The loonie hit the skids again this week, touching yet another all-time low, setting off another round of explanations and excuses. I would think we would make a greater effort to explain the times when the currency is strong rather than weak, given the experience of the past 30 years. Let's face it, our currency does not float, it sinks -- at least it has for most of the past two-and-a-half decades.
I, like most other observers, once believed if only we brought our inflation rate down, the currency would rise. Or if we eliminated our budget deficit or raised interest rates or saw a rise in commodity prices or cut taxes or enjoyed an economic expansion -- then, finally then, the loonie would take flight. Well, now I finally throw in the towel. Forget it, the Canadian dollar is in secular decline and there is nothing -- repeat nothing -- we can do about it, except possibly to make it worse.
I know all of the explanations and policy prescriptions; I have made many of them myself. I know that a weak Canadian dollar is supposedly good for exporters and tourism; and a fixed exchange rate could lead to substantial 'dislocations' and restructurings -- read layoffs. But the truth is, a floating exchange rate is not a shock absorber but a licence to underperform and neglect the adjustments in our economy necessary to preserve value and competitiveness. If a country could devalue its way to prosperity, Thailand, Turkey and Russia would be booming. If a 62.5-cent dollar is such a good thing, then how about a 60-cent dollar, a 50-cent dollar, 40 cents....
I am not being facetious. I have seen this first hand. My husband is originally from South Africa. When he was in graduate school in the United States in the early 1970s, the South African rand was at US$1.40. In 1982, the rand was at par with the greenback (while the loonie had already descended to 81 cents). Today, the rand is at 9.5 cents. You think that is a good thing?
The inexorable decline in our currency is the equivalent of a national pay cut for all of us who earn and invest Canadian dollars. We cannot avoid this pay cut, even if we never venture to foreign lands. We must import orange juice, bananas, computers and software. And many of us do want to spend a week in the sun during the long winter months. Our currency has been devalued so much that we now have a one-dollar coin and a two-dollar coin -- chump change. Will we soon have a five-dollar coin (the foonie?) or maybe a 10-dollar coin?
Where does this end? We say it isn't that our currency is so weak, it is that the U.S. dollar is so strong, that the loonie is up relative to other non-U.S. dollar currencies this year (which is only partly true). Year-to-date, we have outperformed the Australian dollar, the Indonesian rupiah and the Brazilian real. Who cares? These countries are not major trading partners of ours, and their economies are not as closely aligned with the United States. The loonie is down this year relative to the euro, yen, pound, peso and Swiss franc among others -- not to mention the greenback. Since the terrorist attack on Sept. 11, our dollar has sharply underperformed all other non-U.S.-dollar currencies in the world with the exception of the Singapore dollar and the Indonesian rupiah. The Mexican peso is up 4.5% so far this year and 2% since the attack. Our loonie is down 6% since the start of the year and 2.4% since the attack.
A flight to quality and safety in today's world certainly does not mean a flight to the Canadian dollar. Even when the United States itself is under attack, foreign capital -- including Canadian capital -- flows into it. Even when the U.S. federal budget surplus is slated to plunge from a US$237-billion surplus two years ago to a deficit this year, the U.S. government can borrow money for 10 years at a mere 4.2%. Even at these low rates, capital pours into AAA U.S. government bonds. When Russia needed to raise funds to finance its Afghan war and to respond to the Reagan defence build-up, it had to pay interest rates of 20%, 30% and ultimately 40% -- defaulting on its debt and bankrupting the entire country. The strength of the U.S. financial system and its economy is unprecedented. Never has one country so dominated growth and market valuation; and even after nearly 5,000 U.S. civilians died on domestic soil, the money keeps flowing in and the dollar strengthens.
What makes us think we can buck this tide? Let's dollarize and get it over with while we still have something to bargain with. We are in a relatively strong position. While we are harmonizing immigration policy, border controls, airline security and trade policy, why not proceed to dollarize as well? We will do this, inevitably, when the pain of a falling loonie finally gets to be too great. I know we think this would mean a loss of sovereignty. The loonie is a symbol of our independence. But Germany, France and ten other European countries have managed to form a monetary union without losing their national identities or cultural distinctions. Better now at 62 cents than later at 50 cents.
THE END
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