Quote:
Originally Posted by Claeren
I am getting tired of these types of comments from certain corners.
The dollars value is the result of various conditions of the economy being valuated in the open market versus other world economies. It is by definition the valuation of our output. It can't be "too high"or ""too low" because if it were either it would simply move to where it should be over time.
Even when used to support positions like "the dollar is killing our manufcturing sector" it is not true. Our manufacturing sector is dying because (off the top of my head) (1) increased competition from 3rd world countries (2) low Canadian productivity and (3) the higher relative output dollar from natural resource extraction versus manufacturing for every input dollar invested. The current rise of the dollar is the sum reflection of all of those factors. No one mentions that manufacturing has been in decline since its peak (as a percentage of total output) in like 1946! ALl they talk about is how the "dollar is too high".
That dollar simply cannot be "too high" or "not be a good thing for Canada". It IS Canada (for better or worse) - that is what it represents, the sum of all Canadian economic value.
The only thing it can do is move too quickly up or down, but moderation of currency valuation is an entirely different thing...
Claeren.
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Ignoring the fact that i didn't mention "manufacturing" once...
your analysis is fine in a 2 country model, however when you consider that competitive advantage must be modeled across multiple countries, currencies, and commodities, then things change.
The value of foreign exchange is a reflection of the demand for that currency...just as in any other commodity. you are right...the dollar or yen or whatever has no opinion nor any intrinsic "good or bad" or "industry saving versus industry killing" value. even when modeled on a simple 3 country model, competitive advantages in each country, including the size and value of the goods created and subsequently sold, generate different competitive advantages for cost of goods produced and sold. in other words, if it costs us an absolute fortune to make widgets, and another country can make them cheaper, Canada would be at a competitive disadvantage and frankly should find a better use for the commodities that make up the widgets.
the problem here for Canada is that on a sheer size basis, we are extremely dependent upon exports of goods to the United States, in the West that is primarily raw materials. When our largest trading partner can buy say 25% less of our raw materials because of the exchange rate change, that means that somewhere in Canada businesses will sell 25% less, cut back production by 25%, reduce the work force by 25%, and stop investing in new processes or technologies. the exchange rate is arbitrary, however the impact from sheer numbers is significant for the man in the street. i don't think that there is too much that can be disagreed with in a 2 country model in this paragraph.
the next logical step would be that, with the canadian dollar reflecting the strength of our economy, and hopefully the demand for canadian dollars and canadian goods, we would be in demand and one country's or currency's issues wouldn't affect us that much. the problem is that, relatively speaking, the canadian dollar has remained relatively close to other major currencies worldwide...in other words, Canada hasn't suddenly had some major positive swing worldwide. so what. well, we know that the impact has actually been in america...the high canadian dollar is not because of Canada's strength worldwide...it is because of the us dollar's weakness against the canadian dollar and more particularly worldwide. this means that the us dollar is being viewed negatively around the world, not just cad v usd.
to be clear, we are not saying that canada is super great versus the US, we are saying that the US is super weak versus Canada. it has the same apparent effect, but it is quite different. the problem is that there are no countries out there that, for canada as an exporting nation, will be able to pick up the potential lost production of our export based industries.
i am actually pretty tired of debating this already, but i will end with this.
one of the ways for demand for canadian dollars to increase is to have an interest rate that is higher than the us interest rate. monetary policy guides this because it not only removes money from our economy by canadians (save versus spend), but it causes global investors to accept the currency risk in canada for a premium interest rate return. yes, the underlying strength of the economy also affects this, however the concept is that with a higher interest rate, there is less inflation but also less business and consumer borrowing and spending and more saving.
here is the crux of my point. the canadian economy cannot afford to lose any significant percentage of our export based sales without replacing those sales. there does not appear to be any other country that is able to become a bigger trading partner than the US is with us.
and that is bad news for canada. only of course if you think that unemployment and all that this brings to canada is bad news.