Declining US Greenback Will Cause Drastic Change In Canada
I often take part in a conversation about our American friends. It goes something like this. “The Americans can send a missile through an upper left hand window on a house in a valley in Afghanistan. And those missiles cost money. They have to be paid for. Why do you think the Americans are working with such a large budgetary deficit?”
If you don’t get my argument let me put it this way. The American government is spending more money than they are bringing in. Going further than that, they are importing more than they are exporting. It’s unsustainable. I’ve said that many times in this column. But now the Americans seem to be doing something about it. The powers that be are letting their currency go. The US greenback continues to lose value on international currency markets.
Paying back those debts with cheaper dollars must make sense to somebody. However, many economists point to a meeting last month with the Group of Seven meeting of central bankers and finance ministers as the seminal events that forced change. What had widely been seen as unsustainable without a correction in currency values finally found traction? The American dollar slumped, and our loonie jumped. If it continues the effect will become much more pronounced.
Don’t get too confused about this. Currencies are traded every day. Keep in mind currencies like the Canadian, Australian and New Zealand dollar are thinly traded currencies. In other words usually there isn’t a lot of interest in them. The big boys on the block are the Euro and the US Dollar with the former being the world’s favourite. Go anywhere in the world and you usually can exchange US dollars.
It’s that way because the United States has the biggest economy in the world and is the world’s superpower. US currency redefines “convertibility”. In other words it can be exchanges almost anywhere for something of value. I’ve only been in one place in this world where I couldn’t convert them. That was in Sylhet, Bangladesh in 1993. I’m sure today it wouldn’t be a problem.
By letting the value of the US greenback drift lower, the US trade deficit will get easier to deal with. Imported goods will become more expensive. Americans will import less and export more. Paying their debt off with de-valued dollars has an attraction to US Federal Reserve Chairman Ben Bernanke and US President Bush.
Sticking points in currency markets are countries, which don’t let their currency float. China is the elephant in this china shop. The Chinese have as yet to let their currency unit (the Yuan) float. This has the effect of creating huge trade imbalances such as the one between the US and China. If it would continue unabated China would be wagging the US dog. As any North American knows, that isn’t going to happen.
From a Canadian perspective we are just spectators. You might think that the Canadian dollar has been on testosterone, but keep in mind what we are measuring against. Some US analysts like Moody’s Economy.com are calling for another decline of about 15 per cent against major currencies by 2010. I find that scary to even contemplate. A greenback that low would put the loonie at $1.04 US. We’d all have to move to Alberta. Under such a scenario Ontario’s manufacturing and agricultural sector would contract greatly.
This is David Dodge’s challenge. You might have read a few weeks ago in this column about Dodge in the Barbados saying some pretty alarming things. I kept asking, “What does he know?” Well, I think I know now. Even with a good three days last week the US dollar is going to weaken further. That makes Dodge’s job that much more a challenge. His interest rate hikes look like second fiddle compared to this American move.
So yes, but how about those missiles I started out with that the American military could put threw the upper left hand window of a house in a snow-covered valley in upper Warizistan? Yes they do cost money and they do add up in the American fiscal budget picture. Disregarding how some Canadians might feel about this, many Americans feel they are defending freedom. The question is will they continue to be fired.
You see our world has proven over time that it is never stable for long. Currency markets might trade in perfect rhythm with all of these different factors but our real physical and political world moves to a different beat. One missile going astray from whatever source in whatever continent could make these currency predictions mute.