Philip Shaw

Where were you in 1978?  In the year 2006 that almost seems pre-historic.  Many of you reading this piece weren’t even here in 1978.  But I was, dancing into the disco night at the University of Guelph.  So what’s so special about 1978?  It just so happens with our dollar challenging 90 cents US, that’s the last time our loonie got so high in the foreign exchange stratosphere.

So we are in some very uncharted territory.  As bad as things have got in my day job, I like to tell people I’ve seen worse.  However, with our 89-cent dollar taking me back to 1978, I wasn’t even in business back then.  I have no idea how it was to “work and compete” in an 89 cent world.  Unfortunately for me and many other Canadians, we don’t have a lot of time to contemplate our new working environment.  Getting used to a high dollar is something we’ll be working with for the foreseeable future.

Here is a chronology of the loonie’s value over the last 28 years.  Source: Globe and Mail.

JANUARY, 1978 – 90.8¢ U.S.
JANUARY, 1985 – 75.6¢
JANUARY, 1990 – 86.4¢
JANUARY, 1995 – 71.3¢
JANUARY, 2000 – 69.1¢
JANUARY, 2002 – 62.6¢
JANUARY, 2006 – 89.4¢

You can see that its been a bit of a roller coaster.  However, keep in mind 28 years is a long time.  Careers are made in that time.  Lives are lived.  It’s a long time between January 1978 and today, but everybody can measure the time between January 2002 and today.  In that span the loonie jumped 43%.  That’s huge and for anybody employed in the sector of the economy highly dependent on exports it’s a kicker.  Anytime you raise prices 43% there is bound to be some push back.

Remarkably the greater Canadian economy has adjusted to this rather well.  The unfortunate part is there is a great imbalance between sectors of the Canadian economy.  Alberta is a kingdom of its own.  It’s wealthy and getting wealthier.  Everybody knows somebody who has moved there.  The rest of Canada is adjusting.

One such sector, which is really feeling the pain is Canada’s agricultural sector.  Largely dependent on export markets, the high dollar is hurting.  Its also reducing prices paid to farmers.  An earlier Liberal government eliminated income stabilizations policies.  Now that the dollar is high, everybody is hurting.  If it stays this way for long, people will leave the farm in droves and Canada will be importing more food.

For Bank of Canada Governor David Dodge this must be a real challenge.  He has to balance Alberta with everybody else.  At the same time, US Federal Reserve Chairman Ben Bernanke has signaled the US economy might be slowing and he is done raising interest rates.  Dodge on the other hand is worried about inflation so he’s set to raise them.  This US Canadian interest rate inversion is a green light for overseas investors to put their money in Canada.  It’s a green light to the buy the loonie.  That’s one reason it rose 1.8% last week alone.

All of this good economic news makes me a bit nervous.  Are we really that much better off than the rest of the world?  Will Dodge’s interest rate hikes be followed globally?  How will that affect the world economy and how will Canada and southwestern Ontario fit into that?

Just last week China raised its benchmark interest rate to 5.85% from 5.58% making it more expensive for Chinese companies to borrow money.  The Chinese are worried about inflation.  With there huge economy growing at 10.2% in the first quarter of this year, maybe they have something to worry about.  However, is this Chinese move the first of many?  Is it following a pattern globally like David Dodge’s move?  How will this affect us back in the great white north?

Clues might come May 2nd with the release of the Conservative federal budget.  It’s just one of those things that “At Issue” will be going to press just before its released.  The 1% cut in the GST will release 4.5 billion dollars into the Canadian economy for Canadians to spend as they see fit.  Some of us will surely use it to pay higher interest rates.  Some might say it will only serve to foster inflation giving David Dodge more ammunition to raise interest rates.

So what happens next?  Will everything else circa 1978 come back?  My gosh, even disco!  I hope not.  These heady economic times we live in might not be what they seem.  Is the bubble about to burst?  I can’t find one economist who thinks so.  Ditto for me.  If the loonie ever goes to par, maybe we’ll look back at 2006 as the good old days.