Columnists

Duncan Cameron
Canada's monetary policy: Capital flows while Team Trudeau sleeps

| February 16, 2016
Photo: Aaron Strout/flickr

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United Technologies, a U.S. company flush with yearly profits of $7.6 billion, last week closed an Indiana air-conditioner manufacturing factory, and transferred over 2,000 jobs to Mexico.

Asked by Indiana Senator (D) Joe Donnelly about what this meant for Americans working hard to make their companies profitable, U.S. Federal Reserve Chair Janet Yellen replied it was miserable for them, but her job was to see new jobs become available for laid-off Americans workers.

In effect, the U.S. Fed has a double mandate given it by Congress: keep inflation under control and promote full employment.

The increase in U.S. interest rates, orchestrated by the Fed to head off inflation, has led to a run-up in the value of the U.S. dollar.

A sharp increase in the value of the U.S. dollar against the Mexican peso gives any U.S. manufacturing company a strong incentive to move capacity south of the Rio Grande, where it finds Mexican wages are already considerably than lower than in the U.S.

This hollowing out of the U.S. economy has been going on for decades. It gathered speed with the adoption of NAFTA in 1994, but the main site for footloose U.S. capital is Asia.

Pushed by Connolly about unfair competition and currency manipulation, Fed Chair Yellen pointed out the U.S. Treasury had responsibility for exchange rates. In reality this means the Treasury has to decide what to do after higher U.S. rates introduced recently by the Fed pushed the U.S. dollar up.

Both Bernie Sanders and Donald Trump are pledging action from the U.S. government to stop the export of jobs.

In Canada, Unifor celebrated 1,200 announced jobs to make a new hybrid minivan at the Fiat-Chrysler auto plants in Windsor. The weakness of the Canadian dollar was no doubt a factor in enticing the U.S. company to use its Windsor facilities for new production.

Before becoming Governor of the Bank of Canada in 2013, Stephen Poloz worked at the Export Development Corporation. Since he took the job, he has been talking down the value of the Canadian dollar benefiting exporters.

Recently Poloz mused about how negative interest rates could help pump up a stagnant Canadian economy. While he did not mention that lower interests rates would mean a lower Canadian dollar, this was the signal he was sending to foreign exchange markets, which got the message, selling off the Canadian dollar.

The Canadian dollar has gone down from US$1.05 in 2011 when the Conservatives received a majority mandate, to below 70 cents U.S. shortly after Team Trudeau won power in 2015.  

The falling dollar is what drives Canadian economic policy today. This may come as news to Canadians, because it has not been announced by the Trudeau government.

No Canadian government wants to take credit for a lower dollar precipitated by an "external shock" -- the fall in the price of oil from over US$100 per barrel to less than US$30 -- especially when a loonie worth 70 U.S. cents represents a drop in the Canadian standard of living of 30 per cent.

Though it is not well recognized, the Bank of Canada, not the Government of Canada, takes the leading role in making economic policy.

The demise of the fixed exchange rate regime over 40 years ago freed up the Bank to set interest rates according to its own priorities rather than to maintain the fixed value of the dollar.

Floating exchange rates set capital flowing across the world in search of higher rates of return. Free trade deals backed by the Conservatives and Liberal Team Canada jaunts were aimed at implanting Canadian companies abroad.

More open economies made federal fiscal policy more conservative since new general spending to revive a slowed economy was more likely to disappear into imports.

It was easier to watch the Canadian dollar sink when the economy got into trouble rather than adopt an activist industrial policy.

Current Canadian monetary policy supposedly targets inflation. When commodity prices for Canadian exports are falling however, the policy becomes: what to do about deflation, a weak economy?

The fall in the Canadian dollar makes imports more expensive, foreign travel more expensive, and purchase of foreign assets more expensive. The hope is that more money will be spent and invested in Canada as a result, reviving the Canadian economy.

American consumers have been buying new cars, and Canadian consumers as well. Demand drives manufacturing for the North American market. The ability to produce at lower cost in Canada because of falling exchange rates means nothing without American and Canadian buyers for products.

The real story is that the weak currency allows Canadian producers to collect more Canadian dollars for their commodity exports because export prices are set in the higher-valued U.S. dollar.

Most importantly, a lower dollar puts Canadian assets up for sale. Buy a house in Vancouver with U.S. dollars and get a 30 per cent discount! Or buy a Canadian company, shut it down and eliminate competition.

Allowing short-term fluctuations of the currency to drive economic policy makes no sense. Canadians cannot afford to wait for money to come sloshing back into job-creating investment from abroad.

The Bank of Canada needs to be given a new mandate to promote employment growth. The Trudeau government should be looking at establishing public sector investment banking capacity in Canada.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Aaron Strout/flickr

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