nationalpost.com
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Saturday, March 20, 1999 -
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New search for a dollar solution THE DOLLAR AND COMMODITIES:
Terence Corcoran
Financial Post
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Exchange rates and commodity prices: C$ in Us funds, Real commodity prices 2-year moving average: (See print copy for complete Chart/Graph.)
Oil and other commodity prices are rising, the trade surplus is at a two-year high, and yesterday Statistics Canada reported that Canada's inflation rate is at its lowest level in three decades. Despite these bullish portents, the Canadian dollar yesterday still could barely make it up to 66¢ (US). There's nothing new in the dollar's failure to respond to what seem like favourable developments. It's an article of national economic faith that as commodity prices go, so goes the dollar, a belief that has only occasional basis in history. Aside from a major rise during the big interest-rate balloon that marked the turn of the last decade, the Canadian dollar has been on a long-term one-way run down. In fact, while the dollar routinely loses ground during commodity price declines, it has generally failed to respond to rising prices. Through the past few weeks, therefore, it should be no surprise that as the price of oil climbed more than 20%, the dollar remained relatively unmoved. A dismal performance, but the timing is perfect for the Senate Banking Committee's venture next week into the deep waters of a big subject: Should Canada get rid of its foundering dollar and join a common currency with the United States and possibly Mexico? At a meeting scheduled for next Thursday morning, to be televised on C-PAC, the committee will hear from five of Canada's leading economists, including John Crow, former Bank of Canada governor. Their presentations will launch a review of whether a continental currency, nicknamed the "Amero" by one of the economists, would better serve Canadians than the floating loonie that has lost 35% of its value since it was un-pegged in 1970. As TV, it is likely to be hard going. The Senate review, which will culminate in April with testimony by Gordon Thiessen, the Bank of Canada Governor, is also little more than a sideshow to the House of Commons circus, where clowns dominate and the ringmaster thinks the flat dollar is a laughing matter and good for the economy. Not only does the prime minister believe the dollar helps exports, he and his top cabinet ministers -- when they're not in denial about the existence of any productivity problem -- now claim the low dollar has generated a host of other economic benefits. By international standards, Canadian wages are now miraculously lower than those in many other countries. Other costs, measured in real currencies such as the U.S. dollar, also appear advantageous. If Paul Martin and his colleagues truly believe all this, who's to say they're not secretly plotting for a new currency target. Why not aim for 60¢, or 55¢? The economists slated to appear before the Senate committee are far from agreement that a currency union with the United States is desirable. But the Senate review should begin to demonstrate how 30 years of dollar devaluation, and possibly the floating-currency regime itself, bear some responsibility for Canada's declining productivity and falling standard of living. The main argument in favour of a floating currency is that it allows Canada to adjust to sudden shocks in the outside world, especially falling commodity prices. Instead of allowing affected industries -- oil, forest products, mining -- to adjust to falling prices and demand, the currency is allowed to depreciate. That spreads the burden through the whole economy. When the price of forest products fall, a lower dollar effectively makes the worker in Toronto pay the price for maintaining the income and employment of forest workers in British Columbia. If the dollar remains low, the long-term impact is to create an economy that is artificially skewed toward resources. This is especially true in light of the fact that commodity prices have been in decline for centuries. As well, other exporting industries and manufacturers continue to operate and expand, thinking they are competitive and productive when they are not. By distorting the market, the low dollar has helped create Canada's productivity crisis. Herb Grubel, emeritus professor of economics at Simon Fraser University, argues in a paper submitted to the Senate committee that the adoption of a common currency would force Canadian business to operate competitively based on the actual value of their production and costs, rather than on the declining value of the dollar. The argument is far from one-sided. At the Senate committee, Queen's University economist Thomas Courchene will also argue for a closer connection between the Canadian and U.S. dollars. In opposition are Jack Carr of the University of Toronto, Bernie Wolf of York University, and Mr. Crow. Obviously, the case for the Amero will not be won before the Senate committee. But the dollar is too important to be left to the clowns in the circus.
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