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Politics : Canadian Political Free-for-All -- Ignore unavailable to you. Want to Upgrade?

To: average joe who wrote (283)	11/14/2000 1:16:29 AM
From: Kitskid	Read Replies (2) \| Respond to of 37246

nationalpost.com What's bothering the dollar? Maybe the Alliance Brian K. MacLean National Post Earlier this month, CIBC brokerage economist Jeff Rubin made yet another bold forecast. "Its timing may be a little premature," he preached, "but make no mistake about it, the market's instincts on the Canadian dollar are essentially correct." He then presented some unconvincing reasons -- disputed by economists on CIBC's banking side -- for why the Canadian dollar could slide to US60¢ within the next 12 to 18 months. The forecast produced news stories about Mr. Rubin's psychic abilities entertaining enough for publication in supermarket tabloids. But a forecast about what may happen months from now fails to address the big question on the minds of Canadians. Why has the dollar been weak in the run-up to this month's federal election? Accusing the market of premature depreciation, as Mr. Rubin does, is not an answer. It's a confession of bewilderment. If the market is God, the attention-seeking Mr. Rubin is like a televangelist distorting God's message. Let's assume the market is always correct. What is the market trying to tell us? Market participants insist the "fundamentals" are excellent. They note we have lower inflation than the United States, strong GDP growth and current account surpluses. They then drop the hint that the dollar's recent weakness stems from pre-election jitters. But it can't just be that there's an election coming up. Unlike referendums on Quebec independence, elections are not necessarily market-unsettling events. Remember, there was an election campaign for president of the United States taking place when our dollar depreciated against theirs. Nor could Canadian dollar weakness arise because the Liberals are a shoo-in for another majority government. For whatever reasons, the market downplays the role of luck and credits the Liberals for an economy characterized by what Mr. Rubin describes as "stellar fundamentals." And polls released before Mr. Rubin's forecast showed declining Liberal support. Could the market fear a minority Liberal government that is dependent upon NDP support? In only four years since 1961 has the Canadian dollar been worth more than the U.S. dollar. Three of the four were 1972, 1973 and 1974, during which time the loonie averaged US$1.01 and the NDP held the balance of power in a Liberal minority government. If the market could fare so well with David Lewis, avowed enemy of "corporate welfare bums," it probably finds Alexa McDonough less than worrisome. That leaves us with but one explanation -- that market confidence has been eroded by polls showing rising support for the Alliance. Why would the small chance of a victory by the pro-business Alliance make the market jittery? The market in question is the currency market. Its key institutions are banks. Their key advisers are chief economists such as John McCallum of the Royal Bank and Don Drummond of TD. By Bay Street standards, these chief economists are sophisticated, Mr. McCallum so much so that in August the National Post urged his appointment as next Bank of Canada governor. If they have a bias, it is against labour and in favour of "high net worth individuals." They are particularly knowledgeable about exchange rates and budget forecasting. And their knowledge makes them skeptical about the Alliance. The first signal came in July, when chief economist Don Drummond wrote a column politely saying the Alliance budget proposal, based upon a single 17% federal income tax rate, didn't add up. Mr. Drummond felt he was only stating the obvious, and various conservative economic commentators, including the Post's William Watson, agreed with him. Not surprisingly, the heated reply of Alliance economic advisor Mark Mullins was short on economics and long on slurs about Mr. Drummond's previous career with the Department of Finance, "a pleasant spot removed from the working worries of average Canadians." This did not exactly inspire market confidence. A second signal came in early October, by which time Stockwell Day had dumped his party's single 17% rate plan. The market was still not satisfied. "Economists cast doubt on Day's tax-cut plan," one headline declared. "When we talk about taxes at 17 and 25 percent," National Bank chief economist Clement Gignac was quoted as saying, "it's going to leave a big hole in the budget." A third signal came late last month when Mr. McCallum decided to run for the Liberals. Within days, he engaged in debate with the Alliance's Mr. Mullins, and treated him like a tent-show preacher. Mr. McCallum began by noting the Alliance had searched "the whole country to find an economist to defend the flat tax and they could only find one. And that's you, Mark." Market worshippers take note: The bank's chief economists, the high priests of the market, have spoken. If recent dollar weakness tells us anything, it's that the Alliance budget plan is a hoax. There is only one way to slash taxes, accelerate debt repayment and maintain social programs all at once. It is for the central bank to issue extra money and inflate away outstanding debt. Prairie farmers, the largest interest group supporting the Alliance, would benefit from massive issue of such "social credit." Yessirree. But the Canadian dollar wouldn't. Brian K. MacLean, an economics professor at Laurentian University, publishes the free e-mail weekly Canada's Economy in the Newspapers: www.geocities.com/brian79/macecon.html