Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

UPDATE 2:  I asked Denis, my economist friend, how much of the US treasuries is owned by the Canadian government and how much would be owned by the private sector, and he suggest consulting the Bank of Canada balance sheet.  It is clear that the total assets on the balance sheet are 60.8 billion, which means that there is no way that the government of Canada could have lent $134 billion to the US, and that most of the ownership of these US securities must be in the Canadian private sector and can be explained by covered interest arbitrage.  Nevertheless, the reason why this arbitrage happens is because the Bank of Canada has kept the interest rates at low levels and is therefore to blame if the loonie is inflating like crazy.  Denis provided me with the following chart of interest rates:

UPDATE:  Thanks to the comment by blogger 101 Centavos, I finally asked my local Canadian economist if he could tell me what the number $134 billion means.  He says it is not the Canadian government alone that holds this debt, but all Canadian holders both sovereign and private.  I am going to try to reach him by telephone for clarification.  Meanwhile, in the words of the ever opinionated Emily Latella of Saturday Night fame, “Never mind”.

[Please note: the updates above are intended to substantially correct  what follows, which is the original post]

I am thinking about writing a blog for the American Thinker about the announcement that China would spend another 5.4 billion in the Canadian resource sector, this time to buy 5.4 billion of Encana’s natural gas holdings.  My view is that China’s purchases of Canadian resources is more about diversifying themselves out of US treasuries.  But  I found a table updated in November 2010, which shows that the Chinese have actually increased their US treasuries by $265.3 billion since November of 2009 (the chart only goes back that far).  Meanwhile, one stat jumped off the page.  In that same period, Canada has increased its holdings of US debt by $84 billion! I am shocked.

Canadians greatly fear the death of the manufacturing sector.  So now they will tolerate this.  But I am dismayed and shocked that our government is manipulating the Canadian dollar so that it will not rise against the US.  The immorality and the bad management of this situation is beyond words.

A couple years ago, I thought that given the bad fiscal policy of the US government would lead to the loonie soaring against the US dollar.  But now I see that rather than allow that to happen, the Canadian government is subsidizing the American lifestyle and the American bubble.  So that finally explains to me why the loonie remains at par and why price inflation is slow to happen in the US–why price inflation is happening in Canada the same as elsewhere in the world.

6 thoughts on “Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

    • Please explain what that means and why it should make me feel better. I also entertained the notion that these were private creditors, but my understanding of the list, however imperfect, is that these are debts owed to foreign governments. Also, even if there was some way to justify the ownership of some US debt, the sudden increase to $134 billion is troubling. What could have caused an $84 billion increase in a twelve month period, except the insane desire to keep the loonie from going higher against the US dollar? I admit being quite surprised and dismayed. I hear all the time about how much US debt is own by the Chinese at 895 billion, that $673 per person; but with Canada’s smaller population base, Canada’s debt ownership of US debt $3961 per person, or nearly six times higher per capita. By GDP, China’s owns .16 US debt/GDP; Canada owns .086 US debt/GDP–so it is half by comparison to GDP; but still, the media doesn’t talk about how much the US owes Canada–I’ve never once heard the media talk about it. So I am sitting in sheer ignorance about why the US owes Canada 134 billion; I also have no idea how to learn how much the US owes Canada in a currency swap. So I would be happy for you to wear a tinfoil hat and disabuse me of my belief in my government’s stupidity and folly.

  1. Hi PW, reference to tinfoil hats is just a joke, albeit a lame one. I understand your concern with the folly of governments.
    The UK government is also heavily into US Treasuries. The Fed re-opened currency swaps with a large number of foreign central banks back in May 2010. It boggles my mind that the US Govt has to borrow a trillion to a trillion and half *every* year, and it still finds ready “buyers” at each Treasury auction. Run this google search phrase “currency swaps fed treasuries foreign buyers”

    • 101 – I’ve updated this post with a note at the beginning. I am going to have a conversation tomorrow at 10:00 and see if he knows anything. If this is a currency swap it doesn’t make me feel any better. The Financial Post covered currency swaps in this article: Still, the author doesn’t even entertain the possibility that Canada is one of these nations.

      My economist friends says it is private holders of debt doing covered interest arbitrage. He offers this wikipedia article as an explanation:

      It basically amounts in changing Canadian into US and buying a future to exchange it back into Canadian. In the meantime, an investment such as treasury note is bought. The higher interest rate in second currency then would give a guaranteed “risk-free” rate of return. Canadian interest rates over 2010 remained lower than US interest rates so that this sort of “arbitrage” would be common. So it is possible, as my friend suggests, that Canadian private investors are the owners of the debt; but the Canadian government is not off the hook in that case, because the Bank of Canada has left the interest rates low in order to try to maintain parity with the US dollar. So they are the cause of the depreciation of the loonie, even if they are not the buyers of the debt.

      I’ll write again after my chat with my economist friend.

    • Centavos: didn’t understand the tinfoil hat reference until I looked it up. Sorry. I misunderstood your question as an objection. I’ll ask my economist friend about currency swaps and if that accounts for any of US treasuries.

  2. PW – That’s right – there’s a blurry line between public and private in high finance these days.
    JP Morgan processes food stamps in 26 states (latest figure?). If the Canadian branch of Chase or JP Morgan or other affiliated large banks borrow a few billion loonies from the Bank of Canada at near zero interest, and then turn around and purchase short-term US Treasuries, would that considered a private purchase? A trillion-and-a-half deficit. Every year. There just isn’t enough money in the world…

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