Montreal, October 15, 2009 • No 271

 

Harry Valentine is a
free-marketeer living in Eastern Ontario.
 

 

 THE EMPEROR'S DERRIÈRE

The Prospect of Parity Between
Canadian and American Currencies

 

by Harry Valentine
 

          Senior politicians in Ottawa are expressing concerns over the rise in value of the Canadian dollar against its American counterpart. A stronger Canadian dollar means American goods become less costly in Canada while the price of Canadian goods rises on American markets. The increasing strength of the Canadian dollar along with the high price of an ounce of gold also suggests possible weakness of the American dollar. Most of that loss of relative value results from the American Federal Reserve having printed excess paper currency.
 

          The relative strength of the American dollar is also causing concern in Asian markets where central reserve banks hold massive amounts of American currency. A decline in the relative value of the American dollar is therefore a cause for concern for several Asian central banks—especially China’s, which is the largest holder of American currency. There is a danger that Asian banks will dump some American currency should its value continue to decline. While the American dollar still serves as the world’s reserve currency, the prospect of it being replaced with some other form of viable reserve currency in the future grows more likely by the day.

          Since the US dollar became the world’s reserve currency, there have been occasions when the Canadian dollar was on par with its American counterpart for brief periods, and some when it was even slightly higher. During these previous occurrences, there was little doubt as to the security and value of the US dollar on world markets. The fallout from the fiscal events that led up to the mortgage meltdown on October 14, 2008 and the events that have followed have undermined that security. To stabilize money markets, the US Federal Reserve opted to follow the advice of Milton Friedman, namely to print currency.

Doing Something

          The so-called ‘unthinkable’ alternative of doing nothing had actually been successfully implemented during the little-known stock market meltdown of 1920-21 when the US government and Federal Reserve effectively did nothing. The stock market and the general economy subsequently self-corrected in a relatively short time span and with relatively little social upheaval or disruption of the lives of ordinary citizens. Politicians and central bankers today instead opted for what they believed could be a controlled adjustment of the American and world economies. But government economic programs invariably achieve something other than what had originally been intended.

          In Canada, the multi-billion-dollar bailout of the automobile manufacturing sector in Central and Southern Ontario is intended to produce vehicles that will sell in a recovering American economy. The problem is that the American economy is still shedding jobs and factories are still closing their doors. There are any number of vacant factories and vacant shopping malls for sale at bargain basement prices across much of the USA. There is also the looming prospect of a possible meltdown in the American commercial real estate market.

          A segment of the Canadian manufacturing industry and of the broader Canadian economy depends on American markets. The strength of those markets and their ability to purchase Canadian goods, services and raw materials will depend on the strength of the American economy following its recovery. Over the short term, there may be hints of pseudo-recoveries that involve brief periods of increased economic activity, such as has recently occurred. Prevailing political and fiscal conditions in the United States hinder prospects for any real and sustainable economic recovery. Such recovery may be several years away, and perhaps a decade or possibly even a generation away.
 

"Canadian politicians may wish to guide the country's economy through some form of recovery using various economic policies and initiatives. However, the former free-market libertarian who now occupies the nation’s top political office once repeated the maxim, in his role as leader of the opposition, that 'the government that governs least governs best!'"


          Canadians may have to face a reality that could involve a stagnant or shrinking American economy with a Canadian dollar at par with or higher than the US dollar. That dollar could face serious challenges on world money markets as the world’s reserve currency should Asian economies choose an alternative reserve currency. While replacing the US dollar with another viable means of exchange as the world’s or Asia’s reserve currency would cause major economic upheavals in the American economy, such a prospect could pave the way for some slow but real global economic recovery.

          The relative strength of the Canadian dollar on world money markets could be attributed to a combination of factors that include less recklessness in printing excess currency compared to the US Federal Reserve. Other factors include less recklessness with regard to programs that involve excessive government spending compared to the American home building debacle, and less involvement in the internal affairs of other nations such as the US$500-billion debacle in Iraq.
 

Leaving People Alone

          Canadian politicians may wish to guide the country's economy through some form of recovery using various economic policies and initiatives. However, the former free-market libertarian who now occupies the nation’s top political office once repeated the maxim, in his role as leader of the opposition, that “the government that governs least governs best!” It is on such a foundation that several sectors of the Canadian business community could successfully adjust to a changing international market.

          The development of entrepreneurship and business skills would play an important role in the relatively stagnant economy. Many teenagers are actually acquiring such skills through their association with the underground economy, including the sale of restricted goods to their cohorts. State prohibition laws created such opportunities for teenagers to acquire critical business and retail skills through a hands-on approach. Such learning could never have been possible, or been as successful, through formal lessons in the classrooms of state-run schools.

          Informal economic activity has merit in that it can introduce ordinary people into the world of commerce and business. Some people may sell used goods at a garage sale or yard sale, while others may sell garden produce. There is a range of productive economic activities that can occur informally within neighborhoods and communities that ultimately benefit many of their residents. Such activities may include bartering of goods and/or services, and may offer a lifeline to many people in an otherwise ailing world economy. They may become a survival strategy for people when overwhelmed government welfare programs are unable to assist needy citizens.

          There have been numerous government programs over the years aimed at stimulating economic activity or generating new economic opportunity. Much government money was allocated to stimulating the high-tech and information sectors until the high-tech meltdown and dot-com bust. Several other technology development programs that showed promise over the short term revealed a negative side over the longer term. Market demand was minimal for many pieces of technology that had been developed with government funding.

          While governments may want to appear to be doing something worthwhile and productive in the economy, the past record of such activity has been quite dismal over the long term. The record of Keynesian economic theory in regard to how government should manage economic downturns has also been less than stellar. Japan’s stalled economy remained stagnant for up to a decade as that nation’s government implemented various Keynesian strategies to revive their economy. The economic survival of many neighborhoods and communities may ultimately depend on the ability of private people constructively taking the initiative to create opportunities to sustain themselves, their families, and indirectly their neighbors through the means of voluntary exchange.