Loonie Out of Control

The loonie’s spectacular flight toward parity with the greenback (and likely beyond) seems to know no bounds.  It’s climbed by over 25 percent in 7 months; its flight began the same day global stock markets turned the corner back in March.  There’s no reason why this appreciation, the steepest in our history, should stop at mere parity.  Exporters, beware.

Economists agree now that exchange rates are a financial variable, not a real variable.  In other words, they are determined by shifts in a stock equilibrium in an asset market, rather than by a flow equilbrium in real markets (for tradeable products, direct investment, or whatever).

Thus the key problem we face is that hot-money financial traders have too much money to place fleeting bets on different denominations of assets.  The real economy where we must work, produce, and — yes — export, is second fiddle.  I am not in favour of pegging our dollar to the greenback, nor of a common currency.  The real solution starts with questioning why we’ve given financial traders so much leeway to play with so much money.  Reigning in those paper markets, limiting how much money sloshes around and where it is allowed to slosh, would open the door to having exchange rates determined on more sensible, real factors.

In the interim, however, in order to reduce the global demand among financiers for Canadian-dolar-denomianted assets, we need to “shock” their positive view of Canada.  (In that regard, my tongue-in-cheek suggestion to appoint yours truly as the next Bank of Canada governor is only half in jest.  A sudden renewal of Quebec separatism, or a massive accumulation of public debt, would do the trick just as well!)  Our low corporate taxes, our capital-friendly political environment, and above all our uniquely hands-off approach to managing our vast mineral resources (especially oil), are key structural factors behind the appeal of Canadian assets.  Merely announcing that we were changing tack on those fronts, would send enough financiers heading for the exits to accomplish the desired depreciation.

In general, I think the role of monetary policy in explaining the current appreication and/or arranging for its reversal is overemphasized.  I think the deeper structural remaking of Canada’s economy (more business-friendly in general, and more resource-oriented in specific) is the bigger culprit.  We made this point first in the CAW’s submission to the 2007 Competition Policy Review Panel (the “Red Wilson” panel), and I think it’s still valid.  Here’s the link to the full submission:

http://www.caw.ca/en/a-productive-economy-submission-to-competition-policy-review-panel.htm

And here’s my current Globe and Mail column on the loonie’s flight, where I humbly offer my services as leader of the most important economic institution in the land (check out the stunning factoids about the de-globalization of Canada’s GDP):

How to Rein in the Loonie?  Appoint Me!

by Jim Stanford

            March 10 was the day the CEO of Citibank announced his bank was profitable again, igniting a global rally that’s boosted stock markets by 50 percent or more.  Unfortunately, March 10 was also the day the loonie began what has become the fastest, biggest upswing in its history.

            From 77 cents (U.S.) in March, the loonie has rocketed up 25 percent, blasting through 96 cents by Thanksgiving Monday.  It won’t be long before our loonie’s worth more than the U.S. greenback.  That may cause a certain nostalgic smugness among some old-timers (who remember when “a dollar was a dollar”).  But it’s unequivocally bad news for our economy.

            Fair value for our currency, based on purchasing power, is in the low-80s (U.S.).  So Canadian-made products are already artificially overpriced by 20 percent; that will get worse in the months ahead.  No wonder Canadian exports, stagnant for years, have plunged another 10 percent this year.  Statistics Canada announced Friday that our monthly trade deficit reached $2 billion in August – the worst on record.  On this basis, the loonie should be sinking, not flying.

            Here’s a stunning little factoid showing how Canada’s once-vaunted trade position has utterly collapsed amidst both the global financial crisis and the ongoing gritty extension of no-holds-barred globalization.  Exports of goods and services accounted for just 27.7 percent of our GDP in the second quarter of this year.  That’s down 3 percentage points in the quarter, and over 8 percentage points in the last year.  This (admittedly crude) measure of export intensity has fallen almost 20 points since its pre-9-11 peak (of 47 percent in 2000).  Exports now account for the lowest share of Canada’s GDP since 1992 (when the country’s industries were still painfully adjusting to free trade), and we are less export-dependent than we were in 1980.  This is an astounding shift in the composition of our economic activity, that has gone virtually unnoticed.  Unless this traditional reliance on exports is replaced, quickly and permanently, by other economic drivers (like long-run increases, secular not cyclical, in public spending???), we will be driving an economic car without an engine.

            How do we explain the take-off of the loonie, despite these grim trade realities?  It certainly has nothing to do with fundamentals, the real factors economists used to think determined exchange rates (like competitiveness, trade performance, productivity).  Our international trade performance has never been worse.  All our exports (other than oil and minerals) are losing customers.  And our productivity growth is negative.  No, it’s a massive financial mood swing, not economic reality, that explains the loonie’s rocketing ascent.

            It’s cold comfort to note that part of the problem is U.S. dollar weakness (not just the loonie’s strength).  Yes, other currencies are also rising against the greenback – but ours is rising faster.  Since March the loonie has soared twice as much as the yen, and half-again as much as the euro.  Yet we are far more dependent on exports to the U.S. than Asia or Europe.  Mexico is the other economy integrally tied to the U.S., yet its peso has gone nowhere this year.  So Canada is being priced out of all markets, global and North American.

            Bank of Canada Governor Mark Carney agrees the loonie is seriously threatening our recovery.  We’ve got to bring it back to earth.  The question is, how?  Mr. Carney tried jawboning the dollar down, with half-hearted results.  Pledging to keep interest rates near-zero, and finding other ways to boost money supply and prices, would help.  But that ignores the true source of the problem: financial speculators using our currency as a way to bet on the future escalation of oil prices.

            That’s why we’ve got to rethink the fundamental direction of our economic and energy strategies.  Canada has as much oil as Saudi Arabia.  Yet we’re the only major oil exporter in the world with a completely hands-off approach to managing the ownership, development, and export of this resource.  That’s what’s sparked such obsession among global financiers in our mineral resources – which, after all, only account for a couple of percentage points of our GDP.

            So to rein in the loonie, we must rein in the oil export juggernaut that is squeezing out all other exports.  Use environmental and planning approvals to slow down new development.  Tax petroleum profits.  Above all, reimpose sensible limits on foreign takeovers of resource assets.  All that would cool off the loonie in no time.

            Even deeper, we’ll want to rethink all that power we’ve given hot-money traders over this most important price.  They have too much money to play with, making unproductive bets on asset prices – and meanwhile our whole economy gets dragged along for the ride.  Regulating hedge funds and other speculators (constraining their funds, and regulating what they’re allowed to do with them) would restore some stability and rationality to foreign exchange markets.

            Finally, here’s how to seal the deal.  Appoint me as the next Bank of Canada governor.  That’d knock 25 cents off the loonie overnight.

9 comments

  • Nice work Jim,

    So much cash chasing the easy fixes, driving up gold, oil, currencies and whatever else they see fit.

    I wonder how long the likes of Harper and his free market ideologues can withstand this fate.

    He is so concerned about image- that in an image based, attention deficit post-something socio economic system- he might actually hang around for while. Never fear, there is an never ending amount of public cash to convince us all or the Tory “un”plans- relax, have a coffee and a donut, play some piano at the NAC, talk hockey. He is slick, bu8t I would like to see the Harper faces when the loony tops 1.10 again and our unemployment rate tops the charts at 10%.

    No amount of spin doctoring will help this further crisis that is brewing. We need real action and real plan.

    It starts with getting control of the dollar. There are many means as you suggest to influence the dollar- its starts with at least suggesting to the speculators that our government is no longer just a bystander.

    This has been the easiest ride I have ever seen for policy shops in Ottawa- wow doing nothing as a government for the last 3 years sure cuts down on the policy research work.

    paul

  • Ha Jim 25 cents! I nominate myself. 25 cents the first day and 10 cents everyday after.

  • Ha Jim 25 cents! I nominate myself. 25 cents the first day and 10 cents everyday after until I am hung drawn and quartered and those responsible for the appointment.

  • The rising loonie aint making any sense to Economists is because there is no logic behind this. Now is the time for “non-believers” to renew their faith in “Higher Powers” above national level. Manipulation and Internal decisions for this puppet show. Instead of doing it gradually, they went too fast to show the parity and unity with $US believing it will throw economists, journalists and the public off the trail.

    Once the questions start to be raised, watch them slack off. Our shameless politicians think this can’t be detected and Canadians cannot discern this after all, the decisions are made even above their own heads.

    If I can, absolutely others can too. They were joining the family, becoming a part of something big. Oh spoiled the party!

    Canadians will meanwhile live through it, but Karma will befall the ones who weaken the nation.

  • Porter was on the CBC this morning arguing it was economic fundamentals driving the value of the CDN dollar.

  • Do the Economists employed by the Financial Institutions ever tell the truth or worse are they the puppets?

  • March 24, 1999

    Subject: TOBIN TAX MOTION PASSES IN CANADA’S PARLIAMENT

    On March 23, the Canadian House of Commons in Ottawa passed Motion M-239 by a vote of 164 to 83:

    “That, in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community.”

    Finance Minister Paul Martin and most of the governing Liberal party supported the opposition New Democratic Party in favour of the Motion.

    The “Tobin Tax” is named after Nobel prize winning economist James Tobin of Yale, a former economic advisor to President Kennedy, who first proposed it over 20 years ago. The concept has continued to gain supporters over the years. Tobin proposed that a small tax of between .1 and .5 per cent on currency exchange transactions would serve two purposes. It would limit the damage from excessive exchange rate volatility (ie. the recent crises in Asia, Russia, and Brazil), as well as raising significant revenue for global causes. With global foreign exchange revenues over $1.3 trillion per day, estimated revenue from the Tobin Tax is in the range of $150 to $300 billion per year. By comparison, the U.N. estimate of funding required for universal access to basic social services (ending poverty) is $40 billion per year.

    http://www.ceedweb.org/iirp/canadames.htm

    Canada has shown world leadership in adopting a motion calling for an international tax on financial transactions, NDP financial institutions critic Lorne Nystrom said today. Motion M-239 was passed by Parliament last night with a vote of 164 to 83. It read: “That in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community”.

    “This will finally give the Tobin Tax the fighting chance it deserves. The House of Commons in Canada is the first parliament in the world to pass such a motion,” Mr. Nystrom said.

    Problems with sinking currencies and global deflation have buoyed support for increased global re-regulation. The Tobin Tax could serve as both a means to cool “hot” speculative capital, and it could also raise funds for cash-strapped social programs — both at home and around the world. “Canadians and the world have seen the effects of today’s financial system. Speculative capital is wrecking havoc on the international community. The situation in Latin America, Russia and South East Asia is worsening and is leading to more currency turmoil and global deflation. A Tobin Tax is part of the solution to this problem,” Mr. Nystrom said.

    http://www.globalpolicy.org/component/content/article/216/46034.html

    A decade later the foresighted political system lost the nerve. I wasn’t here but the word is that Mulroney also kept the Candian dollar artificially high. Sounds familiar.

  • Actually Jim, I think it would be better if you were Minister of Finance. The dollar might well drop 25 cents initially if you were Governor of the Bank of Canada but when currency traders realized you couldn’t really do much more than the Bank is already doing the dollar would climb back up to parity again. The rate you would directly control, the overnight rate, is already at 0.25%, and 10 year government of Canada bonds are at 3.5%. Could you really do much more? You might intervene in foreign exchange markets but you wouldn’t be the first central bank to try and fail in today’s world.
    As Minister of Finance, however, you could institute an export tax on oil and gas, require processing of same in Canada, and introduce a higher corporate tax on natural resource producers. You might even decide Canada should join most of the rest of the world’s oil producers and nationalise the industry. Next you could bring in measures to create full employment, including a vast program to expand our train system, public transit and develop green jobs. In your spare time you could work on improving public pensions and introducing public pharmacare. Not only would all that serve the interests of 90% of Canadians it would permanently shake the confidence of currency speculators.

  • Ok I will back Jim’s campaign for finance but if and only if he nationalizes all of the oil and gas resources. Potash too. For now the private sector can Keep the forests.

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