Canada's Woes
Part II
I was not planning to do an update on my piece until next of week, but since
the last article generated a lot of questions, and I won't have the time to answer them all I decided to publish a second installment this week, but this time I will look more closely at some of the political aspects of the issue, since this is more my forte than world economics. I'd like to re-state in my introduction that the first cause of our weak currency is our banking system based on fiat money, thus agreeing with some of the criticism sent to me, mainly that the state of trade between Canada and the U.S. is just a factor among many others to explain the weak Canadian currency.
As long as we have a system based on fiat currency in Canada we're heading straight for an eventual market crash, even if we are adopting healthier national financial policy on this side of the border. A fractional money system, in my opinion, punishes the people or nations who are thrifty and rewards greatly those top industrial nations or individuals who go deeper in debt (until, like Argentina, they can't get any more IMF funds and default on their loans). This is why a sound gold backed currency is not popular throughout the world at the moment. Fiat money is addictive. I mean how many banks or businesses encourage their customers to buy their cars cash or to save gold for hard days to come? I've experienced this personally. Most of the many financial advisors I've consulted in the past year were hesitant to recommend gold to me either because their institution did not offer the metal or its related stocks for self-directed portfolios, or because they believed it was simply not a good short or mid-term investment for a young professional go-getter like me. Just like the banks they work for directly or indirectly, many of these financial advisors want to cash in on the interest rates (their banks) or the commissions they will charge you, while allowing the institution to do billions of dollars in profits each year. And that's what angers me the most: what's been encouraged throughout the last century is not only the watering down of our currency and lifesavings through inflation and the fractioning of the currency by the banks (who now make record profits), but that the eventual market crash will affect the little people the most when it comes.
So summarize this point, would Canada's currency be much higher than the U.S. dollar if it decided alone to adopt a currency based on gold instead of fiat money? That I'm less than sure of, especially if the U.S. and the rest of the world maintains a fiat currency. In the early 60's Canada's currency was stronger than the U.S dollar even though we were going deeper and faster into deficit than our neighbors. If we take a look again at Argentina, most economists agree that unpinning it's currency to the U.S. dollar was the first step towards economic recovery for the country, but to me that's not entirely accurate. Defaulting on your IMF loan without a U.S. or joint bailout spells long-term bankruptcy and financial troubles in my opinion.
That brings me to my second point. I believe independence of enterprise, respect of cultural and regional differences and internal diversity of products and services offered by our businesses are other keys to Canada's financial health (if of course the Bank of Canada starts to replenish its gold reserves simultaneously, but that's a discussion topic for a whole new editorial).
Aside from the trade dependency issue, someone pointed out to me that the U.S. was also much more independent at the state level to decide what's best for the economy and the industry of the said state. That could be another factor to explain why the euro and so many other currencies are weak next to the U.S. dollar, even for countries who eliminate their deficits. Excessive central/federal control on economic and industrial policy combined with an important welfare state would explain partially why the U.S. currency is still preferred by investors.
I not only envision the troubles caused by the fiat system, but also the ones caused by Canada's overly centralized government with a welfare state it can only dream of affording 10 or even 5 years from now (as far as reasons go here, aging of our population and a declining birth rate are only the tip of the iceberg). I'm an Acadian from New Brunswick, one of the four Atlantic (poorer) provinces and a lot of people down there are still seasonal workers who depend on transfer payments (E.I.) or the generosity of the richer provinces to survive. It scares me to think what will happen to them if the living gets tough in Alberta during a depression. This form of "bailout" we call "perequation" is no better than the U.S. government bailing out businesses (Chrysler, Lockheed, the City of New York, etc.) and other nations (Mexico, Brazil and Argentina to name a few, now that Argentina is defaulting on its loans), I guess it's billions of your taxpayer's money gone up in smoke), except it's at least designed to help people within the nation. But again, in the event of the crash, those who have only debts and no hard currency savings will be caught in the middle, whether they're living in rich or poor provinces.
Another aspect of that same issue is a criticism directed at me and the Quebec economist I was quoting in Part I of this piece, mainly that Canada was not dependant on it's natural resources in its trade with the U.S., that only the western provinces are -- and that overall, natural resources were only 30% of our trade with the U.S. (It was over 50% ten years ago). Well if the western and richest provinces experience hardship due to a trade slow-down or a recession/depression, I don't think their dependants, the central and eastern provinces will do any better, even if they have a healthier and more diversified economy (which I encourage, but in the end, it will not stop a market crash), that includes a more independent high tech and tertiary trade with the States.
On this issue of the independence of our provinces on deciding what's best for their regions' economic or industrial policies: Unfortunately, several economists on last night's news were suggesting that we adopt the U.S. dollar five or ten years from now. I saw this one coming from miles away. Our finance minister said that we shouldn't see this happening in our lifetime, but I'm afraid it will. If that is what the economics professors are teaching their college students now, that's what they'll be demanding when they get on the market place in the near future. Of course the next generation won't be aware that replacing fiat currency with another fiat currency is pointless. Their profs will probably tell them that this European Union-like move will mean better trade and a better economy in general. Well pinning Argentine's currency with the U.S. dollar did not help them did it ? Will the Canadian government be able to maintain healthy debt reducing finances if the U.S. is doing an opposite policy and the federal reserve is directly pulling the levers of its economy through the U.S. currency? Absolutely not. Just like the U.S., we'll be paying for the fed's blunders. And unlike countries within the European union we won't have a veto or even a vote on the Federal Reserve's decisions. Canada will not even be considered the equivalent of a State so it's decision weight on the U.S. monetary policy will be close to nil.
So that wraps up the question of economic freedom of decision for our poorest or more dependant (on Canada's central government for economic leverage) provinces. If our top economists want us to adopt the U.S. currency in the near future, they'll have 0.1% (and I'm generous) of regional and cultural influence instead of their actual 10% of decision power. Again, after all is said and done, the only solution I see to our financial woes is a gold backed currency here and across the border. Nothing else will do.
Philippe Bérubé, M.A. Political Science
Ottawa, Canada
epb1886@hotmail.com
28 January 2002
Also by Philippe Bérubé
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