Canada and the Peg

If I were the Prime Minister of Canada today, I would pick up the phone and call Obama.

 

“Hello, Mr. President? Yeah, it’s your neighbour upstairs. Would it be alright if we pegged the Loony to your Dollar for the next Quarter?”

 

My reasoning is not simple.  The world economic situation is in a state of disequilibrium caused by a breakdown in fiat money. To understand this let us think of a privately-owned merry-go-round with six ends. Let’s say that this particular merry-go-round is owned by the American boy’s parents. As a result, the other kids don’t mind paying a little tribute to him by allowing him to stop pushing first and start pushing last. Five of the six kids can easily compensate for one rich lazy boy. But then let’s say that the Chinese girl has a big crush on the American boy and only starts and stops pushing according to his pace and not that of the other four. She is able to get away with it because she is situated opposite the American boy on the merry-go-round. While the pace may be substantially slower than if all six were pushing in sequence, and even if only five were pushing in sequence, the merry-go-round still sustains the disequilibrium.

 

At the risk of applying too many real-world concepts to this analogy, I will discontinue it with only one more: Canada, finding itself directly between China and America, could potentially re-establish optimal equilibrium in the fiat money system by also fixing its rate to the American boy’s for a limited period of time. This would nullify any advantage in pushing that the Chinese girl may have gotten by pegging to the American boy, while lightening the burden and maximizing the enjoyment of the remaining three children.

 

China’s Renminbi has been pegged to the U.S. dollar for the majority of the ‘50’s, ‘60’s, and since 1992 – when the Chinese central bank bought and sold as much currency as needed to change the exchange rate from 5.76RMB/$US to 8.62RMB/$US. What this means is that, since very shortly after WWII, the People’s Republic of China has picked the victorious Americans as the merry-go-round of choice; but by artificially selling Mao Zedong-stamped Renminbi at a much lower price than that determined by market forces (the push and whims of the other children) China is effectively flooding the market with its currency – it is selling money “cheap”.

 

My analogy is misleading because it presumes that it is only a generic crush that motivates the Chinese girl to mimic the American boy: it overlooks clear advantages on the merry-go-round and even suggests that the crush will continue off the merry-go-round. In 1964, much to the dismay of the United States and the Soviet Union, China tested its own nuclear bomb. At this very period in China’s history, slave-societies continued to thrive in its remote South-Western borders. For example, of the 56 000 inhabitants of the city of Norsu, in 1959, 47 per cent were slaves. If we consider the economic coercion China practices against Taiwan and the fact that China’s only reaction to adamant American demands to stop pegging has been to filibuster, then the utility of such a mode of economic statecraft within grand strategy becomes crystal clear.

 

Nevertheless, it is not the Canadian way to kick anyone off the merry-go-round. That doesn’t mean that we have or should take a laissez-faire approach to the problems that have and can afflict the world. Especially when we look across at the Rwandan boy, see the new-found light in his eyes; or the Iranian girl laughing with her hair in the wind, against the swirl of the outside playground, the gaze of the not-too-distant guardians.

 

“Why don’t you fly on down, and we can see what we can do.”

 

“Sure thing, Mr. President. Have a pleasant afternoon.”