Tag Archives: currency

The Fallacy of the Value of a Low Loonie


Conventional wisdom has it that a low dollar is a competitive advantage for Canadian manufacturers. It is easy to show that this is not the case. It does provide an advantage for natural resource industries whose primary resource values are not directly related to currency values, but that is a sector largely eschewed by our government.

To understand why there is no currency advantage to manufacturers, consider the case of Acme Widget Company. Acme Widget makes widgets in Ontario and Michigan. It wants to double its production capacity at one of its plants and has to decide which one.

A widget has three components, one made in Canada, one made in the US and one made in Indonesia. Let’s assume the Canadian dollar (CDN) is trading at 0.75 to the US dollar (USD). The Michigan plant pays $1.00 USD for the part from Indonesia. The part costs the Ontario plant $1.33 CDN because the trade is in USD. The Michigan plant buys the US part for $1.00 USD while the Canadian plant has to pay $1.33 CDN. The Ontario plant pays $1.00 CDN for the part made in Canada but the Michigan plant only pays $0.75 USD.

The total cost for materials for the US plant is $2.75 USD and for the Canadian plant, $3.67 CDN which is $2.75 in USD. In other words, the relative value of the two currencies offers no competitive advantage to either plant on a materials basis.

But there are other costs associated with production. Suppose the employees are paid the minimum wage. In Michigan, that is $8.50 / hour USD while in Ontario it is $11.40 / hour CDN or $8.55 USD. On wages alone, it is a toss-up. However, one must also include the cost of statutory benefits such as health insurance, EI, and pension plan premiums which in Ontario, are all costs to the employer.

Further, electricity costs are important. Time of day use, purchase contracts, and unbundled charges for distribution and other services are complex and require a case by case analysis based on projected usage characteristics. One might need to consider other utilities such as water and sewer rates also.

Finally, there are municipal, state or provincial, and federal taxes to consider. The regulatory framework may be important in terms of adding additional operating costs. With NAFTA coming under review, tariffs and border taxes may be a consideration.

In conclusion, the relative value of the Loonie has no impact in the long run, on the material cost of manufacturing. The costs that will affect a decision to build a new plant or extend an existing one are all soft costs associated with the local jurisdiction being considered, and what incentives might be negotiated with governments.

Bits and Pieces – 20170124, Tuesday

Commentary: If Trump achieves half or maybe a quarter of what he wants to he will go down as a “great” American president. I suspect a significant piece of what he would want is impossible, not because of political obstacles but because some things will not be possible.

A lot of jobs that went offshore don’t exist anymore and can’t come back. Companies on-shoring will build new plants populated with robots and highly automated assembly lines. They would have done so anyway for economic reasons and this trend had started before Trump.

His trade policies may backfire. Raising tax barriers and tariff walls will start trade wars – may already have done so – so the imports will be cut but so will the exports. How this will affect the balance of trade is a question. In fact the trade deficits were the only way the US dollar could become the world reserve currency. Trump cannot control the currency – at least not for long. Any attempt to declare China a currency manipulator will lead to the depreciation of the yuan and strengthen the dollar, affecting exports and negating the effect of tariffs on imports.

He has a deeply divided country and he can’t fix this because the divide is to a large part caused by people who hate him and this he can’t change. Read: Trump: America for the Americans! He has inherited trillion dollar deficits and a 20 trillion dollar debt that goes as high as 200 trillion with unfunded liabilities included. The only fix for this is to press the reset button and the reset will be global.

This is going to be a wild ride.

One Bear at a Time

Fresh from finishing Summa: The Great Myth, we came across a Dec. 13 blog entry by Doug Noland, “The Prudent Bear”, titled Q3 2013 Flow of Funds. In reading his blog we came across a section that we reproduce below adding numbering in square brackets and emphasis. We then discuss the errors in his thinking.

A Brief Note on Gold As a Currency

With the refinements our ideas on money in Understanding Money: Part 5 – It’s All Money, we decided to apply them to a topic we have addressed in the past, that of the return to a gold standard.

There is an audience for the idea that the change from a gold standard to a pure fiat paper currency is a root cause for the current financial crisis. In particular, a paper currency allows for the expansion of the monetary base in an undisciplined fashion. We suggest that a pure fiat currency and a gold-backed currency both represent MZMc or the currency component of money with zero maturity whose composition or nature is irrelevant to the money creation process. To understand our thinking, refer to the series of articles on “Understanding Money” at the end of this essay.

Flash Point: Europe is fixed! Not!

We received this note from our friend JR that echoes what appears to be a common sentiment.

This is simple. If the ECB sets rate caps on long-term rates then the solvency crisis is essentially over. This would essentially be a pseudo guarantee of bond markets with the ECB’s backing. This would almost certainly bring private investors back to these markets and help fund the governments. So we eliminate the solvency crisis. That’s a HUGE first step. http://pragcap.com/europe-a-policy-proposal-with-teeth

We will argue that the solvency issue is not resolved but simply kicked down the road. That in turn opens up a rarefied space we haven’t seen commentary or speculation on yet.

Comments on Gold for Currency Purposes

In a private communication with our friend JR we wrote

Again we go back to people with an agenda or bias – they don’t think. The article [http://www.theburningplatform.com/?p=37942] identifies the single advantage fiat currency has over a fixed base currency – the ability to create more on demand. Fiat currencies collapse when the multiplication gets out of control. Until that point they are fine. Gold-backed currencies collapse when the sovereign has a sudden need for more money and the fixed-base doesn’t have the flexibility to allow this. Look at the last hundred or so years of the so-called gold standard. Countries were forced off it when they needed a sudden expansion of the money supply to fight a war. Both the US and Europe have this in their past.

As we have observed before, every PM-based [precious metals] currency has collapsed because the sovereign has always found a way to expand the supply (debase it). This should give the advocates looking for a golden nirvana pause – but it doesn’t. They don’t think. The empirical evidence is that ALL currencies collapse. Some survive longer than others but they all go to that currency graveyard in the sky.

In this post we answer some of his subsequent questions and then move onto some current thoughts on PM-backed currencies.

Who Leaves the Party First?

There has been a lot of speculation over the last several months as to which country would leave the eurozone and possibly the EU first. Majority opinion would probably hold Greece as the most likely candidate. Portugal is sometimes mentioned. Most recently, Spain and now Italy are being considered as good candidates. Another camp has suggested the Northern European countries leave and form a new northern currency block: the Netherlands, Germany and Austria with Finland as a tag-along.

It was then with a bit of surprise that we read from Stratfor this morning, Finland Re-Evaluates Its Eurozone Membership, that Finland is a good candidate for a voluntary departure.

Understanding Money: Part 5 – It’s All Money

This part has been under pen for more than a year. This has given us time to reflect on and clarify our thoughts on money. The result is unconventional but has brought clarity to many issues for us. These will be explored in later essays on the Fed and quantitative easing (QE).

Who’s Dumping Treasuries?

Frequently when the Treasury Department or the Fed reports on foreign holdings of Treasuries, someone publishes a panic piece to the effect that country X is dumping their Treasuries. And from time to time we get articles on China’s doomsday weapon, the threat to dump their Treasuries. If we accept the idea of ‘dumping’ as a sudden massive insertion of some asset into a market, we will show in the post why there are large negative consequences and few positive consequence of trying to dump Treasuries. We will also show why dumping a large Treasury position may not even be possible.

Understanding Money: Part 1 – Introduction

Money is one of the few fundamental creations or discoveries that has shaped human culture over several thousand years. It motivates and facilitates most of our daily activity. It has an apparent simplicity – everyone ‘knows’ what money is – but a surprising complexity when all its aspects are explored in depth.

Wikipedia defines money as “any object or record that is generally accepted as payment for goods and services and repayment of debts“. Wikipedia classifies three main types of money that have been used over time as commodity money, representative money, and fiat money. Further, it identifies three main functions of money, a medium of exchange, a unit of account, and a store of value, but notes that any kind of object or secure verifiable record that fulfills these functions can serve as money. In this part, we consider the common daily form that money takes, that of currency or cash, and what it means.

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