Shooting Loonies

Let’s start by admitting that NAFTA was good for everyone except the United States and Canada. In fact, Canada has arguably taken a bigger hit than the U.S. on NAFTA.

That said, there is a new plan by the Canadian Government to make Canadian prices more equal to that of the U.S. And it’s a really bad idea on a macroeconomic level, that will end up being a really bad idea for average Canadians. And the U.S. could lose some money on a trade deficit with Canada to boot.

Here’s the first problem with equalizing the Loonie (Canada’s “dollar”) again the greenback: the only real way that I can see this being accomplished (especially by the government) is to deflated the Loonie. Canada is already running a trade deficit with the United States:

canadian trade deficit

Now add the exchange rate, which is about 1.1:1. This (sort of) offsets the Canadian trade deficit with the U.S. I say “sort of” because of course, this is NOT the exchange rate that you, or I see. This is the exchange rate that the markets see.

Canadian Exchange

Canadians typically have high tariffs on things, and this has helped the average Canadian, and the Canadian economy. It’s been just at the right levels too. Raising tariffs any more would harm Canadians. Lowering them would also harm Canadians. And that’s exactly what the government would like to do to equalize prices.

The problem with lowering tariffs is that the only thing it will accomplish is equalizing the trade deficit – not the Loonie. It MAY spur more overseas investment, which MAY inflate the Loonie, which MAY reduce the trade deficit – maybe, sort of, in the long run. But overall, tariffs by themselves aren’t going to do much.

So the only way that Canada can equalize the Loonie with the dollar without shooting itself, is to shoot the Loonie – deflate it.

In order to deflate the Loonie enough to equalize, it would have to be lowered to about 82 cents on the dollar. That not only will INCREASE the value of the trade deficit that Canada owes to the U.S., but would seriously hurt the Canadian economy. Everything would go down in order to meet the deflationary levels – including wages. Many provinces tie their minimum wage to inflation. And if the economy deflates, then so will the minimum wage. It would also increase foreign debt.

And what if the U.S. dollar is over-inflated to begin with, as many seem to think? Remember – the U.S. dollar is tied to the stock markets, which are arguably in a bubble right now. If the dollar goes down, then the Loonie will go down with it, in a loud, grotesque manner.

The best thing for Canada to do to equalize prices is absolutely nothing. Yes, the Canadian economy is stagnant, but hairbrained schemes by governments are just going to make things worse. The U.S. Dollar has slid in value against the Loonie before (especially during the 2008 recession) and it will do so again – I suspect sooner than later with the way the Fed is going. Having a greater exchange rate for the Loonie could wipe out Canada’s trade deficit, which would have the same effect as equalizing prices.

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