Weekend Reading – May 25, 2007

1. 1. Faisal Moledina

   Having a single currency would only be advantageous if the needs of all the countries involved are the same. That is to say, the central bank issuing the single currency would have to consider the economies of Canada, the US, and Mexico together. The reality is that given its sheer monetary power, the US will most likely be the decision-maker for monetary policy, and given its size versus Canada and Mexico, decisions will be made mostly based on its economy. The economies of Canada and the US have been fairly divergent since the late 1990s (wrt unemployment, economic growth, etc) and may continue to be that way going into the future.

   Thus, it would be foolish for Canada to enter into a single currency with the US. The way it is now, the free-floating exchange rate between the CAD and USD cushions Canada from US economic downturns. Also, Canada is more stable wrt inflation and business cycles than the US.

   When the euro was introduced, the Bank of Canada released a speech ( http://www.bankofcanada.ca/en/speeches/1999/sp99-1.html ) discussing its implications on the member countries. Here’s an important excerpt:

   “First, you may have noticed that, as much as the launching of a common currency across these countries (collectively referred to as Euroland) was a major event, it did not have a dramatic initial financial or economic impact. This is because of arrangements that have been in place for some time. For example, all currencies in the system had been effectively pegged to the German mark since May 1998; and some for much longer. With pegged exchange rates, interest rates in participating countries have tended to move together, in line with German interest rates. And over the past year, short-term official interest rates in all 11 countries gradually converged to the current single rate of 3 per cent. Moreover, with an effective common market already operating in Europe, a common trade policy and more integrated internal markets have been in place for some time.”

   Later, it discusses the possibilities of a North American currency:

   “To obtain the economic benefits that I described earlier, a currency union, not just a fixed exchange rate, is required.* But, as I have also noted, even with a currency union the economic benefits come at a price. And that price is the loss of a degree of political and economic autonomy and flexibility. Just how significant would that price be for Canada?”

   There needs to be much more common economic factors between Canada and the US before a common currency is discussed. Sadly I don’t know much about Mexico to make any intelligent comments.

   May 25th, 2007 @ 5:04 pm

2. 2. Ed Rempel

   Interseting comments, Faisal.

   I think the issue here is that political automony and economic benefits are different. Economically, the more we promote free trade, the better for all 3 economies. Having a common currency would be one step, as would reducing border controls, matching packaging (units of measure, language, etc.), and allowing freer movement of workers across borders.

   The currency fluctuations now cushion the differences in our economies, and therefore have benefits to the degree our economies differ.

   There are definitely benefits from one currency. Why is it that the U.S. economy and stock market are larger than all of Europe? It is because there are no borders. Products and workers move freely around the U.S., while Europe has different coutries, currencies, languages and borders. Any economist will tell you that the more these border disappear, the better for both economies.

   Having one currency would have some advantages, similar to pegging our currency to theirs. But it is best done together with other strategies to promote trade.

   This would all reduce political control, but having better economies are arguably more significant to our lifestyle.

   Ed

   May 27th, 2007 @ 12:38 am

3. 3. Ed Rempel

   One of my pet peaves is “The rich are getting richer while the poor are getting poorer.” This is false. The study in the article seems to infer that, but there are no details. Any other study I’ve seen shows that the rich and poor have more money, but the rich are growing faster.

   The related issue is the gap between the rich and poor. But who cares? Why is this a relevant statistic? Why is it bad?

   The real issue is whether the poor, at least the working poor, are getting richer. For example, let’s say the average rich family makes $200,000 and increases to $250,000, while the average poor family makes $30,000 and increses to $35,000. Isn’t this all good news?

   Bleading hearts will say you get unrest when there is a big difference between rich and poor, but in reality you get unrest when the poor are very poor. When the gap widens, that usually means that more entrepreneurial and more highly educated people are being rewarded more for their hard work and knowledge – which is good for everyone. This means more jobs, more tax income, and more money for social programs.

   Encouraging people to make more money is why free enterprise is the most successful form of economy.

   Any effort to reduce the gap is bad for everyone. It essentially means to tax the hard working and knowledgeable more to give more money to the have nots. This slows the entire economy and means the hard working and smart are less motivated and make less, pay less tax and then there is less money for social programs.

   In short, trying to reduce the gap between rich and poor means a lower standard of living for everyone. Instead, lets promote help the rich become much richer and the poor become somewhat richer at the same time – and everyone is happy.

   Ed

   May 27th, 2007 @ 12:54 am

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