The Canadian Dollar is No Haven from a US Dollar Collapse
Tuesday, May 31, 2011 at 9:14PM We spend a lot of time here at The Dollar Vigilante chastising Ben Bernanke and the Federal Reserve and preparing our subscribers for a collapse of the US dollar - something which has been paying off very handsomely, with gold and silver at record highs this year - but don't take that to mean that we prefer any other fiat currency. No fiat currency in the western world is any better than the US Dollar. In fact, in every case, they are worse.
The Federal Reserve is still, despite its secrecy, one of the most transparent central banks in the world. It also has, over the last century, despite inflating the dollar downward by 97%, been one of the least inflationary banks.
We often hear of people denounce the US dollar and correctly divine that it is headed to worthlessness, but, in the same breath, they say they own other fiat currencies like the Canadian dollar.
This is a case of ignorance of the workings of banks like the Bank of Canada - or virtually any other major central bank in the world, for that matter.
There are numerous reasons why the Canadian dollar will not survive a US dollar collapse:
- The Canadian economy is very tied to the US economy
- The Canadian Government is intent on devaluing the Canadian dollar alongside the US
- The Bank of Canada has virtually no gold backing the Canadian dollar
- All that does back the Canadian dollar is the US dollar and other fiat currencies
- The Canadian dollar is not used globally
The Canadian Economy is Very Tied to the US Economy
We need only show one graphic to make this point:
It is obvious that if the US goes through a monetary collapse or even just a major depression, the Canadian economy will be hobbled significantly.
The Canadian Government is intent on devaluing the Canadian dollar alongside the US
The Canadian Government has made it painfully clear that they have no intention of allowing the Canadian dollar to rise much more than par with the US dollar. The reason: lobby groups and voting blocks from export based industries will depose of any government which allows this to happen.
The Bank of Canada has virtually no gold backing the Canadian dollar
Since 1980, Canada has sold 99.5% of it gold. Canada now has the 78th largest holding of gold of all countries. Countries such as Bolivia, Bangladesh, Cambodia and Macedonia have more gold than does the Bank of Canada.
The Bank of Canada used to have 653 tonnes but today it only holds 3.4 tonnes. To give a rough idea of what all of Canada's gold holdings look like, we created this rough estimate of what it would look like if Canadian Prime Minister, Stephen Harper, was standing beside it:
All that does back the Canadian dollar is the US dollar and other fiat currencies
If you believe that the US dollar is headed to zero then it makes no sense to own the Canadian dollar. Practically all that backs the Canadian dollar is US dollars.
The Canadian dollar is not used globally
The Canadian dollar is not a true global currency. There is only one, current, true global currency: the US dollar. It is accepted on the streets of New Delhi, Phnom Penh, Buenos Aires, Moscow and practically everywhere. Try bringing some Canadian monopoly money to Shanghai and try buying some street noodles. You'll see how valid of a global currency the Canadian dollar is. No soup for you!
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Reader Comments (10)
So, the Loonie is apparently no better than the Us Dollar-so the obvious question-other than physical Gold & Silver-where else??? If stocks are purchased on the TSX what other currencies are available for the purchase? Or is absolutely nothing but physical metal under ones control the only safe investment-which totally negates all equities on both the Us & Canadian Exchanges? Thank you.
Hi Werner, just because a currency collapses does not mean that stocks 'quoted' in those currencies will go to zero. Just because a stock is quoted in a currency does not mean it has any attachment to that currency. In fact, during currency collapses one of the better places to be is in the stock market because the corporations in that region usually still hold their value fairly well... the Zimbabwe exchange performed reasonably well during their hyperinflation
Totally agree that the Canadian dollar is not a safe haven from a US dollar collapse - only physical gold and good gold shares (and to a lesser extent, silver) are safe haven currencies. Some financially savvy individuals do hold the Loonie as the currency they use to convert as necessary for day-to-day expenses on the premise that out of all the failing Western currencies, the Cando and Swiss Franc are the best for that purpose.
I believe that gold and silver are the best bets for the upcoming dollar collapse, but many people that I follow including Peter Schiff, Jim Rogers, etc., believe that commodity currencies like the Canadian Dollar, Australian Dollar and South African Rand will do well, similar to the Swiss Franc. No doubt there will be a bumpy ride for Canada as they have a closely knit economy with the US, but dont forget they are producing over 100 tons of gold a year and their mint offers storage facilities for bullion. Dont forget that you cant trust countries records for how much gold they have, as you saw in 2010 with saudi arabia doubling their reserves and china doubling theirs in 2009.
When I studied Economics and Political Science at Queen's in 1993, in my opinion the free market will fail on its own because there are so many assholes around. In one of my papers I cocluded that capitalism can only succeed ( with a governent ) if the governemnt provides health care and some welfare. I'm not disagreeing with your outlook but I think Canada is a damn decent place compared to most democracy's. Also I remember thinking that a decent society should be judged by how they treat their most disabled citizens. I'd agree with you but I'm not prepared ( hence we differ in opinions and I'm not a dollar vigilante yet ) to give up.
I will start by saying that I LOVE to read the Dollar Vigilante.
However, there is something missing in your analysis. The strengh of Canada public finance compared to the other G8 members.
I wrote a note on my facebook pertaining to Canada's future economy:
Why Not to Use a Home-Equity Line of Credit Right Now and In the Future
Submitted by David S.
June 26, 2011
If I may, I would encourage anyone thinking about taking a home-equity line of credit out against their house to not do it. Especially, if it is being used to pay off credit card debt or buy a depreciating asset. With the recent news of a decline in housing prices in Canada, this decline will be more severe in the coming months and those looking to retain value in their house will be over extended in negative equity and will lose quite a bit. Don't take my word for it, do your due diligence.
Recently, the governor of the Bank of Canada, Mark Carney, stated that housing prices in Canada have reached their peak and that the housing bubble will soon burst. As this unfolds, the economy in Canada will suffer greatly due to the fact that the banks (TD, CIBC, HSBC, RBC, BMO, SCOTIA, etc.) have over leveraged themselves on selling your mortgages through derivatives such as credit default swaps and mortgage-backed securities. These derivatives are a speculation or bet, for or against the success or failure of the person taking on the mortgage. This in turn creates a further extension of the bank's leverage against your home while adding more assets and profits to their books. And, it is all done at your expense.
When housing prices over inflate themselves they have to correct on the downward side automatically. The further they inflate, the further they deflate on the correction. A prime example is Las Vegas where homeowners are 84% in negative equity in their house. So to create a picture in your mind of what that looks like: a house that was bought for $184,000 is only worth $100,000. It is likely that the $184K was just the selling price and the fees on top of that surpass the selling price.
As the economy will continue to further erode across Canada, especially in limited resource bearing provinces, it will be harder and harder for the working class to continue to make payments on their mortgages. This is also more effectively expressed because of other expenses such as rising food and fuel prices and increased interest rates on pre-existing outstanding credit and auto loans.
Industry will slow due to this because of how much leveraging (debt) the people and banks have incurred. It will be harder for people and business to get new loans or credit in the coming times. With people losing on the value of their homes and the increasing costs to survive, few will be able to afford many consumer items and product, thus decreasing manufacturing rates. This decline will be continued even into sectors of industry where items of necessity (personal hygene, food, clothing, etc.) will be neglected or the need for them will prolonged. The working class will no longer choose to buy the expensive or name brands because when they are hungry they will prefer to buy what is cheapest.
Don't kid yourself for one second though that this will decrease prices, it will not. The more dollars that come into existence via mortgage and home-equity lines of credit to finance necessary expenses, the less those dollars are worth. Well what about supply and demand? Supply will be overabundant initially, but will soon be very limited because of the expense of these manufactured and processed goods because the manufacturers will be paying more for commodities such as steel to produce them. Obviously, the continued decrease of the dollar's value will play a big role in this as banks continue to expand the currency and credit supply. An interesting thing to point out, is the fact that whenever the media reports the value of the Canadian dollar, they always measure it against the US dollar. This is completely asinine when the US dollar is on the brink of collapse and hyperinflation will ensue. This could happen in Canada as well due to the evident fact that Canada imports many goods from the US and China. Another reason this could happen in Canada, is because whenever people take out new loans or lines of credit they expand the currency supply further decreasing the value of the Canadian dollar. More and more people will take loans and lines of credit to decrease interest rates as the banksters raise interest rates to combat inflation.
The only thing that is currently keeping the dying USD propped up is the evident fact that Japan hasn't sold their US treasury bonds yet to rebuild their economy, and the recent tap into domestic oil reserves (emergency) in the US.
The coming times ahead will produce a huge transfer of wealth to those who have decided to hold commodites such as grain and steel, but the greatest transfer will occur to those who hold physical precious metals such as gold and silver as people turn away from paper and invest in a store of value. Those trying to save a devaluing currency such as the CAD or USD will lose big time. Even the once safe haven of RSPs and RRSPs and deferred profit sharings will be dwindling in value if they are not confiscated by government to pay for the interest on their debts.
Excellent comments David, thank you for contributing!
Even though Canada uses it's natural resources to back an economy, under trade agreements like NAFTA, we no longer "own" our resources. This is why I believe Canada will also fall hard when the USD measured on the POSX (think for yourself) is so interconnected. I agree with dollar vigilante. Where do we Canadians get much of our consumer products from that support our consumer economy? You got it Chicago, from US companies, who have their businesses overseas not employing Canadians, if they do it is very insignificant. We still mainly buy Chinese or other foreign
Here's an honest question: When was the last time you bought something that said "Made in Canada"? What was it? Food? That's about all one does buy that's "Made in Canada"...
My point is this, we do not have enough of a sovereign economy to sustain the propping-up of our CAD. So, how do we expect the USD and the CAD to sustain each other?
Interestingly enough, "Federation of North America" notes have been apparently in the works and pre-printed so that way the NAU would consolidate the US debt and back it with Canadian resources...and I do mean people as well, Neo. This is the most brazen of future planning I have ever heard. Don't believe me? Check it out for yourself!
That would be the ultimate carry-over for further destruction of our economy with the banks having the limitless potential to further create dirivatives and other speculative and safeguarding instruments.
Good article.
Glad I could contribute Jeff.
Oh btw, great interview on the Kieser report recently!