Carney ..."other factors, such as the multilateral depreciation of the U.S. dollar..."
Say it ani't so Markie (still keep in touch with your old colleagues at Goldman?)
SAME Full CONTENT of Sept 7/12 Speech
but with it's analysis/summary (a broader focus that mine) in the title
Mark Carney: Dutch disease is the wrong diagnosis
Press Release from BofC Site
excerpted
"Third, while rising commodity prices account for about half of the appreciation of the Canadian dollar over the past decade, other factors, such as the multilateral depreciation of the U.S. dollar and the fact that Canada is “a rare safe haven,” have also contributed to the increase in the value of the currency.
Bank of Canada analysis shows that regardless of the cause of a commodity-price increase, the resulting improvement in Canada’s terms of trade causes income, wealth and GDP to rise. This is the case whether the source of the increase is stronger U.S. demand, stronger demand from emerging Asia—which is behind the current boom—or a transitory reduction in supply.
The Governor also addressed the argument that the Bank of Canada should lean against a commodity-driven exchange rate appreciation. Bank of Canada analysis shows that, over time, such a move would cause wages and inflation to rise, resulting in an appreciation of the real exchange rate and leaving non-resource exporters faced with the same competitiveness challenges. “The cost of this misadventure is lower output of about 1 per cent and higher volatility in inflation, output and employment than when the exchange rate is allowed to do its work,” the Governor said."
excerpted:
Introduction
Some regard Canada’s wealth of natural resources as a blessing. Others see it as a curse.
The latter look at the global commodity boom and make the grim diagnosis for Canada of “Dutch Disease.”1 They dismiss the enormous benefits, including higher incomes and greater economic security, our bountiful natural resources can provide.
....
A New Normal for the United States
The U.S. recovery is following the same dreary path of other advanced economies that have experienced financial crises.
....
An Existential Crisis in Europe
Europe is stagnating with GDP still 2 per cent below its pre-crisis peak and
private domestic demand a stunning 6 per cent below.
private domestic demand a stunning 6 per cent below.
....
Important measures have been announced over the summer to begin to restore
the single financial market, break the toxic links between banks and sovereigns
and, potentially, help ensure that all euro-area countries can finance at more
sustainable rates.
the single financial market, break the toxic links between banks and sovereigns
and, potentially, help ensure that all euro-area countries can finance at more
sustainable rates.
All of these measures need to be fully implemented, not just announced. (red added)
....
The Diagnosis
The Declining Importance of Manufacturing
What Drives the Currency?
....
But this is just the beginning of the story, accounting for about one-half of the
appreciation of our currency over the past decade. Other factors also play
important roles.
Since 2002, the U.S. dollar has depreciated against many currencies, including
those of both commodity exporters and importers. The Canadian dollar has
appreciated against the U.S. dollar by an amount similar to that of the currencies
of two major commodity importers, Japan and the euro area (Chart 8).
appreciation of our currency over the past decade. Other factors also play
important roles.
Since 2002, the U.S. dollar has depreciated against many currencies, including
those of both commodity exporters and importers. The Canadian dollar has
appreciated against the U.S. dollar by an amount similar to that of the currencies
of two major commodity importers, Japan and the euro area (Chart 8).
....
Chart 10: Pre-crisis, Canada was not regarded as a safe haven
....
Improving Canada’s Economic Health
....
Chart 12: Trade inside Canada has grown faster than
international trade
....
Chart 13: Services dominate interprovincial trade growth
....
Chart 14: Leaning against the exchange rate ultimately leads to lower output
Some have argued that the Bank of Canada could improve welfare by leaning against commodity-driven movements in the nominal exchange rate.
It is important to remember that with changes in the terms of trade, adjustments will follow. It is only a question of how. Our floating exchange rate helps to achieve the appropriate adjustments without forcing very difficult changes in the overall levels of wages, output and prices.
We can use the Terms-of-Trade Economic Model (ToTEM) to simulate the effect of the Bank leaning against commodity-driven exchange rate appreciation through a reduction to the policy rate. In the short run, stabilising the nominal exchange rate helps to support noncommodity exports as well as Canadian producers who face competition from imports. But, ultimately, this effort is futile. Over time, wages and inflation rise, causing the real exchange rate to appreciate. Non-resource exporters are faced
with the same competitiveness challenges as they are today.
with the same competitiveness challenges as they are today.
Moreover, this leads to a sustained period of above-target inflation, which begins
to unhinge inflation expectations. Monetary policy eventually has to tighten
aggressively to restore price stability. The cost of this misadventure is lower
output of about 1 per cent and higher volatility in inflation, output and
employment than when the exchange rate is allowed to do its work (Chart 14).
The outcome could be even worse if the Bank cannot quickly re-establish its
credibility after betraying earlier commitments to Canadians.
to unhinge inflation expectations. Monetary policy eventually has to tighten
aggressively to restore price stability. The cost of this misadventure is lower
output of about 1 per cent and higher volatility in inflation, output and
employment than when the exchange rate is allowed to do its work (Chart 14).
The outcome could be even worse if the Bank cannot quickly re-establish its
credibility after betraying earlier commitments to Canadians.
Chart 14: Leaning against the exchange rate ultimately leads to lower
output
output
....
Chart 15: Chinese demand driving oil prices
....
Capture More Value Added in Canada
....
Improve Interprovincial Mobility
....
Increase Skills to Compete
....
Sustained Business Investment
....
Chart 16: Business investment below average of postwar recoveries
....
Chart 18: Canadian corporate leverage is at an all time low
....
Conclusion
Building on our strengths requires that we respond appropriately to the opportunities the global transformation affords us. That starts with recognising that the strength of Canada’s resource sector is a reflection of success, not a harbinger of failure.
The logic of Dutch Disease requires that we undo our successes in order to depreciate our currency. Taken to its natural conclusion, this logic dictates that we shut down the oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector.
Such actions would surely weaken the Canadian dollar, but they would also weaken Canada.
In a world of elevated commodity prices, it is better to have them. Bank of Canada research shows that high commodity prices, regardless of the cause, are good for Canada. Rather than debate their utility, we should focus on how we can minimise the pain of the inevitable adjustment and maximise the benefits of our resource economy for all Canadians.
posted by Walk a Kb or Two in my cassins | 10:16 am
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