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Canadian Dollar Reaches Parity with US$
boxlight writes in to mark the occasion when the Canadian dollar hit parity with the US dollar for the first time in 31 years. The article notes that Canada has run a budget surplus in each of the last 10 years. "This is actually bad for the profits of Canadian corporations that sell their products to the US for US dollars (Canada sells far more to the US that the US sells to Canada); but it means us Canucks will get cheaper Macs as the Canadian prices get closer to US prices with every new release."
Anyone got a graph handy that shows how the two dollars reached parity?
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Somehow that seems like little comfort for us Canadians that realize the impact this has overall on our economy. Anyone that isn't into business or economics up here gets excited about the CDN dollar being stronger because it translates into better cross border shopping for a very small minority, cheaper vacations, and some discounted consumer items like Macs. But take a look at how this impacts the country as a whole and we don't have much to celebrate as an exporting nation.
People assume that the dollar falling in value in relation to foreign currency is a bad thing. This is not necessarily the case. Here are some benefits:
* American products become cheaper to foreign markets. This helps with the trade imbalances we currently have.
* Foreign products become more expensive to American consumers, also helping with trade deficits.
* It discourages foreign workers from sneaking into the US. Getting $4.00 an hour is suddenly not so much compared to what they get paid in their home country.
I could go on, but you get the idea.
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Another way of looking at this is that the US dollar is in freefall against the Euro and other major currencies. The shift between the US and Canadian dollars reflects this new reality. That said, I suspect Forex traders are caught up in the euphoria of parity. The Canadian dollar might well dip significantly below $1 American again as the rush of breathless media attention dries up and currency traders take their profits and run. This certainly isn't good news for Canadian manufacturers - I run a little electronics company that sells 90% of our goods in the USA. We have raised some prices by as much as 30% over the past five years, just to maintain margins. However, our customers don't necessarily see it that way - they think we're getting greedy. To keep things from getting out of hand, we've moved some production to China and started to source North American components in the USA, rather than dealing with Canadian distributors. That's not good news for our economy.
Can the book publishers start to change their book prices, then? It made sense before when they priced them out relative to currency, but at this point, to spend $32 CDN versus $21 USD for the same book, well, as far as I'm concerned, Canadian book vendors are going to go out of business as I start to buy more from Amazon.com rather than Amazon.ca - and Amazon.com frequently offers free shipping.
It isn't necessarily bad for Canadian corporations. When something like this happens, it changes things. Canadian companies now get less money for final goods and services provided to Americans because of the exchange rate. BUT, Canadian companies can get intermediate things for cheaper. So, let's say that Bombardier (a Canadian train/plane manufacturer) buys components (like Aluminum) from the US. They get that cheaper. Then they sell that plane to the US which they earn less money for. That comes out as a wash. It really just shifts income from those who export to those who import. But in the long run, it doesn't even change that. As the demand for American goods in Canada rises, the price level of American goods will rise and along with it the currency. Things in economics tend toward equilibrium in the long run.
These things are called psychological barriers. Likewise with the $1.40 per Euro mark that was reached at about the same time. If these barriers fall, people take extra notice of the trend, not because there's much of a difference to the day before, but because humans pay more attention to round numbers. On your 20th birthday, you're just one day older than the day before, but you don't celebrate the day before or after your 20th birthday. It's kinda stupid, but that's the way it is.
Meanwhile, while I sit in Europe trying to irk my way through grad school living off of dollars I saved while I was in the army(and a part-time job doing IT stuff for a small business), I watch their value and my immediate standard of living drop.
I'm sorry that has happened to you. Unfortunately, anytime the value of something changes, someone wins and someone loses. I know hindsight is 20/20, but how far did you expect to get living in Europe with US dollars in the bank? Why would you not change those over to Euros when you decided to live there?
As for the idea that discouraging foreign workers is a good thing, might I ask in what universe you live in? Do you actually want to pay 25 bucks for a meal in a cheapish restaurant? That is what will happen if the immigrant labor leaves.
I have no problem with immigrant labor. What I have a problem with is illegal immigrant labor. Sure, it helps me get a cheaper burger at Chili's, but when I have to pay $50 for an aspirin at a hospital, I figure I'm not saving all that much. Besides, slavery allowed for cheap food and clothing as well, but that doesn't make it right. When an illegal is working at a plantation.. I mean farm, they are more or less owned by that farm. Only instead of being shackled by chains, they are shackled with the thread of deportation or imprisonment. I expect foreign workers in the US to get a fair wage. When that worker is here illegally, enforcing minimum wage or any other labor laws is impossible.
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That's absolutely the case. The American dollar is falling in comparison to a number of currencies, in particular the Euro.
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Currencies are adjusting to the prospect of a U.S. economic decline because of its non-competitiveness from the LACK of health care costs externalization through universal health care.
So, there's economic decline when companies spend their money on employees' health care, but not when the government takes that money and spends it on employees' health care.
Interesting.
Our beloved, once great country (the USA) is in serious financial trouble. China has been acquiring dollars for awhile now with the trade surplus they've had with the USA for some time. Usually this isn't a problem as the trading country reinvests these dollars into the USA's markets and businesses. This is good for the USA as you can imagine. In theory it should also raise the value of the trading countries currency because their GNP should be higher. But imagine the trading country keeps its currency artificially low so it can export things cheaper and cheaper and acquire more money (dollars) faster to build more and more factories, etc. It does this by sending the dollars back to the USA in the form of treasury bonds.
Now imagine the USA expected a surplus and made a huge tax cut because of it. And then the surplus never happened so a huge debt was created. Someone has to pay this debt off. Imagine if the people paying this debt off are the ones you are running a trade deficit with. Hence, our trading partner buys treasury bonds at an alarming rate.
This works great for the USA short term because we get cheap goods from China (because their currency is still of low value because they invest their profits right away) and save a little bit on taxes. Well, a lot if you're rich.
But as you're probably starting to realize, this can't go on forever. Eventually it's going to collapse. At some point the debts will have to be paid and this will be done by raising taxes and INTEREST RATES. So now not only is the dollar worth less because everyone has a ton of them around the world, but it costs a ton to borrow them so no one wants them.
All of a sudden the value of your house is half of what it was, the value of your paycheck is half, etc. A domino effect is created because no one can afford to borrow money any longer. American business doesn't take risks, people can't take risks, and money is tight. We haven't experienced this in a long time. Money has been cheap. It's been the USA's biggest seller. The dollar was valuable and it was available. That's prosperity. Imagine the dollar being expensive and worthless. That's a depression.
So expect the Canadian dollar to become more and more valuable against the USA dollar for awhile.
"If you are a dreamer, a wisher, a liar, A hope-er, a pray-er, a magic bean buyer
The value of currency is bullshit anyway as long as the currency is by fiat.
The fact that our money is all "elastic" makes it purest BS.
What's really sinking the U.S. dollar is strong inflation. You DO realize that's why they changed the inflation index to not include food anymore, right? They don't want to paint a real picture of what inflation is like because they don't want to cause a panic. If you include housing and food you get a double digit inflation rate over the last umpteen years.
What's worse? Now that the U.S. subprime crisis is in full-swing, the FDIC/Fed Reserve are propping up lenders by giving them money. (Remember the news about this a few weeks ago about opening up billions of dollars?) Where does that money come from? Nowhere! It's made from an elastic currency, which is the same as saying it is really coming indirectly from the people in the form of inflation as the money supply is diluted.
Now if only we had a gold standard again.... If banks weren't given government guarantees with fiat money all the time, they wouldn't have incentive to make shady loans in the first place for fear of going out of business if too many default. i.e. we wouldn't have a subprime mess in the first place. And even if we did, the cost of Countrywide going out of business isn't nearly as big as inflation across the entire populace.
And then there's that whole national debt thing...
Their military budget is a joke when compared to ours. That's why they're able to run a surplus -- it's not being spent on defense.
Whether that's a good thing or not is a matter of opinion, but their lack of a military being the reason they can be more socialized is a matter of fact.
Our economy is strong, and always growing. At least that's what the preznut keeps telling me.
Actually, it is the economists that keep saying it. They get their data from economic indicators such as the stock market, GDP, inflation rate, consumer confidence, unemployment etc. The President just repeats it.
Of course, since it does not jive with your politically colored glasses, I don't expect you to understand.
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>>Socialism is great till you run out of other peoples money.
So are budget deficits. Wait until the Chinese get sick of funding yours.
I was astounded to find that you are right. Federal tax in Canada caps out at 29% http://www.taxtips.ca/fedtax.htm Where the United States caps out at 35%http://www.irs.gov/formspubs/article/0,,id=164272,00.html. One could probubly make an argument that the US federal rates are lower for low income, but there is no doubt that they are higher overall.
Sales tax may be a diffrent story however. The rates in Canada range from 6% in one province, to 13%-16.6% in all the others. http://en.wikipedia.org/wiki/Provincial_Sales_Tax I have never seen a US sales tax rate over 7% http://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States
In any event I thank you for pointing out the Federal rate difference.
I am not at all surprised to see parity. Canada has a strong economy and Alberta especially so.
There are many reasons for weakeness in the US currency including but not limited to a massive government debt and a glutonous appetite for foreign oil.
Yesterday T. Boone Pickens was on TV on the business channel I sometimes watch. He made a number of interesting comments:
1) World oil production is about 85 million barrels per day and T. Boone does Not think it can be increased. The best information I have comes from expertize within the Geological Survey of Canada, but this expertise is certainly not limited to the GSC, and we are now pegging the peak of work oil production at September 2006. If production increases above that level then it will not be by much. T. Boone commented that the estimated demand for 4th quarter 2007 is 88 million Barrels per day.
Hence we will see the oil price driven up in order to destroy demand. In all likelihood it will get worse.
2) T. Boone says he favours nuclear and pointed out that General Electric says they can build a reactor in 3 years plus the friction added by the regulators and dealing with opposition. Probably this is correct.
3) Canada is ramping up Tar Sands as fast as we possibly can which explains why our economy is so strong. We cannot increase production has enough to make much of a difference. Currently we are investing billions per year.
Currently the USA consumes about 23 million barrels of oil per day.
Any way you want to slice it - this is not good news. It is clear the US dollar will continue to weaken is decades of political scrapping and decades of economic mismanagement finally face their day of reconning. As has been said many times, in order to avoid the melt down of our economies due to lack of energy availablity and high cost, we have to build at break neck speed an infrastructure that can replace oil and gas. We needed to start about 15 years before the peak of world oil production. We have not done so.
If the peak really was last year, then all hell is about to unfold and it will not surpise me to see gas rationing in the not too distant future.
Some things to remember.
Ethanol will not solve the problem. 100% of the US corn production will provide less than 2 weeks of liquid fuel. Next, ethanol from any source lives by the equation that 1 tonne of dry plant mass yields the equivalent of about 2 barrels of oil and this if we can do the conversion for free. This includes cellulostic ethanol.
We don't have the plants build anyways.
Industry runs under much tighter constraints than consumers. A consumer will simply give up a dinner at a restaurant in order to save the money to pay for his next tank of gas. Industry shuts down the plant and lays everyone off. We have already lost most of the North American fertilizer industry and plastic feedstock production (IE the pellets that go into injection moulding machines) is also going to die. Electricity production from Natural Gas is not threatened yet but expect power costs to continue to climb as this sector pushes out weaker sectors. In all cases jobs are lost and expensive infrastructure goes idle.
If one looks at the mortgage crisis and factors in the job loses precipitated by energy issues, then it becomes clear that this picture is not yet well understood.
Next consider how a government deals with recession? They print currency. Faced with the choice of inflation or recession, which do you choose? People on fixed incomes will lose their retirement.
Of course - one way to look at this is that its the retiring generation that lived beyond their means and created the mess. Their children certainly didn't. So maybe its poetic justice. However I do not think that people realize how bad its going to be. I watched my father-in-law lose his retirement because of the inflation Pierre Elliot (Idjot) Trudeau and his henchman Jean (Cretin) Chretien during the 1970's.
In part this
Oh, and keeping the Soviet-style economy in mind, Russia wouldn't have to "buy" anything to sustain a war effort. They'd simply order their people to build it - and that would work because the Russian mentality is nothing like ours is here. For one thing ultra-patriotic nationalism is normal and encouraged in Russia, rather than a silly notion as it is here. For another, not much time has passed since the bad old days when you did as you were told or you simply vanished in the night. People remember that too, and they have no illusions about their leaders not resorting to that kind of pressure in a time of war.
The idea, or theory, and it's just that and nothing more, is that as the dollar slides because it becomes more and more common, countries holding a lot of them are going to dump them. And then more countries will dump them, creating a chain reaction. So the people on the bottom holding the dollars end up being the losers. Who are these people? American's of course. We hold them every day. We work for them, our houses are paid for in them and we owe them to people.
This is tied to us too. We don't save money in this country. The average person doesn't have a savings any longer. They have a debt. And as individual's debt climbs more and more, the value of the dollar becomes less and less.
There's a lot of forces at work making the dollar worth less and less. From our lack of savings and increase in personal debt to foreign countries paying off our debt via t-notes. And then of course countries we deal with artificially keeping their currency low.
You do realize that if China did push their currency up, our goods would go up in price too. That would make the dollar more valuable of course, but not short term. So Bush isn't pushing for it because his Wal-Mart voter base doesn't want to pay more for cheap imports.
So with all these forces at work lowering the value of the dollar, the theory is big spenders like China are going to eventually say "screw the dollar, lets sell them now while they're worth something" setting off a chain reaction of dollars. The dollar becomes very much so worthless at this point.
So then interest rates go up because no one can pay their debts. High interest rates are bad of course.
This is one situation but it's increasingly more likely as we continue down this path.
"If you are a dreamer, a wisher, a liar, A hope-er, a pray-er, a magic bean buyer
It's a pyramid scheme. They sell them to someone willing to assume a risk on them. They sell them below market value. Others in turn do the same. Eventually enough people will have gotten out and not want anything to do with the USA dollar. It's like a bad stock.
Eventually someone at the bottom gets stuck with them. That person is you and I.
What you're saying is they're stuck with them. I disagree. They can find buyers (lets face it, it's a USA dollar. It will always be worth something) who will pay below market values for them. Others will do the same, creating a domino effect of devaluation of the dollar in circulation.
What goods are they buying? Do you know what China is doing with all the dollars they have? Stashing them away by buying USA t-bonds. They're not investing in American companies, they're funding the war on terror. Essentially paying us off to build factories and infrastructure on the cheap.
They're going to get sick of holding worthless dollars and start selling their goods to emerging countries that can give them something of value back.
"If you are a dreamer, a wisher, a liar, A hope-er, a pray-er, a magic bean buyer
At the same time they are not investing in their own economy, so that if the US economy falters it will take China with it.
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What's worse is when you consider how many cars are now made in Canada. You're paying a premium for them to _not_ ship it across the border.
What sound do people on rollercoasters make? Hint: it's not Xbox 360.
That "service industry" is just economic masturbation. I sell services to you, you sell services to somebody else, they sell services to a third guy, around and around ... until somebody decides that they'd like to eat today, or buy a DVD player, or whatever, and buys something that's imported. Suddenly that money is gone from the economy.
Relying on a bunch of corporate headquarters isn't how you maintain a civilization. Sure, they'll be the last thing to go, but when they do, there won't be a damn thing left. We'll have lots of service industry left, but no real exportable-wealth creation.
Service industry can act almost like manufacturing, when it 'produces' and 'exports' intellectual property, but as much as US politicians have fastened onto the idea of the 'information economy,' it's not a panacea. I don't see the US exporting enough music, movies, and microcode to make up for the amount of Canadian pressboard furniture, Chinese electronics, and Saudi oil that we consume.
Right now, we make up for this by issuing debt: we import (and in many cases, irreversibly consume) things that have real, intrinsic value, in return for scraps of paper (or, more likely, ephemeral digits in an account somewhere) that are only worth something because they're backed up by the US economy. When people decide that the US economy ain't what it used to be, suddenly those scraps of paper aren't worth much, and not only can we not buy any more, but the people who we've bought stuff from already are going to come calling for whatever we have of value left.
I've been asking for years how exactly the current US path is sustainable, and I've never gotten anything particularly reassuring. The current crop of politicians and financiers is selling the entire country up the river for enough gains today to them to retire on. But at some point in the future, the rest of us are going to be stuck holding the bag.
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>>You shouldn't have to pay duty on computer hardware anyway. That's part of the FTA which became NAFTA.
(LOL) Oh. Really.
The last time I brought a "USA" product thru Canadian Customs, they looked at the Seagate hard drive and said "Hmmm 'MADE IN CHINA' "
I had to cough up a lot of duty AND GST.
So much for this NAFTA bullshit.
HELLLOOOO! Haven't you heard? The USA does not MAKE anything anymore!
They just move stuff around and re-sell it.
How long you think this crappy biz model will last?
And Canada is not that much further behind.
I give us about seven years, maybe less...
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- aqk
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