Thursday, September 20, 2007

Loonie breaks greenback, SPP is Evil, need lower taxes on investment

What a surprise to wake up to find the Canadian dollar is above the American dollar. Unless you are taking a vacation in the US tomorrow, this is bad news for the Canadian economy, and another sign of Conservative fiscal mismanagement.

A high dollar, while it may seem nice if you are going on holiday, is very hard on the economy in general. It makes our goods and services more expensive to other countries which really hurts any export business. Tembec, a large lumber and pulp and paper company recently halted shipments of lumber as it simply can't afford to sell its products to the US at the current value of the dollar. It may prevent the Bank of Canada from being able to control inflation. It discourages foreign investment. It encourages Canadians to invest abroad instead of at home.

One of the major reasons for concern around the dollar's meteoric rise, is the reasons behind why it is rising. The number one reason, is not actually a rise in the value of the Canadian dollar, but a precipitous drop in the American dollar. Canada is still very much tied to the U.S. economy, and the current government seems to not be concerned. Personally, I would much prefer to have our exports spread around the globe, and not rely so heavily on the U.S. to buy our goods and services. It makes Canada subject not only to the Conservative mismanagement of the Economy, but also the Bush mismanagement of the U.S. economy. Anyone concerned about closer ties with the U.S. , should read up on the S.P.P., here is a link to the wikipedia entry:
If you google S.P.P. you will find many leftist, protest everything type websites, but their concerns are valid. I am not necessarily opposed to such an agreement, but the method with which it is being pursued is abhorrent. No public debate, no parliamentary oversight, no public discourse.

That was a bit of a distraction. So back to the causes of the rising Canadian dollar. Second is the high price of oil, and the governments continued subsidizing of the tar sands. Oil is currently at 82$ US a barrel. Canada is a major supplier to the US, the largest consumer of oil in the world. So here is something I do not understand. We are subsidizing (and make no mistake, the accelerated capital cost allowance for tar sands projects is a subsidy) an industry that is massively profitable, pollutes water and air, creates massive amounts of greenhouse gas, is not renewable, and contributes to the rise of the dollar that hurts our sustainable industries such as forestry, the automotive sector and any export services. I don't want to penalize the oil industry, but I certainly don't think they warrant any continued tax protection.

Thirdly, there is continued high global demand for commodities. Canada's large production of these basic resources also puts upward pressure on our dollar.

So where does this all lead to? Is it all doom and gloom? Well, maybe. The Bank of Canada is in a tough place. They are facing a dollar that is significantly above their target level. Normally in that case one would cut interest rates, which discourages foreign purchases of the dollar. But they can't do that, because our economy is currently overheated, and cutting the interest rate encourages spending, which would lead to inflation. Now if the economy is overheated, and the bank wants to slow things down to avoid inflation (which they do), they would usually raise the interest rates. But they can't, because that would put more upward pressure on the dollar, as international investors would lend in Canada to take advantage of the higher rates. The last time the dollar was this high, Canada faced the economist's nightmare: stagflation, inflation at the same time of recession. Does this sound confusing?

Try throwing in a GST cut that nobody from the Bank of Canada recommended, destroying the Income Trust sector by going back on a campaign promise, a US economy heading for recession, a collapsing US real estate market and the hollowing out of many Canadian industrial sector because of weak controls on foreign takeovers.

So what can the government do? A high Canadian dollar, while it make it difficult to sell goods for export, makes it easier to invest in equipment. The current tax structure does not encourage companies (or individuals for that matter) to invest. A lower corporate tax rate on investment that doesn't discriminate by sector would go a long way to helping Canadian companies take advantage of the current high dollar.

Unfortunately, it doesn't seem that any of the Conservatives are at all conservative with their fiscal or monetary policy.

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