A breif lesson on the exchange rate

Yes! Back to basics. Although I will not try to predict the future, I can share some general comments about how the exchange rate can affect the economy.

Say the exchange rate appreciates from 62 cents to $1US. And, gold is worth $736.20US oz (or so). And, you are a gold miner in Nova Scotia, who sells their gold in New York in US$. How will will the exchange rate appreciation affect how much your cost is worth in Canadian dollars? Well, it depends on the exchange rate. If the Canadian dollar is valued at $0.70US (which is the same as saying one US dollar is worth $1.43CND), you will receive $1051.71CND ($1.43*$736.20=$1051.70) in return for 1oz of gold. At parity you receive only $736.20 ($1*$736.20=$736.20). What if we price is fixed in Canadian dollars? The price will raise from the point of view of our American customers because it will take more US dollars to buy the same amount of Canadian gold. Taking our mining example future, because the exchange rate will affect the price we get for our gold, it will also affect production and employment at the mine, and therefore also the wages and profits, and also future investment plan. Finally, the markets where the workers' wages and owner's profits are spent will also be affected overtime.

On the other hand, the exchange rate will change the price of stuff we buy from other countries as well (books on line, foreign cars, and bananas for example) - these should go down in price (overtime) with the Canadian dollar climbs. Lastly, because the prices are changing, it might also affect how much we demand these products. For example: If Dell computers fall in price, will Canadians buy more? How about sweaters from China?

Overall, the short-term and long-term impacts of the appreciation can be hard to conceptualize. It will depend on many factors, like how businesses and policy makers respond to the appreciation, but more fundamentally, it will depend on why the exchange rate moved: Was it because the things we produce are worth more (like oil) or was it because people think that Canada is a good place to invest compared to other places around the world? As you can guess, these have very different implications on the Canadian economy and it is often hard to determine what has moved the currency – I will leave this job to our trusted policy makers and market commentators . In short, it is very hard to determine the full set of costs and benefits of a given currency movement – views often differ - and the assumptions about the responses of consumers, businesses, and policy markers, in Canada and other countries, (and the interaction of these behaviours) can drive the results.

The Canadian Dollar: A Few Quick Facts

At 10:58am (EST) the Canadian dollar traded at parity with the US dollar. Shortly there after: The Globe and Mail reported that "A cheer went up in currency trading rooms across the country".

Yes, parity. This is the first time since November 25, 1976. Back then, as James Powell wrote in A History of the Canadian Dollar, “The strength of the Canadian dollar through this period can largely be attributed to strong global demand, which boosted the prices of raw materials,”. Very similar to what is going on today.

What has drive the value of the Canadian dollar? Historically, the prices of both energy and non-energy commodity prices, CDN/US interest rate differentials, and CND/US inflation differentials have explained the vast majority of CDN/US exchange rate movements. And yes, it is nearly impossible to predict anyone of these factors and there is no telling what the future will bring.

With that being said: my hat goes off to The National Bank of Canada: in April 2006 they predicted parity by the fall of 2007. Nicely done.

For a graphical history of the dollar, there is an interactive chart here (we can't even talk about our currency without talking about hockey!).

Factoid: How high has the Loonie flew? July 11, 1864, the greenback traded at less than $0.36CDN ($1US = $2.78CND). The U.S. dollar recovered by the end of the Civil War in 1865 and the currencies traded at around par until the outbreak of the First World War.

Reference: Thanks to the Globe and Mail for the above picture (can you see where I added something?) and a few of the factoids above.

US Housing Market Pain = Better TV

The Primer: Today's News on the US Housing Market:
According to Bloomberg news, " The total number of U.S. foreclosure filings, including defaults, scheduled auctions and bank repossessions, rose 115 percent to a 243,947 in August from a year earlier, the highest ever in the RealtyTrac study that goes back to 2005. " The turmoil in the US housing market was also mentioned by the Federal Reserve as a reason for their 50 basis point cut today: They said that the "tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth.'' Although I would like to discuss the implications of these events on the Canadian economy, I want to boost my ratings by talking about the long list "Flip that House"-type TV show (I think a number of my readers are addicted - they may not like what is coming).

Good grief, I have come to hate those crazy 'Flip this broken house' , 'Turn a dump into fast money', ' Anyone can reno to fast money' type shows. Yes, in hot real estate markets prices do rise and if you go 43 weeks over budget prices might rise, if you might find someone desparate to take on too much debt. But now: the world has changed and this will become the rarity rather than the rule in the US.

O'yes, even I was almost convinced into thinking flipping is for everyone, I even had the a hammer in my hand with a crazed look in my eyes. And then, I woke-up: when you buy a house, you pay the highest price on the market. It reminds me of the commercial when the guy buys a painting at auction and then tries to sell it to the same group of people he out bid for it. So, thinking that you are the only person that can rip out some carpet, slap down some hardwood and think that someone will pay you thousands to do it is madness. When you pour money into a house you will, generally, get you money back (especially for bathroom and kitchen renos) - let me say that again: get your money back - not make $100K in 12 weeks.

The events in the US housing market will lead to changes in lending practices. Risky consumers will have to work harder to borrow money. Prices will come back in line with fundamentals (wages, employment rates, etc.). And, I hope, when these TV shows start showing people loosing money or keeping the house because they can't quickly resell them, we all be reminded that flipping a house is hard work, it is risky, and not forever one. Most importantly, I hope we get some better programing.

How can Canada running from its responsibilities in Afghanistan?

As much as this blog is about economics, it is a vehicle for me rant about issues burning so fierce that I feel a need to seek public criticism.

Now: the Federal Liberals and the Conservatives said that they want to pull Canadian troops out of Afghanistan in February 2009. I am both disappointed and baffled by this development. Both parties weighted the costs and benefit of us entering into Afghanistan just a few years ago: our safety was (is) at risk, our values were (are) at stake, and the answer was (is?) clear. And now is the situation so different that it is almost time to go? This, our political debate, has not gone unnoticed in the world.

This week, I read an article in last Friday's Globe and Mail . Give it a read. I was moved by the praise of Canadian history, our values, and our influence on the world stage. As the article continued, however, it pointed to the fact that Canadian troops are doing most of the heavy lifting: working in the most unstable regions of Afghanistan and that other counties would not put their own troops in areas where Canadians are fighting.

After read a bit more, I was overwhelmed by the following thoughts: (1) Yes! It is terrible that we have lost lives in Afghanistan; (2) Yes! We need more help in the south from other countries and we need better equipment. Yes! Some things do need to change; but is having Canadians in Afghanistan is one of them?

With that, a series of questions fly at me: How can we pull-out of a country that we helped dismantle? Whether you supported the mission or not, don't we now have a responsibility to stay? If we underestimated the cost of battle, does it free us from the consequences of our actions? Maybe I have this wrong, but wasn't the reason Afghanistan became a training group for terrorist in the first place was because people came in, dismantled the place, and then just pulled-out?

I find it hard to believe that Canadians want to stand-up on a world stage and set the example by saying: “We are leaving, this situation is going to fix itself and no one needs to worry”.

Save your senior from bank fees!

If you have a senior (60 yrs +) in your life, sit them down with a cup of tea and broach the bank fee topic.

Gee I love the CBC radio (I really need to listen more). I was tuned in tonight to hear the story of how Jim Halstrum, 72, received a refund for 12 years of bank fees. As the story goes, Jim's teller told him he should not of been paying back fees since he was 60! And then, Jim was on a mission for all Canadian seniors!

Jim, after refusing to take a mere 3 months refund, called the bank's ombudsman - all banks have one to oversee customer concerns -, and got back $1100. Jim did not stop there: he found out that his wife had paid bank fees from age 60 to 65: Jim got her a refund! Way to go Jim! Did I mention that Jim is from Montague PEI? (we could be related!)

So, if you want to give an early Christmas gift to that special senior in your life: talk to them about Bank fees.

I think that if enough people start calling the Ombudsman's office, they will refund all seniors without them even asking!

A link to the CBC web story: Here .

The Canadian Banker's Association website
on how to deal with your bank:
OR
The TD Canada Trust Ombudsman
The Royal Bank Ombudsman
CIBC "Keep you a Customer Line"
ScotiaBank Complaint Website
BMO's Ombudsmand is a Senior Too!

etc.

Long time no post ...

Forgive me.

I have received several complaints/questions, all largely sounding like: Why no posts?
In short, the summer has been a very busy time (personally and professionally); aka I have no real excuse. I have several topics to blog about, and there is no time like the first week of September to begin learning ...

Canadian Economist