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No More Making Fun of Canadian Money
The Canadian dollar hit parity with the US dollar today, the first time this has happened in over thirty years. Inflation on the return?
Posted by Alex Tabarrok on September 20, 2007 at 11:55 AM in Economics | Permalink
Comments
Is it now time to form a monetary union between the two countries?
Posted by: Joseph at Sep 20, 2007 12:30:20 PM
Not too many years ago, we used to refer to the Canadian dollar as 'metric money' (having about the same relation to the U.S. dollar as the kilometer to the mile).
But with the rise of the Canadian dollar, Canadian prices have not adjusted in tandem -- anyone who visits Canada regularly can see that purchasing power parity is out of whack.
Posted by: Slocum at Sep 20, 2007 12:32:48 PM
When will book price differentials adjust? Would publishers wait as long if the fluctuation occurred in the other direction?
Discover Your Inner Economist:
Amazon.com list price USD 25.95 - USD 17.13
Amazon.ca list price CAD 32.50 - CAD 20.48
Posted by: jaywalker at Sep 20, 2007 12:39:27 PM
Canda is fairly rich in natural resources, isn't it? Could that be a factor here?
Posted by: Brandon Berg at Sep 20, 2007 1:02:40 PM
This post makes me want to know whether there is any study on the relationship between national currency strength and the state of national ego :) As a Chinese, on the one hand, I feel undervalued; on the other, I am not sure whether I will collapse if I am allowed to free flow.
Posted by: Yan Li at Sep 20, 2007 1:19:12 PM
We can't even make fun of the way it looks any more...
http://news.yahoo.com/s/ap/20070920/ap_on_go_ca_st_pe/colorful_abe_1
Posted by: Frank at Sep 20, 2007 1:25:04 PM
It seems to me that large portions of the U.S. polity (people who donate to political parties) want there to be inflation. If only so that their investments in residential real estate don't decline in value. Bernanke and the Congress are cooperating. Inflation is on the way.
Posted by: Tom at Sep 20, 2007 1:27:33 PM
...where the hell can americans still travel that isn't so expensive? Can't go to the UK, can't go to the EU, can't go to canada now...
c'mon, dollar...get yer crap together! :)
Posted by: shawn at Sep 20, 2007 1:36:36 PM
What's Jay Peak Ski Resort going to do now?
For years they had an anti-American scam going where Canadians could pay for lift tickets and food in Canadian dollars.
In other words, having Americans subsidizes Canadians.
Now they might have to be blunt. " Show your a Canadian and pay less."
Posted by: mark at Sep 20, 2007 1:46:14 PM
Brandon Berg that is exactly the cause. Naturals resource prices probably correlate very well wit hteh canadian curency. Resources are about 15% of their GDP and almost 50% of their exports.
Here is one chart plotting oil against the Canadian Dollar. I am sure there are other resource charts too.
http://www.parl.gc.ca/information/library/PRBpubs/images/prb0586e-3.jpg
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070914/dollar_value_070914/20070914?hub=TopStories
Posted by: Mcwop at Sep 20, 2007 1:57:36 PM
Why would natural resources be related to the value of currency?
Posted by: josh at Sep 20, 2007 2:03:50 PM
Brandon and Mcwop-
The USD has fallen against everything, not just CAD. Sterling, Euros, gold, oil, everything is basically at or near all time highs compared to the dollar. Inflation.
Posted by: Johnny Debacle at Sep 20, 2007 2:10:18 PM
Regarding a monetary union ... be assured that very few Canadians want to be tied to Americans' ever-weakening currency and by extension America's fundamentally unsound fiscal policies.
Posted by: Scott O at Sep 20, 2007 2:11:46 PM
Something is amiss, though. Canadian consumer goods, according to Douglas Porter, cost 24% more than they do in the U.S. Additionally, core inflation in Canada is materially higher.
I'd bet that the FX rate reverts somewhat in the coming months. But with respective interest rate outlooks remaining dicey in the short term, the USD could lose another 5% relative value first.
Posted by: caveat bettor at Sep 20, 2007 2:25:23 PM
Why would natural resources be related to the value of currency?
Josh, imagine a country that annually exports US $50 billion of oil and other natural resources at a weighted average of $20 per unit.
Now imagine all else is equal but the unit selling price is $80 and they sell the same number of units. Now they are exporting $200 billion of natural resources each year. That is $150 billion that has to go somewhere. If you assume the exporting companies in question ant to repatriate their sales into their home currency for dividend and reinvestment purposes, what does that do to the value of the currency?
It causes the currency to soar in the absence of negative feedback mechanisms. Over time one such negative feedback adjustment to the stronger currency is that other exporters have a harder time of it. At the same time, domestic companies and individuals will be foreign goods and services more, and travel overseas more for tourism purposes. Another mechanism is that new investments will look cheaper overseas than they did before when compared to at home since "everything" is suddenly cheaper, such as labor costs. The rub about such investments though is how permanent/temporary is the strong currency likely to be?.
Nevertheless, as long as the primary mechanism for a stronger currency is higher natural resource prices, this will still tend to make the currency stronger than otherwise would have been the case.
Canada has a huge natural resource component to its economy and is a net exporter of such commodities.
Posted by: happyjuggler0 at Sep 20, 2007 2:27:15 PM
Has anybody noticed the difference in the public budgets of the two countries.
Then peeked behind the scenes to see what underlies the values of each of the currencies for both short term and long term?
Are we all satisfied that currency is part of money; that the "value" of money is only a claim on (immediate and subsequent) future goods and services (including future satisfaction of past obligations)?
If it were not so, they would have told you at the exchange desk.
Posted by: R. Richard Schweitzer at Sep 20, 2007 2:42:55 PM
IMO it is that the money supply has been inflated.
Posted by: Floccina at Sep 20, 2007 3:21:28 PM
This is just a result of massive inflation in the USA. Measured the way it used to be the dollar inflation rate would be close to 10% through most of this decade.
We've masked it away by excluding housing, oil, food, and natural gas prices out of the indices. The Republicans want to pretend that they haven't driven inflation sky-high again just like they did in the 1970's.
What we really need is the second coming of James Earl Carter to clean up the mess. This time let's not let him take the blame, too.
Posted by: Adult at Sep 20, 2007 3:33:39 PM
We are devaluing the dollar to fund the war (no, I have not thought this through, but sometimes it is obvious, isn't it?)
Posted by: howiewu at Sep 20, 2007 3:46:26 PM
Just don't confuse Canadian money with Canadian Tire Money, which is not trading at par.
Posted by: michael webster at Sep 20, 2007 3:52:38 PM
Ah, but even if the Canadian dollar becomes worth more than the US dollar, it will still get
called the "looney," ehhh? Ha! ha! ha! ha! ha! (sound of strangled suffocation.... )
Posted by: Barkley Rosser at Sep 20, 2007 4:10:48 PM
Johnny Debacle, could it be the U.S is a huge net importer of many resources such as Oil?
Posted by: mcwop at Sep 20, 2007 4:35:17 PM
We are devaluing the dollar to fund the war (no, I have not thought this through, but sometimes it is obvious, isn't it?)
That is the second step. The first step was borrowing abroad to fund the war.
Just remember the revealed preference for this administration is that its tax cuts are more important than winning the war.
Posted by: spencer at Sep 20, 2007 5:01:06 PM
"How much is that in real money?" Is now a Canadian joke on Americans.
At least their hockey teams will stop whining that they can't compete under the salary cap because the American dollar + lower taxes meant the American teams could under bid for star players.
Wish I owned a mall in Buffalo.
Posted by: 8 at Sep 20, 2007 5:02:23 PM
Ron Paul has been the only presidential candidate who has been zeroing on the Fed's role in this crisis from the beginning. In an exchange today with the Fed chair, he focused on how the policy of low interest rates has fostered malinvestment via low interest rates.
What do the folks at Marginal Revolution think about Paul's critique of Fed central banking in relationship to the current crisis?
Posted by: spooner at Sep 20, 2007 5:16:49 PM
