quickly, and use nuclear plants as well as renewable sources to power them. Car culture, in other words, needs to pare back and ultimately be phased mostly out.)

The best gift of all, of course, to make weaker regions stronger is to reduce the tax take by amounts large enough to make a difference. This requires programme elimination and serious programme reduction. In other words, to be healthy in the 2010s, we need to do again what was done in the 1980s and mid-1990s and cut government down, focusing it on a few tasks and really putting an emphasis on them.

Handing them yet more programmes — which themselves are underfunded relative to immediate demand — as the Dion Green Shift(™appropriated) offers to do, will also just make the problem worse.

Our so-called “Conservative” Government has, of course, taken a very “Liberal” approach to its time in Ottawa. It is not too late to change course, stop slopping money around like drunken sailors, picking a few priorities — and closing down programmes to pay for them (please note I said “end”, not “reduce”: once it’s gone and the function disbanded, it has a much harder time rising from the dead).

Let’s hope sanity prevails. Ontario and Québec need it as much as do the Atlantic provinces and the West.

Fixing Our Own Problems First

Living next door to the United States as Canadians do, we are innundated with daily doses of American media. A significant percentage of us have relatives on the other side of the border, or own property there, or have spent part of our own lives living there. Then, too, much of what interests us for our own savings and investments tends to be American in nature: American companies on the stock market, for instance. We are, as a people, invested in outcomes in the USA almost to the same depth as we are to Canadian ones.

That’s why it’s not surprising to find most Canadians feeling that there’s nothing wrong with helping our neighbours out as they continue their descent into an economic collapse of their own making. (Too harsh, that? What else would you call no commitment to ending deficit spending and ever-ratcheting-upward debt, no concern for the health of their currency [odd, given the dependence of the United States on imported energy: slipping US dollar exchange rates means it costs Americans more even if the world price of oil and natural gas is stable], financiers who have once again taken on too much risk and a Federal Reserve policy of saving their bacon at the expense of Main Street, USA?) Indeed, as the combination of the US Department of Homeland Security’s incessant border actions impede business as organized under NAFTA, destroying the effectiveness of just-in-time industry supply chains, and as the insolvency crisis around mortgages continues to drain the American economy of consumers with cash, American businesses are consolidating, to the detriment of Canadian plants and suppliers. Canada ends up with clear differences across the country: sectors in trouble (lumber everywhere, manufacturing in Ontario and Québec), and sectors that are booming.

But we have our own issues. We, too, have been playing the “house equity ATM” game these past few years — after all, if we hadn’t been, local radio wouldn’t be full of advertising for second mortgages, home equity lines of credit, and borrowing from equity built up, especially in the country’s hot real estate markets. Meanwhile affordability has gone to hell in a handbasket: less than 30% of Vancouver-area residents qualify to enter the housing market, even with 95% mortgages CMHC-backed, and the target being a 400 sq. ft. overpriced postage stamp of a condo as houses are out of the question. At a time when fuel is (as it is here) over $1.20 per litre, the suburbs sprawl ever further out, with even longer commutes, to try and trade off land costs and create “affordable” housing. There’s a financial trap: too much money, still, to live too far away, with all the hours spent stuck on the road, in mounting traffic jams (the worst roads are inevitably in the suburban areas outside our cities), and all the life that is lost — not to mention the health care problems to come from all that sedentary, stressful driving time and worries about making ends meet!

Australia saw this coming back in 2004. They — like us, like the UK and Spain, like the Irish, and like the Americans — had a housing bubble and a growth in consumer debt. They decided to get ahead of the inevitable “popping” of the bubble (with consequences clearly on display south of the border). Interest rates were run up, to dry up the speculative building and house-trading. Even today Australian rates are more than double ours — and nearly quadruple where American rates are now after the US Federal Reserve’s 75 basis point rate cut today. This was a little less than anticipated, yet, judging by the futures and stock market action this morning, a continuation of the “preserve Wall Street, to hell with everyone else and the US dollar” approach taken to date.

Yes, Australian prices have fallen. Those on the frothiest edge of the speculative bubble paid the price for being the “last one in” — something that must happen when every set of conditions turns. But they have come down in an orderly fashion — that country is not filled with whole neighbourhoods in foreclosure or for sale at distressed (40% or more down from purchase prices of two years ago) asks with no bids. The Australians have had to tighten their belts for a year or two. But the country is growing, and prosperous; the danger was averted.

We in Canada can (just) still do this. The Bank of Canada ought to be doing the same for us: raising interest rates, signalling to lenders to think more about risk. Borrowers would pay more; real estate would begin to decline in an orderly fashion. Likely, the Canadian dollar would rise as well. The whole combination would likely bring screams of anguish from Southern Ontario (which has had both a housing bubble and a plethora of employers who figured the Canadian dollar would perpetually be the poor cousin of the US one). We would need, as a country, to begin to add high-value-add manufacturing to our mix, instead of competing on price. All this is a long-term benefit to Canada, worth the price of two or three years of pain.

The alternative, after all, will be to be a Japan, with a nearly two-decade long depression — exactly where America is headed. A deflationary depression, with all the levers of monetary policy jammed at zero and unable to do anything, debts galore, a declining currency and escalating costs for food, fuel, etc. due to imports and diversion of foodstocks to make fuel with the ethanol programme. Add a little of the usual American protectionism and the outcome will be America’s withdrawl from much of the world exactly as did Britain a century earlier: unable to afford to stay. This is where the world is headed — thirty or forty years of great power transition. Two world wars signalled the last one.

What Canada must do is take its medicine. Yes, it’s hard: it’ll bring pressure on the government, and will make people like Garth Turner, MP froth at the mouth. So be it. The alternative is to do what we have done so far in 2008: sink ourselves and our future so as not to “deviate too much from the United States”.

America is a dying empire. We need to step up to our own future — energy state that we are — and decouple from the US. We do that by straightening out our own house. Ideally we would go all the way and return to a gold standard. If not that, at least show some backbone — be Swiss, be European, be Australian.

There is no greater gift to the future — no better sign of stewardship — than that a dollar retains its value. When it doesn’t, saving makes no sense. Do we want to be Americans, with a negative savings rate, drawing down capital to keep spending? Or do we want to again practise thrift and a sense of longer-term interest?

The choice is now. Let us hope those in charge in Ottawa get the point, and do what we need, not what we, in our desires, may (at this moment) want.