James Grant has some economic advice for President Obama:
In the long run, nations consume and produce in roughly equal measure; they have no choice. The United States is the rare exception. It is privileged to consume much more than it produces (a difference measured by the current account deficit) and to have done so virtually year in and year out for the past quarter century. This wonderful feat is possible because the dollar is the preeminent monetary brand — the world's “reserve currency.” The United States' creditors willingly accept it. And, accepting it, they turn around and invest it back into the obligations of the United States. There can be few items higher on the to-do list of the incoming administration than to freshen and strengthen the dollar brand.
A strengthened American currency, of course, may be just the thing for those, like Canada, who depend heavily on selling lots of stuff to Americans every year. If the dollar rises and the loonie falls, that has the effect of making Canadian goods, services, and employees relatively cheaper.
Americans, as a result, might buy more stuff from Canadians and our trade surplus — which is getting dangerously close to becoming a trade deficit — would likely widen.
Now, as with any economic transaction it seems, there would be some downside. Because world oil prices are denominated in American dollars, a rising dollar would automatically push pump prices in Canada higher. You might have noticed this already. Even though oil was trading at something around $45 US a barrel (that's right $45!! a barrel), your local gas station was probably charging you something around 85 cents a litre (that's the national average: It's just 73 cents here west of Ottawa). That's better than last summer, of course, but your local pump price hasn't fallen as much as the price of a barrel of oil because the refiners and retailers who supply your local gas station need American dollars to buy their raw material: oil. And as the dollar rises against the loonie, they will need more loonies to buy the same amount of oil. And that's why pump prices aren't falling that fast.
And what about groceries? Food makes up a big chunk of the budget of most Canadian households, particularly those in middle- and lower-income brackets. A lot of the food we buy — oranges from Florida, broccoli from California — comes from the U.S. Again, a stronger American currency makes many groceries more expensive. Indeed, Statistics Canada said on Friday that while overall inflation is pretty tame (just 1.2 % year-over-year), food prices are definitely rising quickly:
Food prices increased 7.3% during the 12-month period, following a 7.4% increase in November. Excluding food, the CPI posted no change in the 12 months to December. This was the slowest pace registered for this index since November 2001.
The underlying factor for rising prices for food was sustained price increases for food purchased from stores. Prices for food purchased from stores rose 9.0% in December, identical to November's increase. The main contributor was a 26.9% increase in prices for fresh vegetable items, products which are largely imported.
Persistent price increases for bakery and cereal products (+12.4%) also contributed to rising prices for food purchased from stores.
In any event, Grant closes his short essay with this paragraph:
No small source of strength in the U.S. economy is Americans' capacity for failure. They excel at pratfalls. They file for bankruptcy and emerge without permanent social stigma. They recognize error and put it behind them. The next administration should thus turn a deaf ear to suggestions to manipulate energy prices, prop up housing prices, suppress short selling in the stock market, or otherwise try to prolong boom-time errors. Japan, refusing to let its own great bubble deflate, suffered a decade of economic stagnation. The United States, too, must take its bubble-related lumps, of which the current financial crisis is clearly one. But as the 44th president would be wise to remind his compatriots, the United States has no time for lost decades. Let markets clear and a new day dawn.
