Category Archives: US Dollar

Financial Train Wreck

Stephen Roach, chief of Morgan Stanley’s Asia unit, says that Asian economies will not be able to withstand the “Tsunami” of American cash which Bernanke is flooding into the financial markets.  http://www.bbc.co.uk/news/business-11756677

American fiscal policy is a train wreck that is set to sideswipe the rest of the planet. The little guys are likely to get squashed.

I see inflation becoming a threat before the global economy has had time to fully recover from the recession. We could be facing a period of stagflation which would be as bad or worse than what we have seen so far. It would most certainly drag out the jobless recovery in the US for a very long time.

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Filed under Economy, Employment, Finance, How It Works, Inflation, interest rates, Recovery, Stock Market, Uncategorized, US Debt, US Dollar

More on the Loonie

The Bank of Canada announced today that they were keeping interest rates the same for the time being. The Canadian central bankers have been on a campaign to talk down the Loonie, which has been rising against the American dollar, yesterday closing over 97 cents. Inflation is under control, commodity prices are stable, and the GDP forecasts are on track for a sustainable recovery. 

There is concern that the rising Loonie could impact the price of Canadian goods on foreign markets which could stall the momentum of our economic recovery.

At least part of the worry is because the increase in the price of the Loonie has been uncoupled from an increase in the value of the commodities like oil, gas, minerals, lumber which we produce and export. An increase which is driven by speculators betting on the direction of the currency, and not on true economic value could have very negative consequences when the speculators turn to play in another area, and abandon the Loonie for richer pastures, leaving us to pick up the pieces and repair the damage to our economy.

http://www.bank-banque-canada.ca/en/fixed-dates/2009/rate_201009.html

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Filed under Canadian Dollar, Finance, Inflation, US Debt, US Dollar

Rising Loonie, Falling Dollar

Hi, just a few thoughts about the rising Loonie. Another instance of happenings south of the border, affecting us here in Canada.

Last year we saw the loonie rise past $1 US, and watched it put a dent in the posted value of US denominated investments you held. Once again the Loonie seems to be on the rise, now passing the 96 cent mark. While this makes shopping and vacationing in the south more attractive, it will have a negative effect on some things closer to home. Purchasing power does not rise in lock step with the loonie. It takes 6-9 months for prices to equalize, although pressure is often placed on Canadian retailers to match their counterparts across the border, by the time the effect of the higher loonie works it way through the system, it will likely have settled back down, and any perceived advantage will have been lost.

The value of US denominated stocks and mutual funds might drop on your statements. The dollar conversion may not offset the rising US stock market. It is quite possible for the price of an investment to be rising in US dollars as their stock market continues to rebound (the Dow is once again closing in on the 10,000 mark). And yet because of the rising loonie, your stocks or mutual funds have stayed flat or even decreased. This should be corrected when/if the loonie returns to an equilibrium state.

Will the loonie drop back? Historically it does tend to trend towards equilibrium, and usually drops back to a normal range after a spike. Is this time different? Maybe. The US is in a difficult situation, they have a great deal of debt they must deal with at a time when their unemployment rate is still over the odds, and their tax receipts (government income) are falling. When their economy turns around their tax receipts will increase, and they should be able to reduce some of their recession induced spending (one would hope). If this is the case, then we can expect them to get their house in order.

However – and there are two big howevers. First the US government historically has been good at increasing spending and very poor at pulling in the reins on special interests once the situation changes. They also have a very poor record of increasing tax receipts (income) by raising taxes in the good times, in order to pay off debt run up in the bad times. Secondly, the Chinese are a wild card in all this. They currently hold a very large proportion of US debt, and are making noises about shortening the reins. We can only hope that they do not want to do anything that would devalue their own investments, and so will not undertake any precipitous actions.

Regardless, even if everything goes along as expected, without any major disruptions, it is quite conceivable that the only realistic way for the US government to get out from under the burden of debt they currently carry will be to allow inflation to rise. Inflation will devalue the dollar and the concurrent debt. So they will be able to pay back today’s debts in tomorrows inflated cash. Good for anyone currently carrying debt, bad for the purchasing power of your savings and RRSPs. Keep this in mind for the future, and when you are thinking about future savings decisions, and planning options.

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Filed under Canadian Dollar, Finance, Inflation, US Debt, US Dollar