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The Current Account Deficit

The National Bank have published a very useful and interesting report on the current account deficit, which is now running at about 3% of GDP. They argue that the deficit – largely driven by a huge fall in our manufacturing and wider goods trade balance – has now become structural, and should be cause for much greater concern than is now the case. They also argue that the Canadian dollar is clearly over-valued, and that its rise has been fuelled by large inflows of hot money rather than by the strength of resource exports.

As Arthur Donner has pointed out, bringing our large trade deficit back into balance would provide a very large boost to GDP and job growth. Yet for some strange reason, Ontario Premier Dalton McGuinty was recently pilloried for making the entirely reasonable observation that a too high Canadian dollar is bad for the Canadian economy.

Enjoy and share:

Comments

Comment from Paul Tulloch
Time: March 28, 2012, 8:31 am

http://hcexchange.conference-board.org/blog/post.cfm?post=428

How come Canadian business interests rarely make such recommendations as the conference board in the USA? I am not a fan of all these recommendations, but some are quite workable solutions compared to the advice we get from our conference board – to help exactly what you point out- fixing structural problems.

Maybe it is because these recommendation are for American multinationals operating in Canada already- so these recommendations to Obama, could hurt us further.

McGuinty has went too far as I do believe there are some new positive signs in the Auto sector, that Ontario’s auto sector dominated manufacturing engine could be coming around as car and truck sales in the US are hitting pre-recession highs. (which actually does translate into action as Toyota just announced an expansion here in Canada at its Rav4 plant- 400 jobs).

Just wondering- does anybody have any research, data or other that focus on Ontario job multipliers?

Comment from MikeB
Time: March 28, 2012, 9:26 am

Perhaps a 2.8% CA deficit is higher than it should be, but on a planetary scope it must all add up to zero. This means some will be exporters and some importers. I think we should be careful about getting into a race to the bottom.

Maybe we should consider that sending Canadian dollars away (very cheap for us to produce in Ottawa) actually has some benefit versus consuming our own resources. Having said that, with 8%+ unemployment, we could use to consume a few more of our resources at the moment. Since we are sending so much money away, maybe we should consider a little deficit spending (Federally) to cover the gap. It is not like that spending would be any more inflationary than just spending the CA here in the first place.

I’m a little confused as to how the CA affects GDP. Certainly I understand that 2.8% of GDP spent here as a positive effect on local business, but isn’t it all counted in GDP anyway?

It is really hard to say what drives the Forex – way too many factors from what I can tell. Does the high dollar affect the CA? – absolutely. Can/should we do anything to try and affect it? I’m not sure, but I do think that trying to out cheap China is not the right way to go. The world is a mess. Canada is a sovereign, currency issuing country that is less of a mess – I expect that will keep our dollar up no matter what we try.

Comment from Paul Tulloch
Time: March 28, 2012, 11:13 am

ahhh Mike, devaluing the currency is precisely what every other nation thinks the solution is, and seems to be working on. Seems to be working for the USA vs China, at least a bit from what the pundits are stating.

I sat run up the deficit and maybe that will devalue our dollar. In many ways the austerity that is being put in place by McGuinty and Harper is only strengthening our dollar and making us worse off in terms of the higher dollar and the lost competitiveness. So in the end the austerity has a big negative on few causation dimensions beyond just the basic cuts to services to many middle class and below families.

So given our low debt to GDP ratio, one should be running more of a deficit not less. The negative longer run implications of this is more than offset by these public investments.

A sad, illogical, bean counting way to run our economy. Keep the damn bankers away from the economic levers.

Comment from MikeB
Time: March 28, 2012, 11:49 am

Paul: Sadly I suspect that our Lawyer/finance minister has bought hook line and sinker into the race to the bottom. McGuinty is strongly influenced by Drummond. The bankers have made fools of us all. If you haven’t already, Prof William K Black is a good read. He is a criminologist and was part of prosecuting the S&L crisis in the US.

PEF seems to be one of the last refuges of sanity. I wish everyone could be forced to read and listen to what some of these great writers have to say.

I’m certainly farther out there than most. A little over a year ago, I tripped over MMT. Arun has mentioned it here a few times. It has completely changed my perspective. It had never really occurred to me to wonder why a nation with a “printing press” had to borrow money. Bill Black made a good point recently – roughly quoting “UK Osborne said they had run out of money, does that mean if German invaded they’d surrender immediately saying we’re broke”. I’m not an economist so I am not sure they have everything right. It seems however that the mainstream media seems to be adjusting course to their view rather than the opposite.

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