Re: Imposing the US Dollar on Canada

["Colin Danby" <danbyc@xxxxxxx>]

Henry writes:

> Dollarization is not the equivalent of a stable exchange
> rate. It merely means acceptance of the dollar's volatility
> which at this moment happens to be over-valued against
> both the yen and the euro. Overvaluation, what the US
> calls a "strong dollar" policy, can be advantageous or
> disadvantages in terms of trade, depending of the state of
> the economy.

Given your remarks below about the complexity of determining an appropriate
value for a currency, I’m not sure how "overvalued" is determined.  To be
sure one result of a peg of any kind is exposure to changes in the exchange
rate of the pegged currency to others.  This merges into the general
discussion of different pegs, baskets, and whatnot.

> A strong dollar policy enables the US to export inflation
>  and maintain a capital account surplus to finance a trade
> deficit.

This raises the question of what causes what, and how much influence the
U.S. gov’t really has over exchange rates.  Clearly part of the explanation
has to be the attractiveness of $-priced assets in recent years, a story in
which the capital acct drives the current acct.  (A more interesting part of
gov’t policy is the growth of Fannie Mae et al., which have vigorously
intermediated foreign saving into US consumer debt.   Fed policy seems to be
rather strongly concerned with propping up the housing market right now --
this might be worth another thread, as there seems to be a lot of built-in
U.S. fragility in consumer debt.)

> But since the big bang a decade ago, trade is inseparable
> from capital flow, making the issue of the appropriate
> value of a currency more complex, because most global
> credit is denominated in dollars.
> …
> What dollarization really does is to rob the dollarized
> economies of monetary autonomy, because the Federal
> Reserve does not include the monetary needs of the likes
> of Hong Kong and Argentina in its monetary policy
> deliberations.

I wonder whether this is the worst problem.  I have suggested before that if
a country could magically import U.S. inflation and U.S. interest rates via
$ization, it actually might not be a bad thing.  The problem is that you can
’t, for reasons having to do both with how prices are set in the real sector
and the structure of the financial system.  (It also strikes me that the
argument *for* $ization and c-boards etc. revolves *precisely* around the
presumed tight-money characteristics of U.S. monetary policy -- if you
challenge it there, you have a rather narrow debate.)

I suggest that in for example Argentina, the problem is much graver, which
is that you abandon any capacity to underpin the banking system, and
basically take yourself hostage -- you set up a situation in which
abandoning the peg would do the gravest possible structural damage, which is
your "credibility" that you will not abandon it.

Add to that the fact that your interest rates will be consistently higher
than the country pegged to (pegging plus capital flows sets a floor to local
interest rates but not a ceiling) because of credit risk, and that this is a
policy aimed at forced domestic deflation, and we have a problem much worse
than whether the FOMC somehow takes Buenos Aires into account.  In short the
problem is not that you get the Fed’s tight money policies for the US, but
that you get something much tighter and very unstable.  And you hobble your
financial system even before a crisis.

Look at current Argentine interest rates -- short-term benchmark rates
around 16%, despite very low inflation.  It's appalling.


To Stephen Block: Canadian $ization would keep inflation in traded goods to
US levels, and presumably put pressure on any Canadian wages that exceed US
wages, so that any US wage-lowering policy would be exported to Canada.  On
both Henry’s and my logic it would lead to high interest rates.  (Of course,
you could have the benefits of all these things even if you kept your lovely
loonie, depending on the government!)


To Paul Phillips: The PE of Canadian support for $ization you provide is
interesting, and a great example for my argument that the PE has to be
worked out locally.  $ization as such is not explainable as a hemispheric
U.S. plot.  Whatever its "essence," as a matter of logic and evidence the
Chossudovsky piece was truculent mush.  It’s great fun to imagine Yankee
plots to seize Canada, but unless you start from the premise that such plots
must exist, there’s no evidence.  The painful truth, I suspect, is that even
conservative US govts are pretty happy with Canada as it is.

Best, Colin