The Proposal:
Lets debase the Canadian dollar by printing cash and use this cash to momentarily pay off Canadian debt. Once the US dollar rises again causing the Canadian dollar to dip to unacceptable lows, lets rebase the dollar with a time-value equivalent in cash.
At Issue:
Dollar parity may sound great but that is not the case. Since the current dollar parity was not brought about by a rising Canadian economy and instead was a result of a weakening American economy, who happens to be Canada's largest trading partner, Canada is presented with a unique opportunity.
The Details:
At present we have over $600 billion dollars of debt. Approximately $500 billion of that is due in Canadian dollars. By devaluing the Canadian dollar, we devalue some of our debt, while increasing the value of the remainder of our debt. According to statcan our current M3 figure for 2007 was $1.12 quadrillion. The M3 figure is largely regarded to be the best measure we have to measure the total amount of money a country has in circulation, deposits, investments, etc. Based on the M3 figure, the Canadian debt is about 0.0446%, which is not a substantially large figure. This is not a surprising ratio, since Canada is a country in a good financial standing and a sizable economy.
It is my observation that most western governments adhere new classical economics religiously. That is to say, they fear government intervention, it doesn't mean that the government does not intervene, rather it refers to the fact that they feel it is absolutely the last resort. However, modifying the overnight lending rate is govenrnment intervention - even if this task is managed by a second party such as the Bank of Canada or the Federal Reserve. I am also fully aware of the stigma the debasement of a currency carries. When discussing the debasement of a currency, usually thoughts of Germany in the 20's, Hungary after the second world war or more recently Zimbabwe creep into our minds. However, the horror stories are a result of hyper-inflation as a result of unjustified currency debasement. Currencies are debased on are regular basis, debasing a currency in-and-of-itself does not lead to hyperinflation.
A higher dollar in theory to most people means lower prices for goods in Canada and cheaper travel abroad. Although the later holds true, the recession in the US will undoubtedly spark lower spending in Canada, including foreign travel. With respect to goods, if the US dollar were to bounce back in 2-3 years Canadians would never see any savings. Companies have an incentive to silently raise their prices since the depression in the US will cut their profits from other sources. Additionally, it takes a number of years for products to make their way through the retail pipelines, meaning the price changes would take a while to be observed - if ever (since a restoration of a high US dollar would mean companies can keep the prices high even for goods that were imported for cheap).
Dollar parity is clearly not good for Canadians and it clearly hurts the exporters in Canada by reducing their profits. So why not debase the Canadian dollar excessively? Well, the answer to that is to prevent hyperinflation. Debasing the Canadian dollar to increase the profit for exporters is unjustified as far as foreign currency traders and Canada's business partners are concerned. However, when a country pays off its debt, the dollars it prints have an intrinsically higher value, since they carry less debt. By paying off our Canadian debt we can provide foreign and domestic parties that deal with Canadian dollars a more reliable currencey.
The key to this entire proposal is the word 'momentarily'. Because if the country decides this is something it will do independent of whether or not the economic climate makes it a favorable option, then foreign parties will have no faith in the rate at which the M3 of Canada will grow. As a result, investing in Canada will become a risky en devour since your money will be debased. By letting traders know that this debasement is only going to be done while the US recession (which is likely to last a year or two) is in progress, traders can rely on the fact that in 2 years everyone holding Canadian dollars stands to benefit from the savings we make on interest.
We stand to save a years worth of interest on half a trillion dollars. Thats not a small figure, especially if we still make our annually payment, since it lets us pay off our foreign debt and put money in the bank for when the debt is rolled back in. Of course, this is a little simplistic since one would need to take the debt agreements into consideration, such what the interest rate on the debt is (if it is less than what could be attained today, then it doesn't make sense to pay it off and reacquire it at a higher level).
Editorial Note:
This article was modified on Nov 26th. I do not retract anything from my original post, which can be found here. The editing was mainly done to bring this post up to date with the rest of my blog. I am trying to make my posts more concise based on reader feedback.
Related Links:
- CBC's coverage of the dollar reaching parity
- Statcan report of Canada's net debt over the past five years
- Statcan report of Canada's money supply
- Nafta Fast Facts
Feed
Email