Time to tame the wild bird
A lesson in lunacy
BY Jim Stanford
Photography by Reuters: Chris Wattie
Illustration by David Anderson
The latest surge in Canada’s high-flying currency has spurred some token hand-wringing in official Ottawa. At one point last fall, our national bird soared to nearly U.S.$1.10. That’s up 45 cents, or almost 75 percent, in just five years.
Our out-of-control currency poses an immense danger to manufacturing, tourism and anything else that depends on world markets. It even hurts our resource industries. In every case it makes Canadian products—Canadian cars, Canadian tourist destinations, Canadian minerals—more expensive for non-residents and reduces the bottom-line incomes that Canadians receive from their work. But those with their hands on the economic wheel—most importantly, Finance Minister Jim Flaherty and the Bank of Canada—claim they’re powerless to do anything about it.
Their “let the market rule” attitude is not consistent with global reality. Many countries actively manage their currencies. Japan uses ultra-low interest rates (0.5 percent) to keep its yen stable against the U.S. dollar. China uses capital market regulations to slow the rise of its yuan to a snail’s pace—despite its humungous trade surplus. Even America is content to give the slide of its own dollar a gentle nudge, via pronouncements of official unconcern.
But even if Canada’s policymakers took active hold of the exchange-rate tiller, they still face a tougher question: How exactly would they bring the loonie back to earth?
The answer depends on how we understand the loonie’s flight in the first place. It has a lot to do with the price of oil. But the chain of causation is more complex than you might think. It’s not just because our oil exports have become more valuable—we don’t export that much oil anyway (still less than automobiles, by dollar value). It’s not because our trade balance has strengthened—in fact, it’s deteriorated, since ballooning imports of manufactured goods are offsetting the growing value of resource exports. And it’s not because inflows of direct investment have been gigantic—those are mostly offset by outflows of capital to foreign locations by Canadian companies.
I suspect the loonie’s flight has more to do with financial markets than energy markets. Stock markets have soared in Canada, driven mostly by super-profits of Canadian resource companies. Foreign money has poured in to ride this wave, in many cases buying out Canadian firms entirely. And speculation in currency markets then exaggerates the upward pressure from this inflow of hot money. If traders think the loonie will rise, they buy it, and their prophecy becomes self-fulfilling.
Reducing interest rates is one obvious response—and a valid one, to a point. The Bank of Canada has been increasing our interest rates, while America’s are falling. That’s added fuel to the loonie’s fire. Cutting rates would knock a few cents off the loonie. But not enough.
I’ve got other ideas for how to bring down the loonie … assuming I could become the finance minister. (Come to think of it, just announcing that Jim Stanford was the new finance minister would knock 25 cents off the loonie overnight.)
We’ve got to mess up the super-profitable oil boom that ultimately underlies the loonie’s surge. Put the brakes on oil sands expansion: if Alberta won’t do it, Ottawa can, with environmental approval rules, for example. Tax oil profits: provincially through new royalties, and federally through corporate taxes. (Unfortunately, Jim Flaherty recently went the wrong way on this one.) Strictly limiting foreign takeovers of Canadian firms to cases where the foreign buyer actually does something useful (rather than sitting back and clipping coupons) would also reduce the inflow of hot cash.
Just announcing these measures would knock most of the steam out of the loonie. And then speculative market pressures would take over again—this time going in the opposite direction. Traders’ greed would turn to fear, and they’d dump the loonie (for fear it would fall further) faster than you can say “red suspenders.”
If these measures weren’t enough, I’ve got a couple of other trump cards in my back pocket. As finance minister I could run up a good old-fashioned budget deficit. And then I’d say something totally offensive about Quebecers, sparking a resurgence in good old-fashioned separatism. That would undoubtedly get our currency back to a level where Canadians can once again produce something—other than oil—for the rest of the world.
