The recent decision by Federal Reserve Chairman Ben Bernanke to maintain artificially low interest rates until 2015 along with a one year, $85 billion per month buying frenzy of U.S. mortgage debt seemed a welcome relief to investors weary of weak job numbers, tepid growth, and fading economic forecasts in Europe and China.
Global stock markets responded with rallies and business leaders hailed the positive news of QE3, a welcome relief from 3 years of 8% unemployment in America and rumours of bailout talks between the IMF, the World Bank, and Spain – a country where the unemployment rate is higher than Greece and where economic conditions worsen by the day.
While many would agree that further action from the Fed was necessary to shore up confidence and stimulate growth, the long term implications of Bernanke’s move will inevitably damage the Canadian economy and drive a stake through the already injured and bleeding manufacturing sectors of Quebec and especially Ontario.
Printing money out of thin air in Washington to cleanse the decrepit balance sheet of U.S. housing will accelerate the long term erosion of the mighty greenback and will bloat the value of our own currency, this will make manufacturing in Canada even more uncompetitive and will demolish precious jobs in one of the few truly productive sectors of our economy.
The Canadian dollar reached a 13 month high following the Fed’s announcement and will force the Bank of Canada to re-evaluate its long term plans, at the same time, the move exposes one of the great dilemmas Bank of Canada governor Mark Carney has to face: if inflation begins to rise an increase in interest rates will only intensify the problem of an overvalued currency. Mr. Carney can’t lower rates simply because they are already near 0% and would make keeping inflation at the benchmark of 2% tricky at best.
If the problems of an overvalued Canadian dollar continue due to the Federal Reserve’s market distortion (and they most likely will) manufacturing in Canada will simply vanish altogether in the next few years. The time has come for governments in Canada to develop bold, aggressive plans to make manufacturing competitive in this country and to revitalize a sector crucial to our long term prosperity and competitiveness.
Excessive, cumbersome, and outdated regulations need to be repealed at all government levels, energy policy must strike a balance between the environment and feasible market prices, and labour laws and industrial relations must be liberalized and updated to meet the needs and challenges of a 21st century global economy where capital moves by the click of a button.
A Canadian economy built upon excessive consumption, soaring household debt, and the construction of vast suburban development lots cannot last and will depreciate the value of our currency and the strength of our entrepreneurial spirit, as has already happened to our southern cousins. If we choose to balance the extraction of our resource wealth with a strong manufacturing sector to produce high quality goods, Canada will outshine all competitors, anywhere, anytime.