No More Making Fun of Canadian Money

by on September 20, 2007 at 11:55 am in Economics | Permalink

The Canadian dollar hit parity with the US dollar today, the first time this has happened in over thirty years.  Inflation on the return?

Joseph September 20, 2007 at 12:30 pm

Is it now time to form a monetary union between the two countries?

jaywalker September 20, 2007 at 12:39 pm

When will book price differentials adjust? Would publishers wait as long if the fluctuation occurred in the other direction?

Discover Your Inner Economist:
Amazon.com list price USD 25.95 – USD 17.13
Amazon.ca list price CAD 32.50 – CAD 20.48

Yan Li September 20, 2007 at 1:19 pm

This post makes me want to know whether there is any study on the relationship between national currency strength and the state of national ego :) As a Chinese, on the one hand, I feel undervalued; on the other, I am not sure whether I will collapse if I am allowed to free flow.

Tom September 20, 2007 at 1:27 pm

It seems to me that large portions of the U.S. polity (people who donate to political parties) want there to be inflation. If only so that their investments in residential real estate don’t decline in value. Bernanke and the Congress are cooperating. Inflation is on the way.

mark September 20, 2007 at 1:46 pm

What’s Jay Peak Ski Resort going to do now?

For years they had an anti-American scam going where Canadians could pay for lift tickets and food in Canadian dollars.

In other words, having Americans subsidizes Canadians.

Now they might have to be blunt. ” Show your a Canadian and pay less.”

josh September 20, 2007 at 2:03 pm

Why would natural resources be related to the value of currency?

Scott O September 20, 2007 at 2:11 pm

Regarding a monetary union … be assured that very few Canadians want to be tied to Americans’ ever-weakening currency and by extension America’s fundamentally unsound fiscal policies.

happyjuggler0 September 20, 2007 at 2:27 pm

Why would natural resources be related to the value of currency?

Josh, imagine a country that annually exports US $50 billion of oil and other natural resources at a weighted average of $20 per unit.

Now imagine all else is equal but the unit selling price is $80 and they sell the same number of units. Now they are exporting $200 billion of natural resources each year. That is $150 billion that has to go somewhere. If you assume the exporting companies in question ant to repatriate their sales into their home currency for dividend and reinvestment purposes, what does that do to the value of the currency?

It causes the currency to soar in the absence of negative feedback mechanisms. Over time one such negative feedback adjustment to the stronger currency is that other exporters have a harder time of it. At the same time, domestic companies and individuals will be foreign goods and services more, and travel overseas more for tourism purposes. Another mechanism is that new investments will look cheaper overseas than they did before when compared to at home since “everything” is suddenly cheaper, such as labor costs. The rub about such investments though is how permanent/temporary is the strong currency likely to be?.

Nevertheless, as long as the primary mechanism for a stronger currency is higher natural resource prices, this will still tend to make the currency stronger than otherwise would have been the case.

Canada has a huge natural resource component to its economy and is a net exporter of such commodities.

Floccina September 20, 2007 at 3:21 pm

IMO it is that the money supply has been inflated.

howiewu September 20, 2007 at 3:46 pm

We are devaluing the dollar to fund the war (no, I have not thought this through, but sometimes it is obvious, isn’t it?)

Barkley Rosser September 20, 2007 at 4:10 pm

Ah, but even if the Canadian dollar becomes worth more than the US dollar, it will still get
called the “looney,” ehhh? Ha! ha! ha! ha! ha! (sound of strangled suffocation…. )

spencer September 20, 2007 at 5:01 pm

We are devaluing the dollar to fund the war (no, I have not thought this through, but sometimes it is obvious, isn’t it?)

That is the second step. The first step was borrowing abroad to fund the war.

Just remember the revealed preference for this administration is that its tax cuts are more important than winning the war.

spooner September 20, 2007 at 5:16 pm

Ron Paul has been the only presidential candidate who has been zeroing on the Fed’s role in this crisis from the beginning. In an exchange today with the Fed chair, he focused on how the policy of low interest rates has fostered malinvestment via low interest rates.

What do the folks at Marginal Revolution think about Paul’s critique of Fed central banking in relationship to the current crisis?

bob September 20, 2007 at 5:55 pm

Well, Americans don’t make anything the rest of the world wants to buy, aside from uncollectable debt, and the bottom has dropped out of that market. If it weren’t for dollar pegs, it wouldn’t be worth anything at all.

Andy S September 20, 2007 at 9:14 pm

The Canadian dollar is currently overvalued relative to PPP. I can’t imagine that this will exist for long. There will be correction– at the very least Canada will cease to run a current account surplus. I think the appreciation in the value of the Canadian loonie (dollar) vs the U.S. greenback is due to several factors. One minor factor would be the changing terms of trade– the high price of oil has been mentioned, but there are other commodities at work here (e.g., nickel). Another minor factor is the higher savings rate of Canadians (both Protestant and Catholic, I might add) than Americans. More important are the differences in the fiscal policies of the two countries governments. Canada’s government runs surpluses and is rapidly paying of the national debt. Canada’s current federal government plans to discharge its debt in about ten years (and this plan will relies on conservative forecasts of revenue and expenditure. the Canadian government routinely underestimates its surplus– and under a parliamentary system all windfall surpluses must go to debt reduction, not program spending). The two major political parties in Canada prioritize debt reduction (they disagree about fiscal priorities for the post-debt period). The U.S. government is running massive deficits and is largely funding its war in Iraq with overseas borrowing (much of it from China’s central bank, which is trying to artificially depress the value of its currency). Canada’s public sector debt is now largely owed to Canadians. Borrowing in China was not thought of when Keynes wrote his famous pamphlet on how not to finance the second world war.

At this point it would be impossible to establish a Euro-type currency for North America because the United States government is violating the deficit rules that any North American central bank would . The Maastricht Treaty said that any country hoping to adopt the Euro would have to limit deficits to 3% of GDP. Since the Euro was adopted some European countries have violated the rule without destroying the Euro, but I can’t see Canada _entering_ into a common currency given the discrepancy in fiscal policies between the two countries. This is unfortunate because currency fluctuations are bad for crossborder trade and Canada is badly suffering for the Dutch disease (which also happened during the later stage of the Vietnam war, when US fiscal policy caused the Canadian currency to be overvalued).

The long-run prospects for Canada are not good. It wouldn’t take cold fusion to destroy Canada’s economy. Not by a long shot.

Russell Nelson September 21, 2007 at 2:38 am
luke September 21, 2007 at 7:49 am

to Mark RE: Jay Peak Ski Resort

i would assume that this is less of an anti-american policy as one to encourage tourism from canada. when the loonie was 70 cents to the greenback, why would a canadian go to a ski resort in vermont? they wouldn’t. jay peak saw this and offered a discount to travelers, rather than loose canadian business all together. if that is anti-american, i guess capitalism is anti-american…

8 September 21, 2007 at 8:12 am

JSK,

It’s under 3%, approaching less than 2%. I think you’re talking about the current account deficit.

djconnor September 22, 2007 at 8:51 am

Canadian wealth in resources may explain their dollar’s long-term trending upwards in value (slightly), but I think earlier commentors are correct in suggesting this is part of the systemic decline of the American dollar. Of course the parity between the two is out of whack- USD is falling down a sinkhole being dug by our various irresponsible doings (Iraq, Fed cuts, etc.)

Mike September 29, 2007 at 1:14 pm

America’s master plan goes something like this:

Trick the Chinese, Japanese, Russians and Saudis to buy up 50% of our national debt in return for giving us lots of stuff.

Devalue the dollar by a good 90% or so.

Buy back our debt on 10 cents on the dollar! BRILLIANT! FREE STUFF FOR US!

Meanwhile, I think I’m going to buy up about a TCF of natural gas and store it in the salt cavern under my house…

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