Seamanship Quotation

“In political activity, then, men sail a boundless and bottomless sea; there is neither harbour for shelter nor floor for anchorage, neither starting-place nor appointed destination.”
— from Michael Oakeshott's
Political Education” (1951)

Monday, January 18, 2016

Governor Poloz’s advice: You, not my bank, must change (Part 2)

Monetary economists and real estate agents are shaking their heads these days. Listing and closing prices in Toronto are crazy and the exchange value of the loonie is crazy as well. This volatile state of affairs, however, actually proves to themand their peers internationallythat their commodity markets are working, free of effective political interference.

Volatility is a sign of good health; sangfroid is their faith.

The Bank of Canada introduced its Free Exchange Rate policy just after Richard Nixon freed the US dollar from the price of gold in 1971.

The tectonic plates of the post-war free world—the economies of Western Europe, the US and Japanhad shifted profoundly and the US simply couldn’t afford to keep pouring hundreds of millions into exchange markets to let others exchange US dollar bills for gold at the irresistible bargain price of $35 an ounce.

The cosmopolitans in our government decided that Canada should act as a flexible plate as well.

Governor Stephen Poloz stands by their decision as if it was an act of nature. He would have us accept that it’s only fit and proper for the bank to not worry about the dollar’s falling exchange value—because not worrying about the fate of the dollar allows the bank to concentrate exclusively on supporting domestic economic growth.

Rising prices for breakthrough foreign technologies, for a family reunion in Florida and for imported fresh vegetables are not his problem and, therefore, shouldn’t be ours. Trees don’t fall in forests because I’m deaf.

Such free market dogma is ironic especially in the Trudeau family’s Ottawa. At the time the bank formally renounced further bank interference in the currency markets, Pierre Trudeau’s government was shutting down entirely the reemergence of free market prices for domestic egg and dairy products.

There are powerful arguments supporting our faith” in markets. Private sector market forces will continue to drive and largely shape economic growth, with or without conservative think tanks and the shadow of Stephen Harper. But to work efficiently, markets need a little peace, as well as freedom, to “adjust.”

It would be neat if we had to pay a freely determined market price for each stamp we buy, each day, and each mile of highway and public transit we use each day; and if every toasty home and workplace had to pay for their exact distance from the source of electricity or natural gas they consumed each day. It’s plausible technically. Such an explosion of market signals would excite geeks, office accountants and hobby speculators. Yes, it would be disruptive.

Yet does the bracing uncertainty of daily price movements, with no logical long-term destination, work as a significant facilitator of positive adjustment?

Does the daily churning of daily market prices actually generate expensive, risky changes and long-term investments by individuals and their businesses?

Is the peaceful peso creating thousands more stable, middle-class careers in our tourist and entertainment industries in Vancouver, Calgary and Toronto compared to the so-called oil-dollar? 

Certainly, after more than four decades and as many business cycles, the evidence is in on the capital market’s response toor indifference towardvolatile changes in the value of the Canadian dollar. Investment in fixed assets and real estate has been spectacular; investment in manufacturing continues to lag even in what we thought was the doomed, arthritic American economy. Canada’s investment and, consequent, productivity per worker—the middle-class’s source of before-tax income growthcontinues to lag by between 20% and 25%.

Needless to say, spectacular investments in the mining and energy sectors have been driven by global commodity prices. Indeed, commodities drive the dollar—not the other way around.

Poloz has been around for a while. Instead of suggesting that flexible exchange rates help players in the economy, he should have said what he surely thinks: “Not complaining about what the dollar does to you allows me and other players in Canada’s governments to spend more to help you.”

He insists that his nonchalant, no-dollar policy is all the rage.

It’s what grownups do. Let’s look at the West’s club of champions, the G-7. The US, the Euro-zone and Japan, the world’s third- and Asia’s-largest market economy, accept that they rest on shifting continent-sized economic plates and must have currencies that float freely between them. Only the UK and Canadanot Germany, nor France, nor Italystill imagine themselves as so endowed with continent-sized characteristics, obligations, privileges and policy options deserving floating currencies of their own.

Canada, at least, is facing a day of reckoning: we are suffering by holding to the decision of 1971; we may suffer if we try something else. However, we can’t deny that we have options. Let’s debate those options. For one thing, it would demonstrate that we’ve got over the PTSD of the Nixon Years and can use our freedom to think out loud in 2016. 

(To be cont.)


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