Yesterday’s crushing defeat of Prime Minister Stephen Harper of Canada is, in no small part—inadvertent but nonetheless all too real—the doing of the Federal Reserve. His victorious opponent, Justin Trudeau, should send a love letter to Janet Yellen & Co.
A key factor in Harper’s downfall is the poor state of Canada’s economy, which has undergone negative growth for the past two quarters. The recession brutally stripped away Harper and his Conservative party’s key selling point in previous elections: We are great stewards of the economy. Look at how well Canada weathered the panic of 2008–09 and compare our growth rates with those of the U.S., Europe and Japan. Marvel at the strength of the Loonie (Canada’s affectionate nickname for its one-dollar coin) vis-à-vis the once mighty U.S. greenback. Vote for us!
Harper’s government did indeed do some very sensible things, including slashing Canada’s federal corporate tax rate–now a mouthwateringly low 15%. But the economy’s most potent rocket fuel was the global commodities boom. Canada’s cornucopia of natural resources turned the country into a veritable money machine. Australia and Brazil also thought they’d arrived at the promised land of forever-rising wealth.
Alas, that fantastic boom was a false one. It wasn’t based on the normal interplay of supply and demand but on the weak U.S. dollar. As a matter of convenience, globally traded commodities are priced in dollars. In the early 2000s the Federal Reserve and the U.S. Treasury Department decided to engage in a gradual devaluation of the dollar to help pull the U.S. out of the 2000–01 recession and to boost American exports. When the greenback is weakened, nominal commodity prices shoot upward.
Just as a virus does in a computer, a weak dollar corrupts marketplace information. The surge in the prices of oil, copper and other commodities led people to believe that suppliers weren’t providing enough to meet demand and that output should be goosed. Investment in mining and in oil exploration and production soared. China and other countries loaded up on inventories in anticipation of even higher prices and to insure against potentially crippling shortages.
Read more at Forbes.com
Photo Credit: Alex Guibord