[asia-apec 945] Chossudovsky on Speculating Against the Canadian Dollar

[BAYAN]

>From: Michel  Chossudovsky <chossudovsky at sprint.ca>
>

>	SPECULATING AGAINST THE CANADIAN DOLLAR 
>
>	by 
>
>	Michel Chossudovsky
>
>	
>Professor of Economics, University of Ottawa, author of The Globalisation
>of Poverty, Impacts of IMF and World Bank Reforms, Third World Network,
>Penang and Zed Books, London, 1997. (The book can be ordered from
>twn at igc.apc.org)  
>
>Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. To
>publish or reproduce this text, contact the author at fax: 1-514-4256224,
>email: chossudovsky at sprint.ca  
>
>
>The tumble of the Canadian dollar has been casually ascribed by politicians
>and financial analysts alike to the "Asian flu" and "the associated
>downward pressure on the prices of the primary commodities that Canada
>exports".1 Yet Canada's primary exports account for less than one percent
>of total forex transactions, -- ie. "a drop in the Ocean", a meagre Can$337
>million out of a total daily turnover of 55.4 billion dollars of which more
>than 90 percent is speculative in nature.2 
>
>Canadian Banks speculate against the Canadian Dollar
>
>The public has been blatantly misled. The official justification for the
>dollar's decline does not stand up; it fails to address the workings of
>foreign exchange markets. The speculative wave which has swept the World's
>currency markets is not limited to the former "Asian tigers". It has also
>struck several Western countries including Canada. 
>
>Bay Street has joined the speculative bandwagon. Canadian financial
>institutions including the chartered banks are routinely involved in
>speculating against the Canadian dollar. The amounts of money transacted by
>these institutions (using the gamut of speculative instruments) are
>staggering: more than Can$55.4 billion (US$36 billion) are transacted daily
>through Canada's foreign exchange market, --ie. thirty two times the
>amounts paid to Canadians in the form of wages and salaries. 
>
>Of this multibillion dollar turnover, a meagre Can$2.5 billion (US$1.6
>billion) constitute bona fide merchandise trade.3  And 97 percent of forex
>turnover is conducted in relation to the US dollar indicating the extent to
>which Canadian banks are part of the US financial landscape.
>
>Some 36 Canadian financial institutions including the chartered banks,
>trust companies, brokerage houses and foreign exchange dealers, are the
>main actors in the speculative assaults on the Canadian dollar. Only a
>fraction of this business is undertaken on behalf of the clients of
>Canadian financial institutions.4  
>
>The loonie has been transformed into "the northern peso": the same deadly
>instruments used to destabilise national currencies in Asia and Latin
>America, have been routinely used by Canadian and American financial
>institutions in their assault against the Canadian dollar. 
>
>Assaulting the Vaults of the Central Bank 
>
>The implications are far-reaching. The speculative attacks against the
>Canadian dollar have led to the demise of monetary policy. Politicians have
>failed to acknowledge the existence of currency speculation and its deadly
>impact. The devaluation is seen as a blessing in disguise: a weaker dollar
>is said to contribute to job creation. Countervailing measures to avert the
>slide were not taken, let alone the imposition of a "code of conduct" on
>Canadian financial institutions. Political inertia provided an unequivocal
>"green light" to speculators.
>
>The surge of speculative activity against the Canadian Dollar has resulted
>in a dramatic drain of Canada's foreign exchange reserves. In recent
>months, the Bank of Canada has entered into multibillion dollar contracts
>in the forex market in a failed attempt to prop up the nation's currency:
>the vaults of the Bank of Canada have been assaulted by Canadian and
>American speculators; billions of dollars of Canada's central bank reserves
>have been transferred into private financial hands. 
>
>Wall Street Creditors to the Rescue of the Bank of Canada
>
>"Bail-outs" by global creditors do not solely apply to Mexico, Korea or
>Indonesia. Heavily indebted as a result of its failed attempts to prop up
>the loonie, the Bank of Canada was obliged to renegotiate a US 6 billion
>"bail-out" (9.2 billion Canadian dollars) with a syndicate of Wall Street
>banks (including Chase Manhattan, Citigroup, Morgan Guarantee Trust, Credit
>Suisse First Boston). Politely labelled in the banking jargon as "a standby
>credit facility", the bailout is intended to restock the Bank of Canada's
>foreign currency reserves.5 The Central Bank (defined in our banking system
>as the "Lender of Last Resort") is obliged to replenish its reserves on
>borrowed money, an absurd situation. 
>
>The Demise of Monetary Policy
>
>In the present context, the "lenders of last resort" are the Wall Street
>creditors of the Bank of Canada. Since 1991, reserve requirements have been
>lifted, the commercial banking sector (rather than the Bank of Canada)
>fully controls money creation. In other words, privately held money
>reserves in the hands of Canadian and US financial institutions far exceed
>the limited capabilities of the Bank of Canada. Together with Canada's
>largest chartered banks, Wall Street ultimately "calls the shots". The
>banks --through speculative trade-- have triggered the tumble of the
>Canadian dollar and the demise of monetary policy. 
>
>Ironically, the same institutions which contributed to weakening the
>Canadian dollar have been called in --under the standby arrangement-- to
>help the Bank of Canada prop up the loonie on "borrowed forex reserves".
>The latter constitute a large share of Canada's central bank reserves. 
>
>Speculation against the Canadian dollar marks the demise of central banking
>and the inability of the federal government through the Bank of Canada to
>control money creation on behalf of society. This signifies that monetary
>policy is in the hands of the Bank of Canada's Wall street creditors. 
>
>Using the Budget Surplus to reimburse the Speculators
>
>The modest budget surplus of 3.5 billion dollars (fiscal year 1997-98)
>announced by the Minister of Finance in October will barely suffice to
>service the Bank of Canada's outstanding debt with Wall Street which has
>resulted from the short-term speculative assault on the Canadian dollar. No
>doubt, the government is also anxious to use part of the surpluses of the
>employment insurance scheme to reimburse the Bank of Canada's Wall Street
>creditors. 
>
>The Federal Reserve Bank of Toronto?
>
>What is the future of central banking? With its hard currency reserves
>depleted, the Bank of Canada may become (in the not too distant future) a
>mere "currency board" in which the Canadian dollar would be pegged (eg. in
>a two to one split) to the US dollar. Alternatively, the loonie would be
>withdrawn altogether; Canadian prices and wages would be converted into US
>currency. The loonie would be replaced by the greenback and the Bank of
>Canada would become a mere appendage of the US monetary system: the 13th
>regional Reserve Bank of the Federal Reserve system of which Canada's
>chartered banks would become the stockholders. 
>
>	*    *   *
>
>Notes
>
>1 Bank of Canada, Press Release, "Bank Rate Raised by 1 Percentage Point",
>27 August 1998.
>
>2. Bank of Canada, Survey of Foreign Exchange and Derivatives Markets in
>Canada, Press Release, 29 September 1998. For commodity trade figures see
>Statistics Canada, Merchandise Trade of Canada, Ottawa, October 1998; trade
>figures are for August 1998. According to Statistics Canada, Gross Domestic
>Product at market prices was 876.1 billion (seasonally adjusted at annual
>rates, second quarter 1998). According to Bank of Canada data, total forex
>turnover is of the order of Can$1189 billion a month (US$773 billion) or
>14.3 trillion per annum, --ie. 16.3 times Canada's Gross Domestic Product
>at market prices. 
>
>3. Ibid.
>
>4. Bank of Canada, Survey of Foreign Exchange and Derivatives, op. cit.
>
>5. Bank of Canada, Press Release, 2 September 1998.
>
>	
>    Michel Chossudovsky
>    
>    Department of Economics,
>    University of Ottawa, 
>    Ottawa, K1N6N5
>
>    Voice box: 1-613-562-5800, ext. 1415
>    Fax: 1-514-425-6224
>    E-Mail: chossudovsky at sprint.ca
>
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