A Black Day for Canada

Further to my companion post (on the Commodity Price-Exchange Rate Transmission Mechanism), here is an op-ed from Buzz Hargrove that appeared in today’s National Post, responding to yesterday’s parity event.

It reflects some of the arguments I made in the companion post about why, exactly, higher commodity prices drive our loonie higher.  The policy implications of this view include some ideas on how to bring the loonie down, including:

1. Pressing the Bank of Canada to cut rates (nothing new there).

2. Taxing resource profits (to reduce the super-profitability of Canadian resource companies, and hence reduce their appeal to foreign investors).

3. Consciously slowing oil sands development (same effects).

4. Reviewing foreign takeovers much more tightly (and hence reducing the net inflow of foreign money to buy up Canadian companies).

Since foreign exchange markets are forward-looking, just announcing these things would immediately knock a huge amount of stuffing out of our puffed-up currency.

Here’s the full article by Buzz:

A Black Day in Canada’s Economic History 

By Buzz Hargrove 

            Some were popping champagne corks yesterday over the loonie’s attainment of full U.S.-dollar parity.  But their celebration was misguided.

            Yesterday was a black day in Canada’s economic history.  Our dollar’s rise to parity is a symbolic milestone of the triumph of paper mania over economic reality.  Far from celebrating, we should be thinking about new ways to stop it, and reverse it.

            The loonie’s flight has been driven by a distorted, unbalanced boom in oil exports, and a corresponding surge of foreign takeovers of Canadian resource companies.  The appreciation benefits just a small, specialized minority of Canadians: retailers, some investors, and snowbirds.  For most of us, the high-flying dollar does much more harm than good.  Our wealth comes from what we produce, not from paper.  And the dollar’s rise badly undermines what we do.

            Yesterday’s events, capping a five-year rise that is one of the most dramatic in global history, should give us pause to reconsider the causes and consequences of these incredible changes.

            Some argue the appreciation reflects global market forces.  This implies it’s a natural, efficient, and likely inevitable result.

            But in fact this record-breaking run-up reflects a series of powerful, wasteful distortions – not efficient market pressures.  Our currency is now at least 25 percent higher than any estimate of its real value (based on purchasing power parity, unit labour cost competitiveness, or any other pragmatic measure).  That’s clearly a distortion.

            It’s been pushed up by incoming flows of hot money, attracted by Canada’s renewed status as resource supplier (especially oil).  That in turn reflects world oil prices driven skyward by cartel power, geopolitical instability, and monopoly pricing.  More distortions.

            Meanwhile, Canadian resource profits are astronomical largely because Canadians receive scandalously low royalties for non-renewable resources that they themselves own.  Oil sands royalties (as low as 1 percent) were set when oil cost $20 per barrel, and the technology was unproven.  Today oil is $80 per barrel, and the technology is utterly predictable.  In that context, a 1 percent royalty is a blatant, distorting subsidy.

         That lucre has sparked an unfettered, chaotic boom in northern Alberta – another distortion.  Wages and prices rise, pushing up interest rates and reinforcing the dollar’s ascent.  The takeover of Canadian resource companies is another distortion: deal-makers scramble to grab virtually any producer with a pulse, at unparalleled premiums, lest they be left behind when the M&A party ends.  The fact that Ottawa demands next-to-nothing of these takeovers in terms of protecting the Canadian public interest, simply throws gasoline on the fire.
        The end result of this chain of distortions is that hard-working, productive Canadian manufacturing workers are losing their jobs by the thousand, every day.  People who work more diligently and productively than ever before, are told they can no longer compete – all because of a greed-fueled orgy on currency and stock markets that is unsustainable, wasteful, and destructive.

      This isn’t inevitable.  Policy-makers could immediately release much of the hot air out from the loonie’s bubble.  The Bank of Canada could cut interest rates; more importantly, it could announce that future monetary policy will be guided (like the U.S. Fed’s) by a broader view of Canada’s well-being, not solely inflation.  The Alberta and federal governments could impose new royalties and taxes (within their respective jurisdictions) to ensure we all get more value from our own resources.  Oil sands development could be managed at a more sensible, efficient pace.  And Ottawa could turn down foreign takeovers that do not demonstrate significant net benefits to the public interest.

        Those measures alone would knock the loonie back substantially, the day they were announced.  More importantly, they would re-equip Canada to retake some agency in our own economic development.  Instead of seeing our economic destiny determined by global cartels and hyperactive financial traders, we would develop our own resources – and the industries which add value to those resources – in line with our own preferences and interests.

            The dollar’s uncontrolled rise is wreaking havoc over vast tracts of Canada’s economic landscape.  Policy-makers who claim they can’t do anything about it, are simply passing the buck.  It’s time for them to do the jobs they’re paid to do.