Once again the dollar is flirting with parity, and once again everyone is very excited about it. Why? Objectively, there is no more significance to the dollar being worth US100 cents than any other value, except that 100 is a nice, round number.
Yes, it means the Canadian dollar is worth as much as a U.S. dollar. But so what? The only reason anyone pays attention to this is because they have the same name. If we were to call our currency something else—I have long favoured “the pelt”—then the mere fact that on any given day, between one currency being worth more than the other and the reverse, their values happened momentarily to coincide would attract little notice. But because they are both called the dollar, it gives rise to the entirely occult belief that the two ought naturally to be at par, the approach of which is celebrated as if it were some kind of cosmic convergence.
That is among those who are not busy complaining that the dollar is “too high.” Indeed, if there is one belief more fixed in popular consciousness than the parity myth, it is that the dollar is always at the wrong level. When it is low it should be higher. When it is high it should be lower. Of course, that doesn’t mean anyone wants to see a rising dollar—why, the only thing worse than that is a falling dollar. In short, while clearly the dollar should never be where it is, on no account should it ever be somewhere else.
Just now the concern is over the high dollar, mainly among the manufacturing industries. Not every manufacturer, mind you. For while a high dollar drives up the price of Canadian exports to the U.S, it also drives down the price of imports from the U.S. In our highly integrated economies, many manufacturers operate on both sides of the border, importing intermediate goods from one country for assembly in the other. So what they lose on the swings they gain on the roundabouts.
Still, it’s the ones who are hurting we always hear from, their cries taken up by the ever-vigilant Do Something lobby. A bank economist argues in a recent paper that “speculative foreign exchange market forces” are “hollowing out” the Canadian economy. “We may be sacrificing business plant and equipment,” writes CIBC’s Avery Shenfeld, “on the altar of a strong currency.”
The last time we heard the “hollowing out” alarm, it was because the low value of the dollar (as it then was) made Canadian assets a steal for foreign investors. Now the high value of the dollar is making them worthless. Okay: either the dollar’s current lofty value is of some permanence, based on fundamental economic factors—oil prices, the weakness of the American economy, Canada’s relative strength—or it is an illusion, driven by “speculative” forces.
But if it’s the latter, then manufacturers should be able to look past any short-term fluctuations, as should their lenders. And if it’s the former, well, what then? Shenfeld wants the Bank of Canada to step in to drive the dollar down. But, in fact, the bank’s ability to do this is quite limited. Merely selling dollars into foreign exchange markets will not work over the long run, if the overall supply of dollars is unchanged, that is absent a loosening of monetary policy.
But if the bank starts setting monetary policy to hit some target exchange rate, it cannot also hit its target for inflation. Perhaps this seems like an acceptable trade-off to you. But, in fact, it’s not even a trade-off—any reduction in export prices from devaluing the currency will be cancelled out by the rise in domestic prices.
That only emboldens a more radical Do Something faction. Short-term fixes for the dollar are no use, they agree. The answer, rather, is to fix its value, once and for all. Of course, exactly what value to fix it at is an interesting question. The last time we heard from the fixed exchange rate crowd it was sold as a cure for the low dollar.
But, in fact, fixed exchange rates are never truly fixed: in time, imbalances build up that can only be relieved by revaluing. So what might have been a gradual process of adjustment to changing economic conditions under flexible rates is compressed into a single, shuddering jolt. You get all of the uncertainty of a floating rate, and none of the benefits.
If rates really were fixed, there would be no reason to maintain separate currencies. Put another way, the only truly fixed-rate regime would be a single North American currency, which in practice means adopting the American dollar. Maybe this would make sense if we were Argentina, and had proven we were incapable of running our own monetary policy. But as it is this strikes me as a solution in search of a problem.
A floating dollar may be unsettling, but it is also useful, particularly in a commodity-driven economy such as ours. When the dollar falls, in response to a decline in, say, the price of oil, the effect is equivalent to a national pay cut, restoring competitiveness much more quickly and easily than would be possible if wages had actually to be reduced directly. The same applies in reverse—a higher dollar spreads the wealth when oil is riding high, making imported goods more affordable.
This is a situation, in other words, that cries out for urgent inaction. For God’s sake, do nothing. M