Wednesday, August 26, 2009

A Welcome Warning from the Bank of Canada

I caught this story on the radio this morning:

In a speech Tuesday, the Bank of Canada's deputy governor, Timothy Lane, said there was a real danger that the nascent recovery would be hobbled if the dollar continued to rise.

"A persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target," Lane said. "If a stronger dollar were to alter the path of projected inflation … we would need to take that into account."

Finally! The rapid rise in the Canadian dollar has put a crushing burden on exporters and our fragile economy can't afford the massive drag that the dollar's rise creates. So far the Bank of Canada has avoided taking measures like increasing the money supply through quantitative easing even though the American government increased it's money supply drastically at the beginning of the financial crisis and has shown little effort to reign the money supply back in.

The Bank of Canada and our government should continue to make every effort to ensure fluctuations in the exchange rate don't wreak havoc on our economy.


Right On said...

I disagree. If the Canadian dollar rises vs. the US dollars exporters to the US will feel pain. No doubt.
But, as the Canadian dollar rises Canadians will be able to buy more or save more or both. This creates opportunity elsewhere.
I am not exposed to those exporting to the US and there are many like me. We only benefit from a strong Canadian dollar.

Anonymous said...

To "Right On"
True wealth is highly based on natural resources and the next step(s) of value added. These industries like forestry, agriculture, manufacturing, processing are bearing the brunt of the strong - and highly volitile - Cdn dollar. In a free trade environment, this has effectively curtailed the growth - let alone profits - in most of these key base industries. Letting them implode for the sake of a slighly stronger purchasing power on consumer goods is a stunningly bad idea in both the medium and long term.
This is not to say I am for a undervalued dollar OR a pegged currency, but acknowledgement of widespread problems this has caused would be a wise idea.

Anonymous said...

It's also (increasingly) based on services. Can't leave that out.

I'd just add that if resources and the subsequent input labour is so valuable then the canadian dollar , as the symbol of our vast resource wealth, should naturally be pretty high. Otherwise it just means we're selling out our resources on the cheap.

Anonymous said...

Devaluing our dollar stagnates the need for innovation and productivity and eliminates the desire to pursue secondary industry markets V bulk sales of resources.
It's a bull-shyte argument that concludes the wealth of the country depends on the sale of raw resources V the refining of resources and manufacturing of finished products, it eliminates the need to employ Canadians and benefits third world slavery.

Patrick O'Neil said...

Appreciate all the comments, and it's a complicated issue for certain. Services are affected by rapid changes in the dollar too - think tech support centres that can be placed anywhere in the world.

I'm not arguing for a weak dollar, I am arguing for an active response to extreme moves in the currency especially when there's a disconnect between our central bank and others around the world such has been the case with quantitative easing.

Richmond BC real estate said...

I absolutely agree with Right On, that we only benefit from a strong Canadian dollar. I of course can think about the arguments of the others, but still it did not change my opinion.
Good article.
Nice discussion.