Economy

US Currency Collapse: Some Thoughts on the Canadian Economy

By Ryan McGreal
Published November 07, 2007

It's just a big ol' jumble of crazy economic news these days.

The Canadian dollar hits $1.10 US, oil futures rise to $98 a barrel, China announces it plans to divest more dollar denominated assets from its forex reserves (with Japan and Sudan following suit), while Saudi Arabia has already refused to cut interest rates along with the desperate Federal Reserve cuts in September and Iran, Russia and Venezuela have all abandoned the petrodollar oil trading system.

An impressive line-up of currency experts believe the US dollar still has plenty of room to fall, since the underlying weaknesses in the US economy aren't changing any time soon, with the US on track to meet an $800 billion trade deficit for 2007.

The International Monetary Fund has cut its forecast for US economic growth in 2008 to just 1.9 percent next year.

How will this affect the Canadian economy?

The standard reasoning among economists seems to be that the strong dollar will hurt Canadian exports and slow our economic growth in the coming year.

Nominally, it doesn't look good. Canada is a net exporter, but over 80 percent of Canadian exports go to the US, accounting for some 45 percent of Canada's gross domestic product and 30 percent of Canadian jobs. Canada exports $360 billion to the US, and its net trade surplus with the US is some $96 billion.

Energy exports (oil - 1 million barrels per day, natural gas - 85 billion cubic metres, electricity - 10 billion kilowatt-hours) account for $87 billion of trade, with another $30 billion each in agriculture and forestry products.

Industrial goods make up $93 billion, machinery and equipment $94 billion, and automotive products $83 billion.

Because US demand for energy and agricultural products is fairly inflexible and supply constraints limit opportunities to source them elsewhere, they are fairly well insulated from the effects of a strong dollar.

The automotive sector, by contrast, faces a double whammy: rising oil costs have reduced demand for highly profitable SUVs and light trucks and the high dollar is rendering Canadian-made vehicles less cost-effective.

The "Big Three" US automakers, softened by lax fuel economy standards and tax and regulatory loopholes that favour cheaply built light trucks, are being hit hardest by high oil prices. Foreign automakers, used to building cars for markets with much higher oil prices, are enjoying a windfall of sales growth as North Americans abandon Ford F-150 'commuter vehicles' for Toyota Corrolas.

(Note to Buzz Hargrove: if you want to save your workers' jobs, you should be lobbying the federal government to make the regulations on automakers stricter instead of lowering interest rates. Years of regulatory mollycoddling is a big part of why the Big Three are in such bad shape to begin with.)

Here's a question: does it make sense to form an economic policy to protect the auto industry from a strong dollar when economic trends suggest that a suburban motoring economy has poor long-term prospects?

Between peak oil and climate change, we should seriously be talking about a post-automobile economy based on rail and shipping goods movement, with personal mobility based on proximity plus light rail.

The collapsing US dollar could be the kick in the pants we need to start shaking off our addiction to easy motoring and long-distance, just-in-time goods trucking.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By Locke (registered) | Posted November 08, 2007 at 15:02:05

I'm no economist, but my personal experience tells me that a load of debt is a monkey on your back. The scariest thing for me is the US deficit and debt and the potential fallout of having those loans called (so to speak).

Your argument that a lot of our economy is well insulated from the effects of a high dollar seems justified to me and your advice to Buzz is spot on.

But we'd be better off if Canadian/US governments would forget reducing taxes and focus more on debt repayment and infrastructure (such as light rail).

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By Ryan (registered) - website | Posted November 08, 2007 at 16:04:23

Hi Locke,

I'm not an economist either, so take my prognostications with a grain of salt. :)

To run with the analogy of family debt to government debt (one of Preston "We need to get our economic house in order" Manning's more enduring legacies), there's an important distinction to be drawn between, say, a mortgage and a credit card balance.

The former represents an asset that, over time, will at least retain its value as long as it is maintained properly.

The latter is more likely to represent an accumulation of non-durable purchases that are either consumed outright - pizza for dinner - or depreciate rapidly - appliances. (Add financing for your car to this latter pile: it starts depreciating the second you drive it off the lot.)

It makes sense to incur debt to invest in infrastructure that will generate value, like light rail (as you write). Debt reduction is important - especially reduction in debt from spending on non-durables, but it should not trump necessary investments.

The Canadian federal debt to GDP ratio has fallen steadily from a high of around 70 percent in 1995 to under 40 percent today and still falling.

At the same time the federal government is paying down the debt and cutting taxes, city infrastructure is crumbling and medical wait times are increasing.

The national public infrastructure deficit is somewhere between %50 and $150 billion. Similarly, health care spending as a share of GDP fell from about 10 percent in the early 1990s to about nine percent today.

A debt-free government is a government that is not building anything.

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By Locke (registered) | Posted November 09, 2007 at 00:32:48

Ryan, I absolutely agree with your analysis of good vs. bad debt. In fact, I'm OK with debt and have plenty to prove it... almost all of which (you'll be happy to know) is in our home (including cosmetic and energy improvements) and none of which is in our vehicle (which is paid off).

I'm really not aiming for debt free... The point I was making (rather sloppily by writing about US and CDN policy at the same time) is that the increasing US debt and (in particular) the deficit are concerning.

1) The US deficit is in large part funding the war in Iraq (bullets & bombs are definite consumables) and not being invested in US society or in infrastructure to make the economy more competitive or immune to an energy crisis. 2) A net deficit since Bush took over has increased the US national debt which is now about 25% owed to foreign debt owners who increasingly hold economic sway. It's one thing to owe your debts to your own pension plans, federal savings bonds and neighbours and another to watch wealth leave your nation forever.

With foreign debt holders diversifying away from the dollar an unwillingness to accept US debt could lead to higher interest rates and deepen the mortgage crisis in the States. If the US consumer (who drives the US economy) finds him or herself 'all maxed out' I think we can expect more than the auto industry to get hit. An economy in recession also won't need as much energy, forestry products, industrial goods, etc.

As you write, for the moment we in Canada seem to be in much better shape with a shrinking debt, record trade surpluses, lower GDP to debt ratio and lower foreign ownership of debt. But if the US economy tanks, all bets are off.

Those positive Canadian numbers should mean more money to invest in our civilization with infrastructure, education and healthcare spending and an opportunity to ensure future health and competitiveness for Canadians.

Instead, we Canadians received (or are about to receive) promised tax cuts which have not proven very effective north or south of the border in stimulating the economy. Ironically, the 'Right' has moved away from Manning's 'keeping our house in order' and embraced tax cuts as a way to drive the economy while the 'Centre-Left' calls for fiscal responsibility. At best, tax cuts are proving to be 'tax revenue-neutral' while mainly benefiting the wealthy and putting further burden on those less fortunate, our pubic institutions and our socity.

"Taxes are the price we pay for civilization." -- Oliver Wendell Holmes, Jr.

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