"Dutch Disease" Disease

There are few things more counter-intuitive than currency trading, particularly for Canadians.  We've spent most of our lifetime accepting that the American greenback, the "world's currency", would always be more valuable than our lowly loonie.  As consumers and travelers we just knew we'd pay that little bit extra, it was just a question of how much more. What most of us didn't understand is that Canadian exporters, especially after the "free trade" agreements were signed in the mid-eighties, made a killing selling into U.S, markets. You'd sell french fries or mussels at $1 U.S. a pound say, and get back $1.24 Canadian. It meant Canadian goods could be  very competitively priced, and led to some of the trade wars in potatoes, soft-wood lumber, and hogs. The Federal opposition parties of the day, particularity the Reform party, would complain loud and long that  the undervalued Canadian dollar was a sign of economic weakness.  Stephen Harper has now turned us into an "energy superpower", and the Canadian loonie is at par and often better than the U.S. dollar. Are we better off?

The media of course has played its role in informing and confusing people. The exchange rate is talked about like the score of an international hockey match. If the dollar is up it's a good thing, if it's down, it's a disappointment.  What's really going on of course is that currency traders, and speculators look at the loonie  in comparison to the U.S. greenback, and other currencies, and like what they see. It is a compliment of sorts,  but they're really paying more attention to is the deteriorating finances of the U.S. and Europe rather than recognizing the hard work and intelligence of Canadians. And lets be honest a lot of our wealth is the good fortune of geography, we have a lot of the stuff that the world wants right now. We're lucky. 

The high loonie  matters a lot to people in the Maritimes. All of our primary industries, including aerospace, rely on the U.S. market, and all have seen their bottom lines cut by 15 to 20% over the last few years as the loonie appreciated.  It's more expensive for U.S. tourists to come here, they don't enjoy that sense of great value that they used to.  On the other side of the ledger consumers living close to the border are much more willing to cross-border shop rather buy locally, more able to buy on-line from U.S. suppliers.

And now it's been turned into a political wedge issue. Thomas Mulcair dared to speak what essentially is the truth. Western resource industries are booming right now leading to an appreciation of the Canadian loonie, and that's hurting Canadian exporters. But apparently two things can't be true at the same time, the media has turned Mulcair's statement into a condemnation of Western success and asked Western premiers to respond. Naturally they're angry at what he said. O boy say the editorial writers, now we've got something we can  write about for two weeks rather than a couple of days.

It's called the "Dutch disease" because when North Sea oil was discovered in the '80's , the Dutch guilder quickly went up in value, and this hurt other Dutch exporters. It's just the way currency trading works. Central banks are really the only ones with power to affect currency values, and the biggest reason Canada's central bank has refused to increase interest rates is that it would give traders more reason to increase the value of the loonie. 

The high Canadian dollar is a given right now, and Maritime businesses will have to learn to cope, but there are two other things at play that are worrying. Equalization  (that Canadian program mentioned in the constitution that ensures the Federal government sends money to have-not provinces) used to include resource revenues, and this would be a way of balancing the wealth of Western provinces, with the impact that's having on industries here, but the federal government no longer includes resource revenues to determine these equalization payments, and a province like PEI is a big loser. The other worry is the rumbling about changes to E.I., especially how it may impact people working in seasonal industries. If they're considered over-users of the system, then the Maritimes will be hurt again.