Following the money not the currency

The ride of the Canadian dollar is on every good policy wonk’s mind. Labour is concerned about its impact on jobs. Manufacturers are concerned about what exchange rate volatility means for their  bottom lines when their sales are in one currency and costs in another. (Note: like border line-ups, exchange rate volatility is a real cost of transacting across the Canada-US border that does not exist for interprovincial trade, and that dwarfs any of the minor frictions that exist in such interprovincial trade. So the next time you hear a pundit, or a federal or provincial government, state that it is easier to trade with the US than other provinces, you will know that they know not of what they speak.) Economists wonder what this means for consumer prices and inflation.

All of the attention has been on the currency itself, personified as if a movie star, its exchange value a form of instant popularity polling numbers. What’s not being talked about are the people doing the trading, a clique of folks who make money either way the action is moving (their salaries and commissions put them at the top of the income distribution, making them part of the problem of the rich pulling away from the rest of us).

They do this first by taking commissions on sales, which gives them a small cut of a very large flow of transactions. As long as trading volumes are high, they are happily taking their percentage. Second, by being close to the source, they are all the better to profit from the swing in prices. And all of the bank commentators quoted in the news are in a conflict of interest given that their employer has taken a position on where the dollar is going.

Also striking is the one-time loss being taken by some financial players. On the surface this would seem a reckoning but I’m not sure. Take Merrill who have been pulling $3 billion a year in profit in recent years. They will take a one-year loss of $5 billion, but here’s the kicker: they can use that accumulated loss to write off future taxes, so don’t expect Merrill to be paying much in taxes over the next few years. The drying up of such prior-year losses is one major reason why corporate taxes paid to Ottawa shot up 19% in 2006/07. (Don’t feel too bad, Ottawa cut their tax rates just a short while after.)

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