Prosperity problems coming with our dollar being greatly overvalued

A recent newspaper headline, Canadian trade deficit nears record, should disturb us all and serve as a wake-up call to our government. That article stated our weak trading sector will cut Gross Domestic Product growth by three per cent.

The crucial point here is the Canadian dollar is greatly overvalued and is at the root cause of our economic difficulties. The situation will only worsen unless remedial steps are forthcoming, and promptly too.

The fact that the country now is running huge balance of payment (trading account) problems despite the higher levels of unemployment than is generally considered desirable, is positive proof the level of the Canadian dollar is at fault. When the Canadian dollar was at a 15 to 20 per cent discount to the U.S. dollar, that enabled us to run a $30-billion surplus in our foreign trade.

Objectively, the fact of overvaluation can be established by comparison with relative purchasing power of other currencies and their relative unit costs of production. The available statistical evidence suggests the Canadian dollar is overvalued by at least 20 per cent, as does The Economist.

That overvaluation can be attributed to several factors. Of course, speculation by currency traders is somewhat responsible. More important is the traditional fixation of the Bank of Canada, which believes inflation is the overriding evil and must be prevented at all costs. Hence, it has raised interest rates three times within a year, in sharp contrast to interest rate stability in the markets of our major trading partners, particularly the United States.

We have not taken effective action to deal with our balance of payments, foreign trade problem. We need to increase productivity and remove impediments imposed on our exports. Our taxation system presently discourages innovation, and capital gains taxes further hinder innovation and entrepreneurship.

We seem to have gone through all this previously. George Santayana stated those who cannot remember the past are condemned to repeat it. In the early 1960s, we were confronted by a similar situation with the Canadian dollar hovering around parity with its U.S. counterpart and our economy was relatively stagnant.

In 1962, Prime Minister Diefenbaker had to contend with James Coyne, Governor of the Bank of Canada, who kept interest rates too high. Despite that controversy, the government slashed the external value of the Canadian dollar to U.S. 92.5 cents, the lowest possible then. The Opposition jeered that move, but it was the forerunner of more than a decade of prosperity.

Similarly today, notwithstanding all the usual objections to a fixed rate of exchange, we should fix the external value, at least temporarily to about 80 cents. It is about time that we tackle this problem once again.

Bruce Whitestone