Oil Prices and the Loonie Again

There’s a refreshingly pragmatic and detailed piece in today’s National Post by Peter Spiro questioning the assumed correlation between oil prices and the loonie.  It builds nicely on previous discussion of the “oil price-loonie transmission mechanism” that has occurred here and here.

Among other salient points, Mr. Spiro points out that:

  • Canadian petroleum exports have grown, but not that dramatically (especially as a share of GDP).
  • Despite strong energy exports, Canada has a large trade deficit which should (other things being equal) depress the currency.
  • FDI flows have been leaving Canada on a net basis, not coming in.
  • The loonie is clearly overvalued (by 25% according to OECD estimates).
  • Portfolo inflows (especially into Canadian bonds) have been a key mechanism for lifting the currency, and those inflows are motivated in large part by the expectation of traders that the loonie will rise (thus enhancing the return for foreign purchasers of those bonds).
  • Financial markets show herd-like behaviour, following fads that often turn out to be irrational.
  • The market’s assumption that high oil prices inevitably produces a high dollar could be another such fad.
  • The Bank of Canada may have inadvertently promoted that herd-like thinking with its past research (dating back to 2006) about the determinants of the dollar.  [I don’t know if I fully buy this argument … traders obviously look at the Bank’s models, but I don’t think they are that sheep-like … and more recently, the Bank has actually been trying to break the univariate association in traders’ minds between oil prices and the dollar.]
  • Whatever its causes, the Bank of Canada could disrupt this self-fulfilling consensus among traders by leaning against the bubble in the currency more forcefully — thus forcing traders to change their underlying model of what determiens the dollar.  [I think this argument is strong.]

A smart financial trader is not one who actually knows the true value of a loonie.  It is, rather, someone who can accurately predict how others in the market will respond to new information bout the loonie.  The dollar rising with the oil price is therefore merely a confirmation that most financial traders think the same way — not a confirmation that Canada’s true “fundamentals” have been enhanced by higher oilprices.  We’ve seen what this kind of herd thinking can produce in the past, and Spiro warns it could happen here too.

The whole scenario reminds me of the judges in Keynes’s beauty contest (General Theory, Chapter 12):

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

Financial markets don’t judge the truth; they play on fleeting judgments about what others think is the truth.  In that regard, the link between oil prices and the loonie (which is strong in recent empirical experience) is nothing more than a self-fulfilling assumption by those who actually make this market.

Speaking of tilting against the windmills of market consensus, here are a couple of additional tidbits relevant to the debate over the loonie and what should be done about it:

The Globe and Mail’s Kevin Carmichael drew to my attention some recent IMF work that provides both theoretical and political support for economies to sterilize capital inflows with the deliberate goal of offsetting overappreciation.  This recommendation is aimed explicitly at successful emergin economies with strong curencies (like Brazil), but there’s no inherent reason why the same logic wouldn’t apply to Canada.  Sterilizing or discouraging the big portfolio inflows that Spiro discusses might be a promising avenue.

And Daniel Poon at the North-South Institute has referred me to recent work by Kevin Gallagher making a case for more direct interventions to manage exchange rates and portfolio flows.


  • A good summary of why capitalism doesn’t work.

    I hadn’t realized Keynes (and everyone who has read Keynes) knew about this long ago yet economists carry on like nothing is wrong.

  • This is precisely the project I am working on right now, for a major organized labour organization which is filing evidence to the tribunal investigating the Enbridge Northern Gateway project.


    Mr Spiro is indeed correct in the correlation estimates, I have used a correlation algorithm with a smoothing trend that estimates prior to 2004 the correlation between Oil prices and our exchange rate to the US dollar was about 0.4. Mind you with a good deal of monthly variance but once smoothed the correlation trend is fairly constant over a several years at 0.4. However once the commodity boom hit in the mid 2000s the correlation coefficient of oil price to the exchange rate trend jumps rather dramatically to 0.8. And again once treated with a smoothing algorithm the trend is a consistent correlation. That is not a small jump in correlation, it is massive!

    I also spent some time using various machine learning techniques to explore how the relationship of manufacturing employment and GDP has responded to this massive increase in the dollars rise. It is not and immediate effect but if one performs some signal processing there is a strong correlation between manufacturing levels and exchange rates. I still have more work to do on this but so far I have found the delay or lag between these two measures can be modeled best using an estimated 17 month delay. There is definitely a responsive signal correlation between the exchange rates and manufacturing levels. Much more research is needed, to compare this over time periods and economic conditions.

    Enbridge has hired a pose of 60 lawyers, bankers, economists and such to somehow indicate that the dollar is not effected by oil prices, and also that the dollar is not correlated to manufacturing employment or output. They also have many versions of causation about dollar valuation, manufacturing and exchange rate functioning that alas are about as anti-empirically based as that which one would expect from the tea party crowd. Definitely not the rationality that one would expect from serious people. I would love to post this work here but keep your eyes focused next week as I am told my work may be submitted as evidence so I do not want to jeopardize that.

    It is indeed a mystery to me why the bank of Canada has never attempted any strategic intervention into mitigating the effects of oil prices on our dollar.

    History clearly shows that markets

  • Market exchange rates are notoriously difficult to predict. But really, compared to most hard currency countries Canada’s economy is doing quite well so is it surprising portfolio shifts are favouring Canadian assets?

    Lowering our $ by buying hundreds of billions of US$ would lower our $ but mostly subsidize our already bloated resource industries.

    Why not just go with it? Take the advantages – lower prices for imported goods and cheap foreign travel – and pump up demand and employment at home through federal government deficit spending in infrastructure investment and social services. To diversify our job base let’s have industrial policy targeted at high value-added industries. Many other countries do industrial policy, led by the US, so why don’t we?

  • Gees and here I thought the CEP and CAW were thinking about merging? I am very surprised at your remarks Keith. You don’t actually believe a high dollar is the way to proceed through this morass. In many ways I view Harper’s lower of CIT to mitigate the rise in the dollar. You are right this is all about investment dollars, and I have a very difficult time believing that a high dollar is a positive for competitive reasons.

    It would be nice to see a decrease in imports costs, but even that possible benefit has yet to transform prices in Canada- which seemingly get swallowed up in the distributive trade networks of collusion and pricing.

    High value adding economy yes I agree that should be our ends, but I do not see how a high dollar is correlated to the means of getting there, other than inhibiting investment. I would say look at the 90’s as proof of what a low dollar can do to a manufacturing economy.

    High value adding still comes with labour costs, not so much direct labour but it is the indirect labour that does matter in the cost equation, the designers, the programmers etc. That is a very high labour cost sector- and that to me is where we get hurt in high dollar era.

  • In the midst of doing a short lit review on the subject of Exchange rates and oil prices, I found this paper by a Swedish researcher.

    Two very interesting discussion items for Canadians to ponder as our resource extraction economy abounds.

    1) the paper basically concludes something that is mentioned above that through research the so called dutch disease of oil price effects on exchange rates is highly dependent on the amount of institutional intervention into the dynamics that drive this causation. In other words with enough government intervention, the oil – exchange rate mechanism can be curtailed quite dramatically without much damage net benefit loss to any industry within a diversified economy.

    2) the author also notes that over the long run there can be a cyclical behaviour that can produce a mechanism that can be described as a perpetual economic bull dozer of destruction for non-oil related parts of the economy. That is over the long run a country can go through several oil price peaks and slumps and corresponding exchange rate hikes and devaluations. In a non-oil export oriented economy, reconstruction efforts in an exchange rate devaluations can be quite effective in increasing employment and economic renewal through investment. However economic reconstruction efforts during these devaluation periods within oil rich exporting countries during are hindered the specter that oil prices will eventually rise again, and therefore reconstruction and transition and diversity of an economy during these times are significantly less.

    try this link for the paper


  • Paul,
    I’ve dealt with the issue of the value of the Canadian dollar in comments to many other posts. In a nutshell I don’t agree that accumulating vast quantities of US treasury securities to lower our dollar is the best way to further economic development in Canada.

    For one thing one quarter of our exports are energy products and about another quarter are other basic, barely processed commodities. So about half the effect of lowering the dollar would constitute a subsidy to those industries and promote colonial style economic development. Is that a good thing? Granted it would help the other half of our exporting industries but what an inefficient way to do it.

    I also feel uneasy with promoting export-oriented economic development since its logic is usually based on a lowish currency and wage suppresion. I know people on the progressive side are not calling for wage suppression but as I say I feel uneasy adopting one half of that argument. In addition, in real terms, producing exports means working for foreigners. Wouldn’t we be better off working for ourselves and capturing output for ourselves?

    If we want to lower the dollar it would much better to rein in overdevelopment of the tar sands and limit electricity exports. Better still would be to convert the oil and gas industry into a public interest industry owned by various regional public and cooperative interests. David Thomson and I wrote a paper for CCPA about this a couple of years ago and a new version will be coming out soon. Check out Jim’s earlier posts on this currency topic.
    Additionally, and perhaps most importantly, the Canadian government has the ability to run the economy at near full employment if it so wishes by spending more in a variety of ways, ways that help Canadians – improve public transit, build a high speed train link down the Qebec City-Windsor corridor, and one between Calgary and Edmonton, implement a public pharmacare program to assist many people directly as well as the provinces, rebuild infrastructure. Etc. Of course Canadian industry should be given priority in these endeavours to provide jobs. This additional spending might lower the value of the dollar as imports would rise although it might not as our economy would boom and foreign portfolio shifts toward Canadian assets might increase.

    In summary I think we should just get on with building a developed economy and not fiddlle with the value of the currency. It’s not necessary and perpetuates our current over-reliance on resources.

  • I’m actually somewhat with Keith on this one.

    Personally, I’m a big fan of industrial policy – a word all but forgotten in government circles these days. I think we often lend monetary policy more power than it actually has…

    For example, in this case, while a devaluation would probably help some export-oriented industries, the value of the dollar does not entirely depend on us. The government United States, the emitter of the currency whose rate matters most for us, is flooding the place with dollars these days, variably trying to…

    – shore up a financial system that is still shaky to a large extent;
    – Boost its own export-oriented industries by decreasing the value of its currency (it is also trying to parlay China into helping them there);
    – Monetise some of its obligations.

    We can try to beat them downward and perhaps make it for a while, but I am not sure this is the most fruitfull course of action. Like Keith, I think that with a bit of imagination, we could use the favourable terms of trade to refit the economy away from primary commodity production… instead of letting it go that way even more by simply standing by.

    The key part is “a bit of imagination”. In a world where Erin becomes the NDP premier of Saskatchewan (should he want the job) and the likes of him are in other provinces and at the federal level, then we can start thinking along these terms. There is precedent in Canada for successful overhauls, with a bit of political will and a good deal of hard thinking… Jacques Parizeau’s years at the helm of the finance ministry in Québec come to mind, for example.

    In the absence of such leadership, it may well be that a devaluation is a fruitful temporary measure to stem the downward spiral. This can’t be but part of the overall project, however.

    Update: Just for fun, I looked at the currency of a similar country – Sweden – but which does not have the oil industry. The exchange rate pattern with respect to the United States almost mirrors that of Canada if we look at the last decade (the exchange rate went from around 11 kronas/dollar to a little more than 6, with a couple of spikes upwards in the last couple of years). That’s evidently not a proof of anything, just to say that I am not entirely convinced by Spiro’s investor bubble argument or even that it is mainly a Canada-specific phenomenon driven by oil.

  • I have been researching frantically the Oil price to exchange rate relationship, and there is definitely an interesting long history of measuring this. It is interesting seeing how this relationship started out as a negatively correlation as denoted by Amano and van Norden (1995) from the Bank of Canada. However work Issa, Lafrance, and Murray in 2005 showed a structural break in that correlation situated in the early 90’s, where it turned positive, pretty much due to NAFTA and the associated loss over our oil sovereignty.

    More recently the recent work by Mohammad Shakeri, Richard S. Gray and Jeremy Leonard in their IRPP publication in May of this year, show that indeed oil and non-oil energy commodity prices have increased substantively in their correlation to the dollar.

    Basically the estimate that a 1 percent
    increase in energy prices is associated with a 0.54 percent decrease in the value of the US dollar
    relative to the Canadian dollar in the post-2003 period. The relationship was much smaller at 0.15 percent decrease for the 1992-2003 period. And prior to that it was a negative correlation.

    There were many transition periods in that correlation, but even as late as this year the Bank Of Canada estimates the correlation rises to 0.88. Which agrees with my research (as a rudimentary analysis as the methods I use).

    No of course correlation is not causation, but when you have the following quote from a Forex trader, you know that causation cannot be far off from proving in this causation.

    “Looking at a chart that compares crude oil and the performance of the Canadian dollar is like watching a pair of professional dancers. Oil is the leader and where it goes, its partner, the loonie, usually follows; at least about 80% of the time, according to the exact correlation figures. Therefore, a move in oil is a leading indicator that can be a tip-off for the astute investor to buy or sell short Canadian dollars.”


    So my question is, given this long and quite variable ride we have been on with commodity prices that take our currency for a ride, how can one build a high value adding economy amidst such an instability. Potential high value adding investment is not effected by such variability, however I am not convinced that such environments are conducive to non-commodity investment, at least I am not sure they will attract such investment- where as a low dollar will induce a labour savings cost, the new pass production era will be just as labour intensive as the old, it will however demand highly skilled workers that will be very high value adding and a dollar near PPP would and should be our goal.

    Interesting study here that shows how PPP is potentially not the long run equilibrium for exchange rates for small open resource based economies. Cashin, Céspedes, and Sahay (2003) test for cointegration of the realexchange rate and commodity export prices for 58 countries.

    Sadly in the review process for Enbridge Pipeline tribunal that I am currently involved in, the projections on net benefit for Canada assume in their model an exchange rate near PPP. That is a pretty wild assumption that totally discounts the real costs to our economy. See a nice paper by Robyn Allan that was submitted to the tribunal called “An Analysis of Canadian Oil Expansion Economics”
    April 10, 2012

    Sadly the public depository site never seems to work and I cannot link to the article. But have a search for it.

    The Alberta Federation of Labour is doing a great job of defending the economic realities that face workers through this whole process, no matter how outnumbered by 50 enbridge lawyers.

    I would like to know how though such a gigantic project can take something as basic as the exchange rate and pretend that we live in some alternate reality. That truly is misleading Canadians and brings in billions of dollars in biased projections of net benefit. Lies lies lies and more lies.

  • that should be mass production era lol, although pass production may be more fitting?!

  • to Keith, we are in the same page, theoretically. However, much of our economy is still branch plant based, or foreign investment controlled.

    And of course it is not just investment we look for in developing a high value adding economy, it is also technology, know how and several other factors that are needed to build an economy dominated by high value adding capacity. So, unless we develop a bunch more R&D, tech dev and organizational know how, we will be reliant like many other smaller countries on foreign investment as the gatekeeper into the high value added economy.

    I do agree that commodities are important to our future and do make up a component of our economy. I would still like to see a study that puts employment figures on the energy sector and one that specifies permanent versus construction related jobs, because I am pretty sure it is over estimated when it comes to employment importance. Especially given the building activity that is going on. Once the construction is completed in 5-10 years, the multipliers will come down for the energy sector such as the tar sands.

    I see the high dollar as actually promoting colonial growth in these sectors not a low dollar.

    There is a lot of talk right now about how much we need foreign investment to expand the tar sands. Of course this in the midst of some attempted buy outs of some large players in the Tar Sands.

    I do not see a shortage of investment, the government could easily buy these , and invest Canadian tax dollars. But not with this government, they would much rather jeopardize our economic future and send all sorts of high value adding jobs, along with the resource ownership to foreign interests.

    So we do need to get this debate a whole lot more into the public eye. We are about to sell off a whole pile of national sovereignty to our economic future and Harper seems to be quite excited about the dismantling of our economic union.

    Wow the debate is just not happening in our country over the sale of our sovereignty, it is no wonder the PQ gained a victory in Quebec, I am thinking we need a new party in Ontario as well. Potentially the feds have went so far now in diluting the central body that it is but a zombie amongst its 10 parts.



  • Thanks for the references, Paul, I,ll check them out and dabble with some data myself… And best of luck in the current struggle.

  • Paul,
    Here are a few reasons I do not agree with lowering the value of the dollar.
    1-Half our exports are energy or commodity products. Clearly a lower dollar will tend to increase these, all else equal. It will help other export sectors too but why adopt a policy that will strengthen this colonial style development?
    2-Lowering the value of our currency is not cost-free something proponents neglect to mention. Beside reinforcing our backward economic development it will also lower our standard of living by increasing many prices, especially basic food-stuffs, energy and other low margin products. While this will negatively affect all Canadians, my guess is the impact will be greatest on low income people. (Perhaps you have some insight into this?). It will also raise the price of foreign travel, something many Canadians enjoy, especially in the winter.
    In terms of industrial development, it would also make it more expensive to import technology and modern equipment.
    3-To lower the dollar the Bank of Canada would have to buy and hoard very large quantities of US dollars. The counterpart to that is the government of Canada or the Bank of Canada will need to issue and sell bonds or notes to cover those purchases. Either way Canadian government securities outstanding would increase by the same amount as the amassed US dollar securities and I have no doubt that conservatives would criticize the exploding gross debt and demand further cutbacks to social programs. Of course it would be nonsense but when has that stopped them in the past and why give them that ammunition?
    4- In real terms exports are a benefit to foreigners not us. Yes we get jobs but we don’t get the output, by definition. Rather than target export industries per se why not serve ourselves first and let the exports follow? This is where industrial policy and imagination come in, as noted by Mathieu Dufour previously. For example Canada is far behind in public transit and public transport between cities. We are at least 40 years behind France in terms of high speed trains. Let’s finally build the high speed train down the Quebec City-Windsor corridor and one between Calgary and Edmonton. We also need to refurbish and expand our city buses and commuter train systems. We’re talking at least $50-60 billion in investment that will make our lives better, less stressful and help the environment. Surely such a program could provide technologically advanced, high margin value-added products and know-how that we could export as well as serve our own needs. Other non-brainer things we need to do for ourselves: build an east-west electricity grid and an east-west oil pipeline. More tens of billions there and more hi-tech, value-added, advanced know-how industries serving our needs, with products and know-how we could export. We also need to redesign and retrofit our cities to be commuter, cycle, pedestrian, and public transit friendly. Who knows what could come out of that? Think of cycle chic, the bixi and more.
    Etc, etc.
    5-The issue of volatility you raise is different from permanently pegging the dollar at, say, 80 US cents. It might well make sense to intervene to prevent crazy volatility such as the one that raised our dollar to $1.14 US a few years ago for a few days. And why 80 cents US? Our dollar has varied between 63 US cents and $1.14 over only the past 20 years. If the dollar is to be pegged does that mean defending it if it drops below the peg? Keeping the dollar from dropping is difficult since our government can’t issue US dollars. Currency pegs typically attract currency speculators, something we can do without.

    In any case, I have enjoyed this exchange and I know we both want a developed, socially generous country.

  • Hi Keith,

    Thanks for your reply and quite relevant points.

    Just a couple follow up points.

    Trade data out last week showing further decline in exports to swell the merchandise trade deficit to its largest level since 1971.

    Somebody has to do something here in a major policy sense of doing something, and given the regime in power, about the only thing that will happen is a further rise in the dollar, and a furthering of the forces driving up our dollar.

    Potentially, once our economy implodes our dollar will sink back to a PPP level that is justified. But at what cost, there is a way to manage this without coming off the rails.

    That ultimately is my point, something has got to be done.

    I also do not believe that the high dollar contra machinery and equipment purchases is a negative sum game, i.e. investment is much more than machinery and equipment, otherwise given all the cash hoarding going on, why would the corps not just go out and make the investments here in Canada and reap said rewards? Why — because there is a lot more to investment and fluidity of the profit chain than having cheap machinery. Medium to long term decisions are made on many factors, and I go back again to the 90’s and the systemic belief that our dollar was more directing lined to PPP and not artificially making the cost of doing business in Canada higher.

    Also, look at the USA, in many ways, the US dollar has been devalued, and if you look at there manufacturing data, it is actually painting a much more positive picture.

    Lastly, my point again- something must be done to quell the decline, we have a debt load for consumers that is about to take the head wind out of demand, and somehow we need to leverage policy to protect and manage the housing bubble, that is in many ways like a massive nuclear bomb for our economy.

    Leaving the dollar and pursing the current course of a high dollar, is basically agreeing that in order to make our way forward we need to nuke our economy.

    And that is exactly what the bank of Canada agreed to the other day with its updated position release. It is quite sad really, as Carney make so many errors and omissions in that statement that it is callously irresponsible. I have a hard time figuring that guy, one day he is at the CAW convention giving it to the corps, and the next day fully in bed with Harper’s oil development and dutch disease, nuke the economy approach.

    Managing the economy through a lowering of the dollar to me is a very viable and doable strategy. Sure I would agree there are many other policy options that could be in play, but none that this government would support. However, a devaluing of a dollar is as easy as appointing Jimbo Stanford as finance minister. Truly, history is filed with beggar they neighbour approaches to hasten recovery. Mainly because it is an easy fix.

  • damn I hate 13, anyway I meant to add that that I am hoping to finish a small bit on this with a critique of Carney’s position paper last week. There were several misleading statements (and that is not including the ideological machinations and bias). It potentially will be a guest post to the site by me. I kind of like it here lurking in the comments rather than posting. That way I don’t have to take it, I can just dish it !!! lol.

    Complicated economic space we are in here and sadly I just do not see much in terms of positive direction.

    And lastly Carney was very irresponsible in that statement by saying opponents to a high dollar want to shut the tar sands down. That is exactly the kind of talk that will indeed destroy our union, and should not be made by any public civil servant. It is just wrong wrong wrong wrong and he knows it.

    It is a slowing down of the tar sands insane acceleration that is being suggested. It is just a bit of a lifting off of the accelerator is all we are asking. Not a ban on oil production in that fashion. Again, just a stupid stupid politically charged statement by somebody that I thought was serious about this country.

    Oil production will always be a part of Canada and the potentially for value adding is a great part of economic sovereignty for our nation. To suggest otherwise was, like I said, mystifying to me. Potentially the Tories at the Bank of Canada prevented him from doing a final edit?! A very sad display of an institution that is supposed to stay neutral politically. It is there own researchers through the years that have been the ones measuring how integral oil is to our exchange rate! So I really do not get these people other than politicizing another major civil service responsibility, much like they did to Statistics Canada.

  • sorry that should be “is a negative sum game”

  • Hi Paul,
    Thanks for responding. It gives me the opportunity to add something I wanted to write but forgot. At one point you wrote: “Leaving the dollar and pursing the current course of a high dollar, is basically agreeing that in order to make our way forward we need to nuke our economy.”

    Well, this might be true if the federal government does not maintain an adequate level of aggregate demand in Canada to offset the decrease in net exports. With a high currency exports will normally decrease and imports increase and jobs will be lost. No question there. So in my opinion the response should be to boost federal spending to an adequate level and do the stuff I referred to in an earlier comment. And more as well, such as infrastructure (and Pharmacare to relieve the provinces of expenditures). We both live in the Ottawa area. Could you believe the photo of the car that fell into a sinkhole on highway 174 a week or so ago? Similar things have happened in Montreal over the last year.

    Lowering the dollar to serve foreign demand should not be the priority when there is so much to be done at home. Of course increased federal expenditure will increase the deficit. Other than the challenging propaganda effects of household logic perpetrated by Conservatives this should be of no concern to us as long as inflation remains at acceptable levels.

  • Paul,
    A comment re Carney. I have noted over the past few years that high profile representatives of the Canadian elite will often make pretty good sounding statements but then offer useless solutions if they offer one at all. So Carney’s solution to his good point about the business cash montain was to increase dividends! What? OK, some pension funds would be helped out and God knows they need it, but other than that his solution would just feed more cash to the wealthy and increase inequality.

    I also recall a year or two ago the Conference Board (? not entirely sure it was them), flush with prominent members of the elite, wrote that inequality was a problem in Canada. Sounded good. But did they propose higher taxes on high incomes, lower taxes on low incomes, higher minimum wages, better protections for workers, better social programs, etc? Of course not.

    I see these types of comments as the way of the Canadian elite. They aren’t brutal like most of the US and other elites, and they’ll even put up with some social programs. While that is a good thing and actually makes it possible to at least talk to them, there’s no way they’ll actually propose anything that’ll put a dent the rapid increase in inequalty in our country and all the toxicity that creates. In fact they’ll fight such measures tooth and nail.

  • Keith, I’m on side with your 4:51 on Sept 14. Well said.

    Jos Laliberte and I have discussed this offline, and we both agree. Increasing public spending is the right way to address this problem. In fact, it addresses both problems, as you point out: the lack of productivity-enhancing public investment and the strong dollar.

  • Thanks Circuit. I should add that I enjoy your blog very much.

  • Yes Circuit great blog site.

    Okay Keith potentially one more question. Sorry for the later response, been a bit under the weather of late.

    My question QE3 and its impact on our exchange rate.

    It is official now that QE3 is indeed upon us. To what level and how long- well seems like I read that QE3 will be here until we see a rebound in the last three charts that Circuit presented on the recent of QE- employment and housing prices.

    It seems one outcome of QE generally agreed upon by various experts: it has devalued the American dollar.

    And as I mentioned previously, there are some evidence in the research that as the US dollar has declined world oil prices have risen- OPEC is a price giver not taker. So what we have is the potential where two forces could impact the Cdn dollar.

    I am trying to assess these using empirical data.

    I do realize that simple moving correlations will not be enough to investigate the relationships. I will need to use co-integrations methods to properly, not sure if I will have enough time to do such.

    It to me is one piece of this statistical puzzle that is missing, the relationships of: the price of oil, the exchange rate of Cdn/US$ and the US Trade weighted US dollar index (minus Canada).

    We need to separate the varying forces here to get a clearer view of causation. I guess I will have to dig into this to feel I have done a proper job of exploring this issue.

    My guess- QE3 will indeed sink the US dollar more, and it will effect our dollar directly and indirectly by raising the price of oil- both clearly in the direction of raising our dollar.

    Desired Policy Outcome- I agree with you Keith- demand management is a pivot point here for crashing our economy.

    consumers cannot keep the economy afloat with debt financing and without a change in course Harper and the austerity bound premiers will crash the economy


    1) we either devalue and let exports help supplement demand, which could also mean longer term investment similar to the 90’s with our longer term low dollar strategy. Why not our own QE? or how about negative interest rates or better yet appoint Jimbo and Keith as co-governors of the bank of Canada.

    2) kill austerity and start spending government monies on much needed public services and infrastructure that will improve both our current needs and future productive capacity. I would launch a massive innovation and education strategy. With low interest rates projected for quite a few years yet- think US housing prices (not rebounding anytime soon and wild eyed consumer debt spending will not come back for a long time like it did in ’03-’07). Canada’s debt to gdp is in great shape and so to is our deficit to gdp so I do not understand why we let Harper push us into the abyss of austerity it is bloody insanity. I should also mention the Green need for many areas of the public space such transportation.

    3) elevate wages rates : further empower unions and other means of raising wages like productivity through production process investment and innovation. This would mean coaxing labour legislation from the most anti union federal government in the history of Canada. It would also mean coaxing investment from the corporations that seems to be fixated on dead money (maybe negative interest rates would help?)

    4) several others that I cannot finish right now. got to go and cook supper!

  • add on

    4) slow the growth of oil sands development (not to all Bank of Canada employees and citizens of Alberta- I said slow the growth, not no growth!!!!!and increase value adding of this resource here within our borders and keep and expand jobs in Alberta and elsewhere in terms of refining and product development- which will potentially mean restricting ownership or at least putting some regulations on ownership.

  • Paul,
    I wrote quite a long comment re QE, the value of the dollar and other things but it suddenly vanished. I don’t feel up to rewriting it now as I’ve picked up your cold over the Internet (haha!). Perhaps it will show up somewhere and can be posted.

  • Yes it was a nasty cold, and seems to have leveled many around me for a few days.

    QE3- seems like I have been reading quite a bit about a new round of global devaluation and some talk about the US dollar losing more credibility as a global currency (right- I don’t buy it- or should I say everybody will continue to buy it, safety is everything these days, I am just surprised the Americans are not printing a whole lot more- I guess that gets into that whole MMT space).

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