QUACKGRASS PRESS

The Canadian dollar has fallen to the US 65¢ level. It's time to dust off the old gags about the "Hudson's Bay peso." That name was invented for the Canadian dollar during one of its earlier bumps down the staircase to extinction. 

Diane Francis pointed out (Financial Post, July 25/98) that, "So far in 1998, the C$ is down by about 3.8% against the US$. It has slid from 3.3% to 3.6% against four of the other Group of Seven currencies ­ France, Italy, Germany and Britain." She quoted a currency trader who says "I cannot see a bottom to the dollar. What's changed that will make it go up?" She observed that the collapsing C$ "may end up becoming a national emergency," and she deplored Prime Minister Chretien's irrelevant maunderings about a low dollar being "great for tourism." 

David Frum wrote on the same topic that day, but with more emphasis on the central fact of currency devaluation: it "translates into a poorer people. Everyone who earns a salary denominated in C$s, or owns a house or other property in Canada, or stores his savings in C$s has been impoverished by the falling dollar." (Emphasis added.) Frum rightly noted that a currency devaluation is a country-wide pay cut; that's why it's "great" for tourism and exports. 

Both Francis and Frum laid the blame squarely on Chretien's government, but neither pointed to the obvious cause: inflation. 

When a currency is inflated faster than other currencies, its value falls in terms of those others. This is news of the same order as announcing that sunrise illumines the landscape, yet Francis and Frum didn't bother to report money supply statistics. It's getting light out, so let's glance at the eastern horizon in search of a cause: has there been any inflation lately? 

Yes: the Bank of Canada has been inflating like crazy! The M1 money supply ballooned a whopping 16.2% in the year ending in first quarter 1997. The rate declined over the course of the year, but was still at 12.8% in fourth quarter 1997, and averaged above 14.5% for the year. In the first quarter of 1998, the year over year M1 inflation was 11.8%. (Source: the Bank of Canada's "quarterly greys.") 

This year's drop in the value of the loonie is explained by the flood of loonies churned out in recent years. Don't be lulled by the modest rate of recent price rises; inflation has been roaring in Canada. The collapse of the loonie is just its first obvious symptom. Unless the inflation is outrun by expanding production due to economic progress (it could happen), commensurate price rises will be along in due course. 

The collapse of the loonie has lessons for everyone, not just for Canadians. Economist George Reisman has pointed out that every country with a fiat currency is only 2 or 3 years away from the catastrophic price rises known as hyperinflation; that's about how long it would take for a sufficiently irrational central bank policy to inflate a currency to destruction. 

Hyperinflation is a Sword of Damocles which hangs perpetually over our heads. You may hope that central bankers would never inflate so recklessly, but if you remember the inflationary 70s—not to mention such wild inflations as that of 1920s Germany—you will put that hope in its right perspective. 

What can you do to protect yourself? In a world of fiat money, prudence dictates diversifying your investments among countries, and therefore among currencies. Diversification greatly reduces your vulnerability to the irrationality of any one country's central bankers. 

It's too late for Canadians to protect themselves against the recent plunge of the loonie—that's water under the bridge—but it's not too late to protect against future drops. International diversification is your best defense against future fiat money irrationality. 

It's very easy to diversify among countries these days. There are a host of mutual funds which routinely practice world-wide diversification. Any mutual fund salesman will be more than happy to tell you about the international funds he offers! 

What?! You have no investments?! Shame on you! However do you expect to thrive, and to look after you and yours when we finally bury the welfare state? Start your savings program today!¹ And invest your savings outside your home country through one of those convenient mutual funds. 

Don't think that a lack of investments makes you immune to fiat money madness; it makes you helplessly vulnerable to it! Your house is priced in local currency; your future salary will be paid in local currency. You pay prices in local currency. Above all—if you are expecting a pension, it will be paid in the local currency. Foreign investments are the only basic defense against all this vulnerability: they are for everyone. 

If you have only trivial capital, you can quickly set up a combined hedge and savings program by borrowing in your local currency to buy foreign stock investments.² The loan payments will be your monthly savings; the interest you pay on your loan will (probably) be tax deductible; the foreign investments you buy are immune from local financial shenanigans. If your local currency falls in value, your foreign investments will bring you correspondingly more local currency. You can expect widely diversified stock investments to earn the world-wide average rate of profit, and those profits will (usually) more than cover the interest you pay on your loan. 

What if your local currency rises in value? That would make your loan harder to repay, but you would benefit from the rise in many other ways (e.g., cheaper imported goods). Whether your local currency rises or falls, your foreign investments will be working to even out the fluctuations in your overall position. 

When you have significant foreign investments you will be able to regard a collapse of your local currency with relative equanimity. Canadians with such a hedge keep on profiting serenely even while the loonie plunges. So can you! 

^1. For great advice on how to save and why, get yourself a copy of The Richest Man in Babylon. It's a true classic! 

^2. Yes, stocks! Gold is useful as money, and it's a wonderful asset for sitting out temporary stock market turmoil, but it earns you no consistent profits that you can compound over the long term. 

You needn’t despair at your fellow citizens' vulnerability to fiat money—you can become a Quackgrass activist! Copy this article! Keep the original for future copies. Paper meetings with it! Paper your office! Leave a stack on your business counter! If you expect hostility, use stealth and cunning—it’ll drive your opponents wild! Be ingenious! Have fun! 

Quackgrass Press will use all the help it gets. E-gold is the easiest help to give! 

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©1998, by Michael Miller. Permission is hereby granted for any non-commercial reproduction and circulation of this article—MM.