Here's an interesting article on currency. The NYT site may still require registration, but it is free (and very, very good!!!).
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nytimes.com
Economic View: Argentina and Canada - Two Sides of Uncertainty
By ANTHONY DePALMA
Stability might not be everything," Karl Schiller, the former West German economics minister, once remarked, "but without stability, everything is nothing."
The global landscape is littered with the debris of strong national economies that were undermined by the uncertainty of political crises, fiscal emergencies and other catalysts of instability. Right now, the currencies of two countries at opposite ends of the Americas — Canada and Argentina — show both the strength of certainty and the withering danger of uncertainty.
The exchange rate for the Canadian dollar is set by the market. Argentina's peso has been pegged one-to-one with the United States dollar since 1991. Although Canada's economy is far more developed than Argentina's, their populations are similar in size. Commodities are important to both economies, and both depend heavily on large, competitive neighbors.
When it comes to the currencies, however, Argentina's peso is strong, while its economy is weak. Canada's dollar is weak, but its economy is consistently strong.
The reasons for this seeming contradiction are complex, but they come down to stability, and the confidence that supports it.
Some economists blame the dollar peg for Argentina's recent problems, in part because a strong American dollar translates into a strong peso, which hurts Argentine exports. But the recent loss of investor confidence may be far more damaging, said Steve H. Hanke, a professor of applied economics at Johns Hopkins University. His defense of the dollar peg is not surprising since he helped Argentina adopt it. "The problems in Argentina have nothing to do with the currency board," which controls the dollar peg, he said. Argentina really needs to bolster investor confidence, he said.
Soon after taking over last December, the coalition government led by Fernando de la Rúa tried to climb out of a recession set off by Brazil's currency devaluation in early 1999. The plan was to reduce the budget deficit by raising taxes. It backfired, raising fears of default or devaluation.
A few weeks ago, the government introduced austerity measures that appeared to satisfy some foreign investors and the International Monetary Fund. But the belt-tightening set off a huge general strike by three major trade unions — a situation that can only further dampen investor confidence.
Guillermo A. Calvo, director of the Center for International Economics at the University of Maryland, and other economists worry that just forcing Argentina to shape up fiscally will not restore confidence.
Professor Hanke contends that Argentina should abandon the peso and adopt the American dollar as its legal currency. Professor Calvo says the I.M.F. should offer more than the $7 billion credit line it has set aside for Argentina. A larger contingency fund, he said, "would make a big difference in preventing a collapse in 2001."
But another devaluation in Brazil would cause havoc, leading Professor Calvo to suggest it may be time for Brazil and Argentina to consider a common currency.
Some academics say a similar moment may have arrived for Canada and the United States. The two economies are substantially integrated, and when the Federal Reserve Board decided recently against decreasing interest rates, the Canadian dollar — sometimes called the loonie because of the water bird depicted on $1 coins — was pummeled. It dropped to its lowest mark in two years, worth just 65 American cents.
Despite the limping loonie, Canada is enjoying "a continuing stream of good economic news," said Karim Basta, director of global debt strategy at Merrill Lynch. Taxes and unemployment are declining, job creation is vigorous and the Toronto Stock Exchange is outpacing United States markets.
Theoretically, Canada allows the value of its dollar to float, meaning that the market determines what a loonie is worth against the United States dollar. In reality, many economists say, the loonie is consistently undervalued. When it drops too low, Canada's central bank defends it by intervening in the market and buying the currency.
Professor Calvo said such interventions "prevent the currency from doing its job," which is to respond to whatever the market will bear. As a result, Canada has neither the responsiveness of a completely free floating exchange rate nor the predictability of a fixed rate set by a currency board.
But what does it matter if the nation remains stable? Canada's economy is cushioned against doubt, so much so that even with closely contested federal elections tomorrow, it is the character of the candidates, not the condition of the currency, that is likely to determine the outcome. |
