Loonie Tunes

The Canadian dollar—the so-called “Loonie”—has been flirting with parity against the US dollar in foreign exchange markets.

This concerns some Canadian politicians, regulators and economists. An economy based on commodities relies on exports for economic growth, which bolsters the image of those who attempt to manage trade.

A strong dollar makes Canadian goods more expensive to foreigners who must pay more to acquire the dollars needed to pay for Canadian goods.

Some economists have suggested that the Bank of Canada should sell Canadian dollars to devalue the currency. This sort of fine-tuning would make exports more affordable to foreign customers.

Let’s ask a Bastiat-style of question: “What about imports”?

A devalued dollar will make imports more expensive. So, all imported goods required by Canadian business and consumers will be more expensive. How is this helpful?

Transactions across borders are fundamentally no different than transactions executed entirely within national borders. Only intervention by politicians practicing the black art of economic management makes it a big deal.

Frankly, all the fuss over exports or imports is a non-issue. First of all, the purpose of exporting in the simplest terms is to be able to import more. Just as you labour at your job to be able to get cash to pay for goods, an exporter exports in order to get the resources needed to import goods. The only thing that makes it matter more is politics. If politically-connected businessmen lobby politicians to do something about lowering the costs of exporting it is likely that currency manipulation may be employed sooner or later. And, it will be encouraged by some economists.

This is the myopic thinking so typical of professional economists today. They are deluded in their training and in the context of their current employment. Most believe in the “magic” of Keynesian economic theory, the essence of which includes the ludicrous idea that national economies can actually be managed by elected government representatives. The failure of this premise should be self-evident.

There are attributes of a strong currency that are worth considering as values by traders. A strong dollar will attract foreign investment to a capital-starved resource economy. Capital is required to develop new projects, initiating production and job creation, necessary preconditions to the consumption of anything.

Canada has tried through its various government-managed economic efforts to be regarded as investment-friendly. Well, except for 2010. This will be the year remembered for the rejection of the takeover of Potash Corp. by Australian mining company BHP Billiton. The rejection was politically motivated. Conservative MPs from Saskatchewan would have been in danger of losing their political lives if the deal went through.

Mix politics with economics and economics is compromised. Economies are simply the cumulative impact of the economic decisions of millions of individuals comprising the economy. Mix politics with the economic decisions of millions of individuals and their individual economies and political liberties are compromised.

©Copyright 2010 Edward Podritske

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