Weekly Commentary  

Our dollar's up: why?

People worldwide like our loonie. Is it because we have more gold in the country since winning all those Olympic medals? Nope.

There are a couple of reasons. I'll use people in Russia and the USA as examples of why Canuck bucks are attracting attention.

First, off to Moscow. Last week there was an article in a financial paper making an interesting observation. It was reflecting on some of Russia's fiscal woes. Then came the interesting comment. It said that their central bank was going to add strength to its own reserves by buying Canadian dollars.

Units of money are just like any other product. If people think a particular currency has value then they will be interested in buying it. Because chances are good it will hold its worth.

Why do they think the Canadian dollar will hold its worth as compared let's say to Japanese currency? One of the key reasons is that the amount of our national debt is a lot lower than Japan's (and lower than most other countries' debt by the way).

A country's debt load is compared to the total value of all the goods and services produced in a year in that country. That total of all goods and services produced in a year is known as the Gross Domestic Product, or GDP.

So just as an example, let's say the country of Pandora (sorry all you Avatar fans) has an annual GDP of $10 Billion. And let's say the government has been borrowing money every year just to run all the government programs like health care, education and defense (to fight off all those nasty people from planet Earth). And let's say the amount of Pandora's government debt is $5 Billion.

Then the bean counters who actually sit around all day and measure this stuff would say this, "Pandora's Debt is $5 Billion and its GDP is $10 Billion.” Since its debt is 50% of its GDP then they would say its debt to GDP ratio is 50%.

The debt to GDP ratio of a country is used by people all the time to evaluate what kind of economic shape a particular country is in. The bigger the debt the more money the government has to pay every year to service that debt.

The more money a country has to pay to creditors the less that country is able to spend on essential programs for its citizens, like health, education and defending against earthlings and other invaders.

Also, when a government has to pay a big percentage of its revenues on debt it is tempted to raise taxes on workers and business to get even more money to pay that debt. And as taxes get higher, workers get discouraged and lose incentive and business people look to other places to do business.

So you can see that a high debt to GDP ratio is a job killer and leads to higher unemployment and therefore, less taxes to service the debt. It becomes a very vicious circle.

Canada's debt to GDP ratio is about 31%. Japan's is 115%! That means its debt is actually bigger than its GDP. Ouch. Imagine trying to make those debt payments.

So, a country like Russia, looking to buy a currency that is not overly bogged down with debt will look to buy Canadian dollars.

For that very same reason the U.S. manager of the largest bond portfolio in the world (worth one TRILLION dollars) recently also had good things to say about our dollar.

He says he is recommending to the investors that he deals with that they should be investing in Canadian markets. That means more economic growth for Canada. More jobs in Canada. More tax revenues coming in without tax rates having to go up.

That means more money to help reduce our debt payments and more money for services like health care etc.

That's called a virtuous circle and that's why we are taking clear steps to keep government spending under control and taxes down.

Hope you like that approach.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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