Thursday, September 20, 2012

The Loonie Zone

Excuse me. I was too busy debasing the currency of a third of the world's economy to make it to the conference.

Bernanke bit the bullet and pulled the trigger. QE3 is now on. The US dollar is getting debased in order to spur the economy; But they aren't the only ones. The top Central Bankers in the world came together and had their annual summit in Jackson Hole, Wyoming last week and came to one firm conclusion - we should all do this together. The Euro zone, England, and China are also engaging in Quantitative easing to boost their economies.  All together, it is creating a new global orthodoxy of the role of central bankers. 

There is one developed Western country that is absent from this policy because, relatively speaking, their economy is not doing too shabby. Not great, but not shabby. Engaging in quantitative easing has negative side effects, such as increasing inflation, increasing income inequality, and decreasing purchasing power. If your economy is doing okay, then these harms can outweigh the benefits. That country that is the holdout: Canada.

As some of the world's most notorious currencies are going to lose value - the US dollar, the Euro, the pound, and the yuan - the Canadian dollar only stands to gain on these other currencies. The Canadian dollar has already hit all time highs against the US dollar and it will only continue to go up. I would not be surprised if the Canadian dollar is on par with the Euro within the next year or so.

The Canucks are not the only ones interested in pursuing a strong currency - also known as a consumption currency - at the moment. Iceland and Greenland, who have had their own serious banking problems in the recent past, are considering adopting the Loonie as their national currency. Seriously. The Icelandic krona is essentially worthless right now after they defaulted on their debt and Danish krone, used in Greenland, locks them into a monetary policy that makes more sense for Europe than this tiny island nation. Canada, at least in theory, likes the idea of being the head of an Arctic economic union. Call it the Loonie Zone.

Duck, duck, Loonie.

Fun fact: Jackson Hole, Wyoming. Have you heard of it? I didn't think so. If you are wondering why this small town  in the middle of no where - and even that is being generous on its size - became the epicenter of global monetary policy, then the answer is: trout. It is a fantastic fly fishing location. When Paul Volcker was the Chairman of the Federal Reserve, they choose a locale that was so personally appealing to him that they could guarantee his attendance. The tradition to meet here stuck.


  1. But the question is, why? Why is Canada pursuing a strong stance? Doesn't this hurt Canadian exports?

    1. Canada is not pursuing any strategy at the moment. By taking no action, it has become a strong stance relative to other countries by default.

      There are costs to pursuing a weak loonie - inequality, inflation, etc. I believe that the Central Bank does not view that it is currently worth the cost to do anything.

      Or perhaps they are just waiting to see what the response is to the US announcement before they take action? They could change course, especially now that the Japanese Central Bank (who is traditionally considered the most conservative in the world) has announced easing as well. We'll see.

      Thanks for commenting!