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Et tu, Dudley?

By Fred Bethune on Saturday December 18, 2010 09:29 AM


The Bank of Canada has long been a paragon of virtue among central banks. It always plays by the rules, and regardless of its policies, or even despite them, always seems to succeed. The Bank's greatest badge of honour is its exchange rate policy. It was actually the first central bank to attempt a floating currency in the 1960s, and has generally been a leading proponent of unmanaged currencies.

For almost 15 years now, the Bank of Canada has avoided any intervention in the foreign exchange market. This means that the BoC allows the value of the Canadian dollar to fluctuate freely. It can still influence the exchange rate indirectly through interest rates, but it does not actually go into the forex market to buy and sell dollars, like a Chinese or Japanese central bank. According to recent speculation, however, the Bank of Canada may be driven from this virtuous path:

Govenor Mark Carney is dealing with a recovery that is slowing, partly because of flagging U.S. demand, but also because the stronger dollar is eroding Canada's export competitiveness by making goods more expensive outside the country. At the same time, he wants Canadians to stop gorging on debt, but he has to keep interest rates low for economic reasons.

"He would like to raise interest rates to slow household debt accumulation," Mr. Shenfeld said in a report today. "For now, he can't do so for fear of sending the loonie soaring, and adding to the existing drag on exports."

But, he noted, a weapon that remains is "fighting fire with fire."

"Canada could match foreign central bank intervention in favour of our currency with an offsetting intervention, selling an equivalent volume of loonies," Mr. Shenfeld said. "That would simply move back to market-determined exchange rates, and would loosen the death grip on the Canadian dollar. Just a thought."

Just a thought, indeed. At the very least, this would be a symbolic death blow to Bretton Woods II. To Canada''s central bankers it is utter sacrilege, underhanded knavery, despicable selfishness and… maybe not such a bad idea.

Things have usually worked out well for Canada's central bank, but lately that just isn't the case. Canada is now caught in the same double bind that Greenspan was caught in earlier this decade: low employment and a growing housing bubble. This combination doesn't leave you any good moves with regard to interest rates. Do you raise rates to delfate the bubble, costing thousands of jobs, or do you lower rates to support employment, and become responsible for the bubble? Greenspan (to his credit) chose the latter, and look where that got him.

The obvious cause of this problem is a malfunctioning exchange rate due to foreign intervention, and the solution is to either stop the foreign banks from intervening, or start intervening yourself. Canada lacks the geopolitical heft to force a new Bretton Woods, so it comes down to currency intervention. Everybody's doing it:

Several countries are now managing their exchange rates amid a currency cold war, for want of a better phrase, sparking much controversy.

"Going to school on the lessons from the past crisis, global policy makers are moving towards financial sector reforms, while a second source of those troubles, an imbalance in trade tied to misaligned currencies, is getting less action" Mr. Shenfeld said.

"Bank of Canada Governor Carney warned of a 'death grip' on the U.S. dollar, with over 40 per cent of America's trade now with countries with managed exchange rates against the greenback, and more than a dozen countries seeing double-digit growth in their reserves as they control those rates."

But the loonie may also be in a death grip of its own, he said.

"Anything that elevates the greenback against overseas economies is tilting Canada's cross against those same markets, and affecting our trade balance as a consequence."

So it's either strangle or be strangled. Could the Canadians go over to the dark side, and become currency manipulating mercantilists? Not for a while yet, I'm sure. But if the US refuses to defend itself and the rest of the floating currencies, there's only so long that you can stick to the losing cause.

Comments (8)


delightful flirtation with orthdoxy here FB


do you mean rhetorical flirtation, or do you think my position is close to orthodox?

Al Schumann:

Ortho, hetero, whateverodoxy. It's a good explication of a nasty double bind. Is there a way to finesse it, FB?


one of the job class oriented left
hopes will answer Moray Al's
electric question

a policy con
of the job class oriented left
oughta love
a nicely falling currency amidst strong prices
for locally produced or extracted and exported commodities
such "exports"
are a nice source of export tax revenue for the state btw
such tax revenue
is a non supply regulating "rent "
paid out of local firms operating income
the proceeds like all rent income really
ought to be returned in full
to the citizenry thru a dividend process
of course such a mechanism
ties in with any pollution warrent auction cap and trade revenue

greening energy production itself ????

in resource rich canada
i'd let the provinces figure that initial path finding with per capita federal grants
not funded from cap and trade

off sets ???
strictly local and easily monitored like the pollution it off sets
no sense little pop canada get into the nigerian off set racket

needless to say any party gub that got into these types opf strategy moves would get the -castro-allende-ortega -chavez
treatment by uncle sore head


in greening
use borrowed money

discovering the local sunk costs of green living
oughta be funded out of "whole of the people " borrowed looney money
like all research and primary development
pure public goods baring or not

looking at sweden circa early to mid 90's
a great source
of sound public macro and micro memes
down the loony and
besides an export boom in produced industrial exports
ya see
local imported stuff rise in price

good part ???
some might trigger domestic substitute products as well as a general if minor shift to non tradeable expenditures
but only
if the favorable forex persists
or at least is strongly suspected to persist

a little cluster of shops and plants
like southern ontario and quebec could use
a MAP plan to regulated the import price tsunami
and as to domestic inflation
what's so wrong about fully adjusting wages
and delighting in the contraction
of real household debt burdens ???

the real estate boom is easily curbed
by a system of federally sponsored local ground rent taxes
with citizen dividend mechanisms


infra structure building ???

screw that
its for wimps


"a policy con
of the job class oriented left
oughta love
a nicely falling currency amidst strong prices
for locally produced or extracted and exported commodities "

Isn't that the issue here though: How to get a lower loonie? With interest rates a 0.5%, I don't see many ways of doing that besides forex intervention. That's obviously in Canada's best interest, but on a global level Canada would then be part of the problem.


"It's a good explication of a nasty double bind. Is there a way to finesse it, FB?"

There are ways to address it, but none that have much finesse, and that's the problem.

The main issue is that when the Bank of Canada lowers rates, it affects the economy through two main channels: the domestic credit supply and the exchange rate. If they both work correctly, you should get a nice lift from both, without running into the problems that come with over-using one or the other. If one of them isn't working (exchange rate) you have to overcompensate, and relying too much on the other (domestic credit) leads to a problem (housing bubble). Normally, lowering the interest rate should also lower the exchange rate, but when you have China and company intervening to hold down their currency and elevate everyone else's, the exchange rate won't decline enough.

The solution that this CIBC economist proposes is the closest to finessing the problem. You would simply join the other countries who are intervening, and start directly managing the loonie by printing loonies and using them to buy american dollars, thus increasing the value of the US dollar and decreasing the value of the loonie. The problem is that a lot of the gains in employment would come at the expense of American workers, the US government would be very angry, and Canada would be contributing to the same problem that caused this crisis.

There are other solutions, but they would be more difficult to implement. One would be import tariffs and export subsidies, but Canada is signed on to a lot of agreements that would be violated. You could also run a huge deficit, but unless you are monetizing it (printing the money to fund it, rather than funding it through taxes a la MMT) it's not really sustainable.

The ultimate solution is a new Bretton Woods agreement. To China's credit, their position is that they will start behaving when we get a new Bretton Woods system with a non-national reserve currency.


"Isn't that the issue here though: How to get a lower loonie? "

quite sensibly fb here talks possible
as in doable within present set of
canadian institutional and poli cultural constraints

we simply need to under line something here:

these are not matters of economic macro science
as my comment tries to suggest
a few of the ways these alleged
big problems could be resolved to job class benefit are fairly obvious and trivial
once you are willing to violate the sacred rights of trans nat corporations
hi fi raiders and sundry portfolio rentiers

the loonie loon forex drop is good notion numero uno
btw it's not a problem
not for an "independent canada "
any more then the swede deval of the early 90's was bad for this "member of the common market "

the lot bubble consequent on easy credit simply requires regulations of real estate credit flows
which nicely" examples"
what's wrong with loose talk
about the unitary interest rate
policy lever

when it comes to the multi dimensional
set of sectoral credit flows
talk of it on the left
a totemic superstition soaked cult
like communion
and ongoing meme fallacy
like trans substantiation
its harrisite "function"
its a useful alibi and dodge
for pro transnat/ multinat
forex and wage control


"The ultimate solution is a new Bretton Woods agreement"

to now underline the real
where otherwise i underline the possible
a new bretton woods without uncle as foster parent
amounts to a very sensible call for a world monetary reserve system
as well as a global balance of payments/forex mechanism
ie trade czar

such a global central bank etc
opens up a power vacuum at the new top tier of gubernance

as in who or what in hell will control
this global central bank (GCB )etc ??

why would uncle go along with an abdication
of reserve status for the imperial dollar
b4 knowing who'd control this GCB ???

to think uncle don't got a de facto veto
is fantasy common
on the flakey wakey econ con left

Clio ---the trickster --
suggests we gotta fight
a couple of 'great world wars'
'great world powers '
to clear the incidental underbrush
like uncle's armada
b4 we can travel down
that yellow brick road

keynes himself drafted up
a fairly workable
set up (bancor)
during the last great war

we got dexter white's
uncle heg show instead

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