Annotations on Mark Carney’s speech about Dutch disease

Stephen Gordon: What the governor said and why he’s right

Mark Carney, governor of the Bank of Canada in Calgary, Alberta, on Sept. 7, 2012. (Todd Korol/Reuters)

With any luck, today’s speech by Bank of Canada Governor Mark Carney will be the final word on the ‘Dutch Disease’ debate in Canada:

Some regard Canada’s wealth of natural resources as a blessing. Others see it as a curse.

The latter look at the global commodity boom and make the grim diagnosis for Canada of “Dutch Disease.”1 They dismiss the enormous benefits, including higher incomes and greater economic security, our bountiful natural resources can provide.

Their argument goes as follows: record-high commodity prices have led to an appreciation of Canada’s exchange rate, which, in turn, is crowding out trade-sensitive sectors, particularly manufacturing. The disease is the notion that an ephemeral boom in one sector causes permanent losses in others, in a dynamic that is net harmful for the Canadian economy.

While the tidiness of the argument is appealing and making commodities the scapegoat is tempting, the diagnosis is overly simplistic and, in the end, wrong.

This is an argument I’ve made several times — here, for example — but here I’m going to flesh out how Carney frames it.

Coinciding with this period of elevated commodity prices, the share of the manufacturing sector in Canadian GDP has declined since the turn of the century from 18 per cent to around 11 per cent.

For the promoters of Dutch Disease, this is the “a-ha” fact, with the coincidental relationship described as causal. With a broader view, however, it is evident that the decline in manufacturing is only partially in response to the rising exchange rate and, in fact, is part of a broad, secular trend across the advanced world (Chart 5). Major forces of globalisation and technological change have dispersed manufacturing activity across borders, increasingly concentrating the highest value-added stages of production in advanced economies.

In 1970, Canada’s manufacturing-to-GDP ratio was 6 percentage points below the average of members of the Organisation for Economic Co-operation and Development (OECD). Today, it is 3 percentage points behind. Likewise, the share of jobs in manufacturing has declined, but not as steeply as it has in our commodity-importing neighbour to the south (Chart 6). Although the adjustment has been difficult, it has occurred over a longer period of time than the boom in commodity prices and, in general, Canada has not lost ground relative to other advanced economies.

In a nutshell, the long-term shift out of manufacturing is not a phenomenon unique to Canada.

The coincident strength of commodity prices and the Canadian dollar in recent years has been treated by some as prima facie evidence of Dutch Disease in Canada. But this diagnosis ignores the fact that the Canadian dollar is influenced by a diverse set of factors.

Commodity prices do play a role. Canada is a net exporter of commodities while our main trading partner, the United States, is a net importer. This causes our respective terms of trade to move in opposite directions in response to commodity-price changes. As a result, the Canada-U.S. exchange rate tends to appreciate when global commodity prices rise (Chart 7).

The expression terms of trade is something worth spending more time on. As the Wikipedia entry says:

In international economics and international tradeterms of trade or TOT is (Price of exportable goods)/(Price of importable goods). In layman’s terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports… An improvement in a nation’s terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is influenced by the exchange rate because a rise in the value of a country’s currency lowers the domestic prices for its imports but does not directly affect the commodities it produces (i.e. its exports).

This is a better way of thinking about the effects of higher commodity prices than in terms of the exchange rate. Glenn Stevens, who is now the Governor of the Reserve Bank of Australia – and who was once my classmate – put it this way:

When the terms of trade are high, the international purchasing power of our exports is high. To put it in very (over-) simplified terms, five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets – partly due to TV prices falling but more due to the price of iron ore rising by a factor of six. This is of course a trivialised example – we do not want to use the proceeds of exports entirely to purchase TV sets. But the general point is that high terms of trade, all other things equal, will raise living standards, while low terms of trade will reduce them.

The link between commodity prices and Canada’s terms of trade is surprisingly tight (clicking on a graph opens a larger version in another window):

And so is the link to living standards. A recent Statistics Canada study notes that after 20 years of stagnation during the 1980s and 1990s, real wages finally showed some marked progress in the 2000s:

So it’s better to think about changes in commodity prices in terms of the terms of trade than on the exchange rate. After all, as Carney notes, there are other things that can and do affect the exchange rate:

But [the increase in commodity prices] is just the beginning of the story, accounting for about one-half of the appreciation of our currency over the past decade. Other factors also play important roles.

Since 2002, the U.S. dollar has depreciated against many currencies, including those of both commodity exporters and importers. The Canadian dollar has appreciated against the U.S. dollar by an amount similar to that of the currencies of two major commodity importers, Japan and the euro area (Chart 8).

Overall, the Bank estimates that about 40 per cent of the appreciation of the Canadian dollar since 2002 is due to the multilateral depreciation of the U.S. dollar.

The balance of the appreciation reflects forces other than U.S.-dollar weakness and commodity prices. In particular, a variety of attributes make Canada an attractive investment destination, including our sound public finances, resilient financial system, and credible monetary policy.

These strengths limit the downside risk associated with Canadian assets, making Canada a rare safe haven in a risky world.

This status is reflected in the behaviour of Canadian 10-year yields, which tend to decline at the same time as risky assets such as global equity prices. This correlation suggests that money flows into Canadian bonds in response to increases in perceived risk. Indeed, by this measure, Canada’s safe-haven status is second only to the United States and the United Kingdom (Chart 9). This was not always the case. During the Great Moderation, this correlation was essentially zero (Chart 10).

That said, Carney makes the point early on that, although the net effect of higher commodity prices is positive, that doesn’t mean there are no costs:

That is not to trivialise the difficult structural adjustments that higher commodity prices can bring. Nor is it to suggest a purely laissez-faire response. Policy can help to minimise adjustment costs and maximise the benefits that arise from commodity booms, but like any treatment, it is more likely to be successful if the original diagnosis is correct.

So what treatment does he suggest? A good summary of his recommendations is “eat your vegetables.” Firstly, Canadians should get past the notion that the path to prosperity lies in being the low-cost exporter of manufactured goods to the United States:

Research at the Bank and elsewhere suggests that, while oil and metals prices have historically moved with the business cycle in the advanced world, this relationship has broken down over the past decade. In particular, industrial activity in emerging Asia now appears to be the dominant driver of oil-price movements (Chart 15).6

Our reliance on the United States, which still takes nine times as many of Canada’s exports as fast-growing emerging-market economies, is an issue only if we expect U.S. underperformance relative to both history and the rest of the world to continue. Unfortunately, that is what we must expect for some time, as the United States goes through a difficult adjustment process.

In this context, the only way to recover the beneficial correlation between commodity prices and demand for Canadian manufacturing exports is to diversify our export markets toward fast-growing emerging markets. That is one of the many reasons why Canada is pursuing an aggressive, emerging-market-focused trade strategy.

For example, manufacturers in Ontario could take greater advantage of the opportunities just north of Montana:

Other new markets can be found at home. For example, as of November 2011, 255 Ontario firms were suppliers to the Canadian oil sands.7 As well, Ontario’s exports of mining-related services to Alberta grew 44 per cent in the last year measured. Capturing more of the value added in commodity production, from energy to agriculture, remains a tremendous opportunity for all of Canada.

We should also recognise that, in an era of high resource prices, better operating efficiency, improved resource management and products with a more sustainable environmental footprint make commercial and social sense. Advances in building energy efficiency, enhanced farm yields and power plant performance would pay immediate domestic dividends.

The list goes on: greater interprovincial mobility, enhanced skills, higher levels of investment. These would be good things to recommend under any circumstance, like eating your vegetables.

Carney concludes by saying:

Building on our strengths requires that we respond appropriately to the opportunities the global transformation affords us. That starts with recognising that the strength of Canada’s resource sector is a reflection of success, not a harbinger of failure.

The logic of Dutch Disease requires that we undo our successes in order to depreciate our currency. Taken to its natural conclusion, this logic dictates that we shut down the oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector.

Such actions would surely weaken the Canadian dollar, but they would also weaken Canada.

In a world of elevated commodity prices, it is better to have them. Bank of Canada research shows that high commodity prices, regardless of the cause, are good for Canada. Rather than debate their utility, we should focus on how we can minimise the pain of the inevitable adjustment and maximise the benefits of our resource economy for all Canadians.

This really shouldn’t be that hard to understand.




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Annotations on Mark Carney’s speech about Dutch disease

  1. Actually there is at least one other significant example of so called “Dutch Disease”. Britain’s rapid development of north sea oil coincided with a precipitous drop in the UK’s manufacturing sector – i’m pretty sure exchange rates played a part in that too.
    Carney makes a good case but perhaps its the pace and scale of the resource development that is the problem.In any case surely much more evidence has too be presented that we absolutely must reorient our trade away from our main trading partner and most of our eggs into the resource sector economy.
    He also leaves out an important political aspect, namely that while things are changing the majority of Canada’s population is still shared between ON and QC – where manufacting is still important.I hardly think the resource boom is likely to sustain both sectors; and resource booms and commodity prices have a nasty way of crashing from time to time – this one will too. And while positive ToT sounds all fine and dandy it, as you point out it will negatively affect balance of trade – surely more bad news for central Canada manufacturing.

    “The logic of Dutch Disease requires
    that we undo our successes in order to depreciate our currency. Taken
    to its natural conclusion, this logic dictates that we shut down the oil
    sands, abandon our resource wealth, have high and variable inflation,
    run large fiscal deficits and diminish our financial sector.

    Such actions would surely weaken the Canadian dollar, but they would also weaken Canada”

    I found this very interesting from Mr Carney, At best it’s a ridiculously hyperbolic bit of pseudo analysis; no one is suggesting anything such thing. Really he should keep his nose out of cheap theatrical politics and leave that to the politicians.

    • Yes that statement from Carney is ridiculous. If one compares inflation vs the fluctuations in the dollar over the past 15 years there is zero evidence a falling dollar increases inflation and a rising dollar lowers it.

      From 1997 to 1999, the dollar fell 14% but so did inflation from 2.1% to 1%.

      It’s also pure propaganda to suggest the oil-sands have to be shut down to revalue the currency. Our currency is overvalued by 25% according to the OECD based on PPP.

      An impartial central banker should desire neither an undervalued or overvalued currency because of the negative side effects on the economy including: a) 500,000 export-related job losses; b) a $20B trade surplus being turned to a $50B trade deficit with imports purchased on record levels of personal debt.

      • Actually, the BoC was allowed to bring the dollar down through lower interest rates precisely because inflation had been quashed by 1993. The lower inflation happened first, then they brought the dollar down by drastically lowering interest rates. And as I’ve said elsewhere, lowering rates further is not an option at this time. They’re at record lows already.

  2. It’s not an issue in a booming resource economy, if prices remain relatively high, as he has predicted earlier.

    But, having lived through the crash in 1986 in Alberta…

    • True. But the difference is that back then the price of oil crashed below $30/barrel to create problems big problems for Alberta. Now it only has to drop below $80/barrel to make oil-sands oil unprofitable.

      This year the Alberta deficit tripled when there was a dip in oil prices. So betting everything on resources is short-sighted to say the least.

      Letting our value-added sector and productivity wither and die is also terrible economic policy. Canadians need a 21st-century innovation-based economy to maintain living standards and keep up with the rest of the developed world.

      Alberta deficit set to triple on slumping oil prices

      http://www.theglobeandmail.com/news/national/alberta-deficit-set-to-triple-on-slumping-oil-prices/article4509683/

  3. So what is the plan for the ‘inevitable adjustment’? Has the current government offered up anything?

    • Shhh…a week is a long time in politics and bloody well near an eternity for these clowns.

    • With a dollar at parity, wages are inflated by 25% (according to the OECD based on PPP.) To maintain a dollar at that level, wages will have to be downsized by 20% just to get us back to square on our competitive position.

      Harper is getting the ball rolling by cutting back on EI benefits, forcing workers to take less qualified work with lower pay; plus he is letting corporations hire temporary immigrant workers at a 15% discount.

      Since wages are sticky (workers are loathe to accept lower pay) they can only be reduced through recession and high unemployment.

      Another problem with wage deflation is debt: it causes the relative value of debt to increase. Lower wages means lower tax revenues and higher government debt. People will have to downsize their houses which will put a downward pressure on housing prices destroying many people’s retirement savings they have in home equity.

      In short, it is not a fun trip down the deflationary spiral. Tough Tory times for sure.

      • Ron, serious question here. Why has the massive devaulation of the USD not helped the US? They’ve fallen a full 25% BELOW PPP vis-a-vis Canada. Shouldn’t they be booming right now?

  4. Only Norway ever learned anything about how to manage a gold rush apparently…..

    • 94% of the oil-sands GDP stays in Alberta which has a population of 4M (compared to Norway’s 5M.) If Alberta was a country the oil sands could make it as wealthy as Norway (highest GDP per capita in the world; highest productivity.) But as it stands, it is not nearly enough to support 30M people in the rest of Canada.

      We need economic policy that allows all provinces to prosper, not one that builds a firewall around Alberta.

      • Norway has a capital reserve to ensure future properity….it isn’t eating it’s seed corn.

        • True.

          • Albertans are usually irrational on the subject of oil I’ve found…..so belligerent they put customers off, yet you can’t force people to buy a product….and also so eager to get the bucks they let Americans pay less than they should, they put very little away for a rainy day….and there are always rainy days….they aren’t developing better cleaner technologies, and they aren’t diversifying their economy.

            What’s worse is that they’re living on it! 30% or so! And they still have a deficit….a growing deficit!

            Saudi Arabia spends 80% of it’s oil revenue on social programs…..not education, not diversifying….social programs. So when oil goes downhill….there’s going to be one hell of a coup.

            Alberta should contrast Saudis with Norwegians and choose accordingly.

        • Norwegians also have an average personal debt level approaching 200% of annual income.

          http://tinyurl.com/8sszpth

          They’re not eating their seed corn, they’re eating their own kids.

          Canada’s personal debt level at 148% of income is worrisome enough. Those admiring Norway are in the same position of those who were admiring Ireland and Iceland five years ago. A debt-fueled housing bubble ends the same way, regardless of where it occurs. We’ll get ours, and Norway will get theirs. We’re running out of countries to admire.

          • Debt isn’t debt when you can cover it, hon.

          • Sure, and when their housing bubble pops, they’ll be just fine. The government will tap the sovereign wealth fund, pay off everyone’s mortgage, and there will be no problems. Right before the tooth fairy shows up.

          • You don’t understand much about this subject, you’ve just been panicked by the rightwing harping on debt as the ultimate evil.

            Chill

          • I am chill. I’m debt free. If you are suggesting that housing bubbles in Norway and Canada aren’t a problem, then you’ve got no business lecturing anyone else on their understanding of the subject. You’re quite simply clueless. There was no shortage of people like you 6 years ago insisting that mortgage debt wasn’t a problem in the US (or in Ireland, the UK, Spain, etc…), because supposedly people had enormous capital appreciation built up in their homes, and therefore had the assets to cover the debt. We don’t seem to hear much from those “experts” now.

            Many of those cheering on the housing bubble were right wing. Bush and his “ownership society” comes to mind. Then there’s Flaherty and his asinine decision to allow CMHC to insure 0 & 40 mortgages before finally coming to his senses. Cameron recently lowered the down payment required for government-backed mortgages to 5% in the UK. It was Mulroney who first allowed 5% down in Canada for first time buyers, announced in the 1992 Budget. When it comes to debt and housing bubbles, the right wing is even nuttier than the left.

          • Ahh a Puritan, convinced of his own righteouness.

            And except that you understand none of it…..

  5. Economists are social scientists, not scientists, and there is no ‘final word’ in economics because there are no correct answers.

    I find it peculiar Governor made a comment at all – ndp and dutch disease is political issue, nothing to do with Bank or Carney. Cons should be making case against dutch disease, not Carney, tho the Governor does better job explaining his thoughts than Harper or his Ministers have done so far.

    • True. The Bank of Canada governor is supposed to be at arms length from the government not peddling its propaganda. Last week both Carney and Flaherty were chiding corporations for sitting on huge cash reserves. Carney should not be involved in these kind of politics.

    • There are important implications for monetary policy, especially if the “cure” for Dutch Disease is to engineer an exchange rate depreciation.

      • I was pleased to hear him suggest spreading the O&G wealth around Canada – by pipelining to Ontario/Quebec. One might think this is political as well, but earlier he has spoken out about how we sell AB bitumen below market, and import Brent oil in east at world prices. So, in his domain.

        Your take as well?

        • I believe in Mr. Gordon’s last column, he took the position that processing the bitumen in Canada was a bad idea because refining adds little value to the final product and is therefore the opposite of value-added.

          But what’s best for corporations is not always best for people. Piping and shipping raw bitumen is much more dangerous than conventional oil. This approach ships tens of the thousands of jobs out of the country. It doesn’t make sense to export oil on one side of the country and import “unethical oil” from the other. And as you point out, Alberta is taking a big hit because of discounted prices on their sulfur-laden crude.

          Harper/Carney are free-market non-interventionists. They might flirt with the idea of processing oil in Canada. But that is just cushioning the blow: the Northern Gateway pipeline is a foregone conclusion (with more weasel words on the way…)

          • He’s a big guy. He can answer for himself. And handle criticism as like other bloggers on Macleans. This is the bigger leagues.

            Though it may appear that he is being a bit schizo over his now unqualified support of Mr. Carney’s positions (earlier suggesting his claims about corporate cash were unfounded in an earlier blog) , I interpreted the earlier effort as more of a co-ordinated shoot the messenger undertaking, Mr. Gordon amongst other blogging academic economists being very supportive of the Conservative’s continuing CIT cuts in the last election, going to the point of making predictions of corporate performance after implemented. When it appears the forecasts didn’t meet expectations, it can’t be management’s fault, nor the forecast, must be the numbers are being used improperly by the Governor.

            But now Mr. Carney’s apparently back on track.

          • To err is human. To blame others shows management potential.

          • Sounds like an idea for a research thesis for some economics grad student.

            Are corporate income taxes now low enough? How do you measure (growing dividends? share buybacks? flush cash accounts?)

            Or:

            Why doesn’t Canada’s corporate performance match empirical evidence gathered elsewhere? Is Canada suffering from duhh disease?

      • What exactly would these monetary policy implications be?

        Let’s look at the facts by comparing (from 1995 to 2005): a) the CAD/USD exchange rate; b) Canadian inflation rate; c) US inflation rate; d) Canadian interest rates; e) US interest rates.

        From 1997 to 1999, the dollar sharply dropped from 75 cents to 65 cents. It rose up to 69 cents by 2000. It dropped down around 63 cents by 2002. From 2003 to 2004 it sharply rose to 76 cents.

        During this entire time the Canadian inflation rate followed the US inflation rate except it was lower in Canada (with the exception of a temporary 3 month spike around Jan 2003, more amplified than the US spike.)

        From mid-1996 to 2002, interest rates were lower in Canada.

        Oops, almost forgot the budget balance. From 1995 to 2000, it went from a $30B deficit to a $20B surplus; in 2005 it was $13B surplus.

        So Carney’s claim that we will have high inflation and big budget deficits is nothing more than propaganda. The Emperor wears no clothes.

        • You are mistaking correlation with causation. Explain how you would manufacture an intentional currency devaultion without destabilizing the economy and creating inflation? Interest rates are already at record lows. We didn’t choose a low dollar back then, it simply was low due to factors outside of our borders and outside our control. We did not choose a high dollar now. Again, the value of our dollar is priced against the value of other currencies, most of which have taken a severe beating. We got less of a beating, so we’re stronger, and our currency reflects that.

        • The way to lower exchange rates is to make it so no one wants $ CAD. Ontario and Quebec probably would qualify. The “problem” seems to be the thriving western economies. And from what I understand, some of the eastern ones.

          Oddly enough Saskatchewan changed into a thriving economy by changing policies.

          This whole discussion sounds suspiciously like “let’s make everyone poorer so we all become rich”.

  6. Arguing that Canada “suffers” from Dutch Disease is akin to complaining about all the taxes you have to pay since you got rich!

    • Canadians are not richer, unless they are cross-border shopping. A higher dollar means higher costs incurred in Canada making goods more expensive. More purchasing power also puts an upward pressure on prices which cancels out any benefit.

      The dollar has risen by 25% since 2006. One would expect prices to drop by 25% which would cause deflation. But except for the deflation caused by the 2008 Great Recession, inflation levels have been either in the 2% target range or higher.

      Subsequently, from 1997 to 1999 the dollar dropped 14% from 75 cents to 65 cents. This did not create 14% inflation. The inflation rate actually dropped from 2.1% to 1%. And this wasn’t because of low GDP growth. Growth was relatively phenomenal: 4.2%, 4.1%, 5.5%. GDP growth in 2011 was 2.4% and is forecast lower over the next 3 years.

      An inflated dollar has zero benefit for average Canadians but has many costs, including the loss of 500,000 export-related jobs and the requirement to downsize wages by 20% to restore our competitive position.

      • Canada is not only an exporting nation. We also import a lot of goods from other countries, especially the US. These goods are now much cheaper for Canadian consumers. One does not need to cross the border to benefit from our strong currency. My main point is that our resource boom has made all Canadians much richer. The currency gains are a much smaller problem.

        • Canadians have record levels of debt. So it appears we are buying imports on borrowed money instead of earning it through value-added exports. The overvalued dollar has turned a Liberal-era $20B trade surplus to a $50B trade deficit. All the US PIIGS had big trade deficits before their debt crises emerged…

          The Swiss just devalued their currency because they said a “massive overvaluation” was harming its economy. Time will tell what effect the dollar has on our economy…

          • That argument holds no water. Canadians are richer than ever. Their imprudent levels of debt are more than offset by record assets.

          • Our economy is a house of cards. It’s nothing compared to what it was when the previous Liberals government was managing it. One can only hope it unravels before the next election so we can get to work cleaning up the mess.

          • You don’t think the global recession has anything to do with our weaker economy these days? You don’t think the tech boom of the late 90s and early 2000s, and the US housing & financial boom of the mid-2000s (as well as in Europe and elsewhere) had anything to do with the Liberals “management” of our economy? We don’t exist in a vacuum.

      • Has our dollar risen or have others just fallen? Don’t forget, when you talk about a rising or falling dollar, you’re only really talking about a cross-rate quote in another currency, usually the US dollar. The USD, alas, has fallen off a cliff. I’m not in any hurry to follow it.

  7. “And so is the link to living standards. A recent Statistics Canada study notes that after 20 years of stagnation during the 1980s and 1990s, real wages finally showed some marked progress in the 2000s:”

    This argument is completely ridiculous. According the OECD, the proper value of the dollar is 81 cents US based on PPP. Over the past 6 years the dollar has soared from that to parity which is a 25% increase. So that means the real value of wages are *inflated* by 25%.

    Canadians haven’t earned this increase in wages with rising productivity, higher GDP growth and increased value-added exports. In fact the opposite is true. Productivity has fallen; value-added exports have shrunk; 500,000 export-related jobs have disappeared; and corporations are hoarding cash instead of investing it to raise productivity.

    Any economist worth his salt would not claim inflated wages are a positive thing. In this age of globalization inflated wages are a big drag on the economy. So in order for the dollar to remain at parity, wages will have to be busted by 20% just to restore our competitive position.

    Since wages are sticky (workers are loathe to accept lower wages) this can only be accomplished through recession and high unemployment. Good economic policy creates jobs and produces solid GDP growth, not the opposite.

    • I don’t know what you mean by ‘inflated’ wages. Real wages – as measured by real buying power, calculated by deflating nominal wages by the CPI – increased. That’s good news. That it came from an increase in Canada’s terms of trade doesn’t change the fact that real wages increased.

      • The rise of real wages is entirely due to the soaring, overvalued dollar. It’s not something *earned* by means of rising productivity, for example. Productivity over this time has declined in relation to the US.

        If one looks at workers in a car plant, they now cost 25% more to employ than they did in 2005 (when the dollar was at it’s “fair value”according to the OECD based on PPP.) To bring costs down to 2005 levels with a dollar at parity, workers will have to accept a 20% wage cut. But not just at car plants; this applies to all workers across the country.

        So by the time wage costs are leveled out, workers will no longer have higher real wages. Like Uncle Milty used to say, there’s no such thing as a free lunch.

        • I don’t see why giving auto workers an increase in their buying power is a bad thing.

          • From what I’ve read of union economist Jim Standford, workers don’t want higher real wages because they’re no good if they put you out of a job.

            This Dutch Disease issue is like a Twilight Zone episode: free-marketers want workers to have higher wages; workers want lower wages…

            But the economics behind the positions is simple:

            Workers would rather take a 20% reduction in real wages because the inevitable alternative is a 20% hit in nominal wages. If the dollar is revalued so are their debts. If nominal wages drop, debt will remain the same and it’s relative value will increase.

            Investors would rather the dollar remain 25% overvalued and workers take a reduction in pay. This increases the real value of their wealth. As wages are downsized, share value will rise.

            Given Harper’s wage-busting policies, it’s clear he wants a dollar at parity and wages to come down, siding with investors. This policy is wrought with danger, however: workers already have record levels of personal debt; lower wages means lower tax revenues and bigger deficits; wages are sticky and are only driven down by recession and high unemployment; recession causes bigger deficits; etc.

          • Are you sure? Seems like the CAW is pretty determined to resist demands for pay cuts.

  8. You’re all exactly right. What the heck does Carney know anyway? Just because he followed his bachelors of Economics at Harvard with a Masters and Doctorate in Economics from Oxford, sits on the Board of Directors of the Bank or International Settlement, and is a member of the Group of 30. Pish tosh, you folks all have computers, and can read things on the internet.

    • You’re position is an authority fallacy. A scientist can win a Nobel Prize, but that doesn’t mean everything he says is a scientific fact.

      In fact, economics is much more politics than science. There are varying positions on the Dutch Disease based on interpretations of the facts. Just because Paul Martin said ‘no’ to American banking regulation, preventing a financial market meltdown in Canada, does not raise Carney to the level of deity.

      And one has to wonder which Mark Carney to believe. A year ago he was claiming the strong loonie cast a shadow over our recovery. What changed between then and now? The NDP pushed the Dutch Disease position.

      So I guess even the economic gods are not impervious to cooking up a position that suits a particular political agenda.

      Thankfully the gods gave us brains to weigh the evidence instead of just mouths to be spoon-fed the agendas of the powers that be.

  9. The govenor of the bank of canada doesnt even care about canada…….he rather see us all dead then rich and thats the god honest truth wake up everyone

    • Congratulations on making the single stupidest comment in the history of the Internet, writing and all human communication!

      • Hey if this award is up for grabs, I’m sure a few of us have some nominations for you…

      • Such a feat deserves to be recognized. I feel privileged to have witnessed it.

    • We’ll tackle the education issue for people like yourself in another article.

    • I believe that is next week’s Macleans cover story:

      Why Mark Carney wants you dead: The shocking truth about the Bank of Canada’s real agenda.

      • Don’t spoil it. Also he dresses like a skank.

  10. Dutch Disease in the headlines: the other side of the story (and Mark Carney…)

    G&M: Harper government funded study arguing Canada suffers from ‘Dutch Disease’

    National Post: Thomas Mulcair’s Dutch Disease warning supported by OECD report

    G&M: RBC: Shrugging off Canada’s competitiveness shortfall
    “Almost three-quarters of the competitiveness gap is due to the soaring loonie”

    G&M: Strong loonie casts shadow over recovery: Mark Carney

    CBC: Is Canada suffering from ‘Dutch disease’?
    “shifting international trade patterns are responsible for some of the 500,000 manufacturing jobs that have been lost in Canada”

    G&M: Carney warns falling oil price could grease economy’s slide

    • OK. Suppose that is true. What is the cause of our dollar being so high? How do we lower it? We can’t use monetary policy, because interest rates are already at record lows. We have no other levers to lower the loonie, at least not any levers that wouldn’t have destructive side effects (i.e. an intentional devaluation through excessive money-printing). How do we force the loonie down? How do we stop the Euro and the USD from continuing to lose value against our currency? Certainly a high dollar prices some exporters out of the market. But that makes perfect sense when you consider that our primary export markets are on the economic skids. We can’t fix the problem by fixing a symptom. Our “high” dollar is a symptom of weakness in our major trading partners. It’s not because we’re doing something wrong.

      • The overvalued dollar is related to a commodities boom, not any strength of the Canadian economy. Our economy is mediocre when compared to the rest of the developed world. In fact our productivity is falling and we just got bumped down from #12 to #14 on the WEF Global Competitive Index:

        * OECD productivity (2011): #17
        * OECD productivity growth (2011): #24
        * OECD government debt/GDP (IMF 2011): #25
        * OECD Unemployment rate (2012 Q1): #17
        * OECD GDP growth (2011 2.4%): #14
        * OECD trade balance (IMF 2011 -2.81%): #24
        * Inequality-adjusted Human Development Index (2011): #12
        * Conference Board of Canada Economy Rankings (2011): #11
        * WEF Global Competitive Index (2012-2013): #14

        Harper is lying to Canadians telling us we have “the strongest recovery on the planet,” the “lowest debt by a country mile” and other nonsense. By 2015, he won’t be falsely boasting but looking for someone to blame for the mess he created.

        • And a commodities boom is bad for a country with lots of commodities? Let me guess, you square that circle with a Dutch Disease argument?

    • The devaulation of the USD doesn’t seem to be helping them much does it?

      • There was no devaluation of the USD. It is a stronger “safe haven” currency than the Canadian dollar (in terms of 10-year T-bill yields.) The problem with the US economy is, aside from the 2008 meltdown it has yet to recover from, the country is broke on a municipal, state and federal level for doling out countless, reckless tax cuts over the past 30 years. They are in a state of net austerity measures. The US total money supply (M3) is also declining from trend; the tripling of the “state money” via QE only affected 15% of M3.

        FP: Where’s the Money?
        http://opinion.financialpost.com/2012/08/03/money-wheres-the-money/

        • QE1. QE2. Both of those were devaluations. QE3 coming soon. Another one. Which is why our dollar shot up again this week. The USD dropped vs. the C$.

  11. Mr Carney;
    You keep referring to the Toronto area as; “Central Canada”
    Toronto area is NOT,,, central Canada!!!!
    Central Canada is just outside of Winnipeg. Look at the map!!
    Do Torontonians really think they are the centre of the Universe????
    (aren’t we special) This is embarrassing to the rest of us in Canada.
    Did you ever think of referring to Toronto as,,,, Toronto???
    Please have your speech writers change this for the future.
    Ger

  12. “Overall, the Bank estimates that about 40 per cent of the appreciation of the Canadian dollar since 2002 is due to the multilateral depreciation of the U.S. dollar.”

    This figure appears to be cherry-picking — not telling the whole story.

    If you go over to FxTop you can compare currencies over time. This shows that the USD significantly gained strength against many currencies from 1995 peaking around 2001-2002. Then it significantly weakened from 2002 to 2008.

    Here are the approximate numbers from: 1995 / 2012:
    Euro: 1.35 / 1.25

    Norway: .16 / .17
    Sweden: .14/ .15
    Denmark: .18 /.175
    Singapore: .73 / .80

    Can: .72 / 1.00
    Australia: .75 / 1.05

    So the multilateral depreciation of the US dollar from 2002 is pretty much cancelled out in many countries by the multilateral appreciation starting around 1995 — except in resource-dependent countries like Canada and Australia.

    In short, the OECD number, which says the proper value of the Canadian dollar is 81 cents US (based on PPP,) appears to be the most reliable number. It says the dollar is overvalued by 25% (which is the equivalent of a 25% tariff on exports.)

  13. “These strengths limit the downside risk associated with Canadian assets, making Canada a rare safe haven in a risky world. This status is reflected in the behaviour of Canadian 10-year yields ….”

    Canada is not so rare a safe haven. If one compares international interest rates on 10-year treasury bills, Canada ranks #11; US: #9. Last year: Canada #9; US: #7.

    A country that’s a real rare safe haven? Switzerland. It ranked #1 this year; #2 last year.

    But Switzerland apparently doesn’t like being a rare safe haven. It has decided to devalue its currency arguing that “massive overvaluation” is hurting the Swiss economy.

  14. I wished Mark Carney would hold back his political ambitions and focus instead on his current job. The governor of the Bank of Canada is still a public servant and is not supposed to give political speeches. Its really distracting and discredits the office.

    • It was an economic speech, not a political one. He is attacking the idea that we need a lower dollar. The value of the dollar is within the purview of the BoC (thankfully), not politicians. If anything, we should be more upset when politicians start crying about currency values and/or interest rates.

  15. To me this article is totatly irrelevant and is filled with a bunch of words trying to disquise what is truly the problem with the canadian dollar. Ron waller makes a good point talking about how inflation is not something we need to look towards but to turn away from it. What needs to happen is we need to abandon the Central Bank of Canada, because NO MAN, GROUP, OR GOVERNMENT, Should decide what a nations money is worth as well as what our intrest rates should be. KEEPING Intrest rates at 1% for howmany years is like building a brick house with no mortar, sooner or later it will come crashing down. Our money’s value should be backed behind GOLD and SILVER and allow a free market to exist so Canadians can finaly take the neccesairy steps to become an economic powerhouse. My last comment is for all the people bought in by the liberal fear mongoring propaganda revoling Mr Harpers ecomic decisions; The man understands that the euro and USD will come crashing down very soon and hes only preparing for the worst of it. It is time we abbondon the LIBERAL notion of centeralized currienes with paper notes backed with interest and adopted A FREE MARKET with money backed by GOLD AND SILVER. Pardon me for my spelling and yes im very biased towards a truly fiscal conservative way of running our econamy

  16. What does Carney know about the Dutch consequences of the Dutch Disease?
    NOTHING. Social injustice, unequality, asymmetric redistribution, non-recognition, poor participation, suppression, state-corporate crime, budget-bunus and public-private plunder are all imported by the United States from the Netherlands in 1963 when the planet’s biggest PPP-constriction*) was fabricated/imposed on the Dutch government to prevent atlantic cheap natural gas competitive advantage that would threaten post-war US industrial dominance:
    *) Gasunie=Exxon+Shell+Gov.nl
    … and I know, because my father signed the contract as the first ceo – a contract that would rule all the sovereign laws of whatever land.

    Due to the globalised Dutch Disease of democratic cancer, informationterror and parliamentary deficit, this virus can’t be beaten, unless Europe stands up against American exceptionism of arrogance and aggression with a fiscal balancing act as described by the “tax Machima” – Atlantic Unbundling. following Europe’s Act of Abjuration: clean euros fighting dirty dollars!
    WE LIVE IN FISCAL TIMES !
    http://pollutico.com
    Stephan Tychon
    World Stability Council – 2002
    htt://bit.ly/taxMachina

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