The sliding dollar is all part of the plan
AS THE FINANCE MINISTRY has gripped the Bank of Canada more and more tightly, the institution’s goals have shifted to Ottawa’s
Since May 3, when Stephen Poloz’s appointment as Bank of Canada governor was announced, the dollar has fallen nine full cents against its U.S. counterpart. Since Oct. 23, when the governor formally disavowed the bank’s previous policy “bias” toward raising interest rates when economic conditions warranted, it has fallen more than seven cents.
Since Jan. 4, when Minister of Finance Jim Flaherty volunteered his opinion that a lower dollar would be “good for manufacturing,” it has fallen nearly four cents. On Wednesday, after the bank again left interest rates unchanged, coupled with some conspicuous fretting over the “downside risks” to inflation, it fell by more than a penny.
What we have here is an accelerating run on the dollar. While a number of contributing factors might be identified, from softening commodity prices to sluggish exports, the overarching explanation is quite simple: It is the policy of the government of Canada to let the dollar slide.
I say the government of Canada for a reason. For whereas the exchange rate would previously have been considered part of the mandate of the Bank of Canada, to rise or fall in line with its overall responsibility for the conduct of monetary policy, it is no longer meaningful to speak of the bank in terms that suggest an independent agency. Government policy is bank policy, and vice versa.
This is true, not just in the long-standing, and appropri- ate, sense that the government bears overall responsibility for monetary policy, but remains at arm’s length from its implementation — a division of powers embodied in the practice of negotiating inflation targets between the governor and the finance minister. Today, there would be little point in such negotiations. The creeping takeover of the ba nk by finance, observable for some years, is now complete.
Poloz’s appointment, after all, was the source of some puzzlement at the time. Why had the bank’s well-regarded deputy g ove r n o r, T i f f Macklem, been passed over? Why had Flaherty involved himself in the selection pro- cess to such an unprecedented degree, not merely ratifying the choice of the bank’s board of directors, but more or less conducting the whole thing himself ? And why Poloz, who, while he had once been director of research at the bank, had been out of the monetary policy game for more than a decade?
There was speculation that his choice, as president of the Export Development Corporation, signalled the government’s determination to hasten the dollar decline, or at any rate to see a less “hawkish” policy pursued. It would seem the speculation was right. The minister and his protege have been as one in talking down the dollar and, lo, they have got what they wanted.
This is disturbing, for a number of reasons. There’s nothing wrong with a falling dollar, in itself: Indeed, the fundamentals may well support a decline. But that is a different thing than a deliberate policy of devaluation, which is no more to be desired than a policy of propping it up: both subordinate the proper objectives of monetary policy, domestic price stability, to an extraneous target.
There are winners and losers at any value of the dollar, but it is not coincidental that the winners from the dollar’s recent fall are to be found, primarily, in the manufacturing sector, concentrated in southern Ontario, where unemployment is high and where the Tories’ electoral fortunes will be decided.
It is, of course, not a given that even a 10 per cent devaluation will be manufacturing’s salvation — with the pressure off, businesses may feel less impetus to make adjustments to regain competitiveness — but whatever gain there may be to exporters comes at the expense of everyone else, in the form of higher prices for imported goods and services. Whatever celebratory pieces you may have read elsewhere, there is no particular reason to favour the interests of manufacturers and exporters, and of all the reasons that might be offered, securing the government’s re-election is the worst.
That, of course, is not the reason the bank gave in its policy statement. Rather, it is concerned that inflation is too low. This, too, has become a common theme in the business press: My God, my God, prices are not rising quite fast enough. To be sure, at roughly one per cent per annum, inflation is running at half the bank’s target level of two per cent — though it remains within the one to three per cent band that is in fact the bank’s real target.
But that is a good thing, not a bad thing: It would be well if two per cent were the upper limit on the band, rather than the mid-point. Indeed, the bank has at times mulled lowering its inflation targets in such a fashion, and while some caution is understandable — would the gains of moving the mid-point from two per cent to one per cent be worth the cost? — if that is in fact where inflation has settled, there seems little point in jacking it back up again.
I know, I know: The bank is deathly afraid of deflation. This is a bogeyman that is regularly invoked to frighten the children — I’ve been reading about The Coming Deflation for at least a decade — but never quite manages an appearance. In any event, its baleful effects are greatly exaggerated: We would not turn into pumpkins just because prices fell a small amount for a month or two, any more than we do from a small increase in prices.
Ultimately, the level of inflation is a function of bank policy. If it has decided on a policy of higher prices and a lower dollar, it should say so, not hide behind hobgoblins.