Wednesday, July 27, 2011

The American Debt Crisis and Canada

In Canada we are suffering from the American debt crisis through our dollar being pushed upwards.   I was altered to this through the Buttonwood blog on the Economist website - they were focusing on the Swiss franc but noted the impact on the Canadian dollar

In the past there have been numerous currencies for the world to move to if it had concerns about one currency, but at the moment was only have a few stable currencies in the world with no threats to them.

  • Currently the US dollar is seen as potentially unsafe because of the political wrangling about the debt ceiling.  
  • The euro is in trouble.  The Euro zone has been going through on going problems in a number of nations and now seemingly Italy is in trouble.    There is even talk of the end of Euro 
  • The pound is hardly a safe currency given the financial trouble Britain is in.
  • The yen has not serious future as a safe place to park your money
  • The yuan of China is not a freely traded currency
  • No one takes the ruble seriously as a safe currency
  • The New Taiwan dollar could be a safe haven, but most of the world does not recognize the nation
  • The Saudi riyal is pegged to the US dollar

I am not sure anyone had ever considered the concept that the top two reserve currencies would both be in trouble at the same time.   For the last 12 years 90% of the foreign exchange reserves in the world have been made up of the US dollar and the euro.

What is the world left with?

  • The Swiss franc
  • The Australian dollar
  • The Canadian dollar
  • The Swedish krona

If there is a shift of ten percentage points of foreign exchange reserves from the US dollar and euro to other currencies, this would be a shift of over $1,000,000,000,000 to these currencies.  This is equal to 1/3 of the combined GDP of the four countries.   This will continue to drive up the currencies.

The other place where money has been going is into gold.  Certainly the rise has been a flight to it from the main reserve currencies.  

If the Americans can come to debt ceiling deal and show that the nation will deal with the deficit, the Canadian dollar should begin to come down.  I am not certain any deal and budget in the next years will be the sort of one the US needs.  

I am also assuming the Euro zone will come to some sort of way forward with the ongoing financial problems of the nations in the zone.     If the euro comes apart, it will take some time before the new German lead "super euro" could become a reserve currency.  Canada will continue to be a place to hedge some of the world's financial reserves.

Ultimately all the macro-economic work done by successive governments over the last 25 years in Canada means we now have one of the most stable and secure currencies around.    We are also one of the most secure
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