Jay Currie

At the end of WWII Switzerland was unscathed, had a strong currency and a sophisticated – and secretive – banking system. When my parents got there in 1960 it was awash in currency. So much so that my father bought a house which had a negative mortgage. That’s right, the bank paid him to own the house simply to have a safe place to put some money. While we lived in Switzerland the exchange rate was, roughly, 4.3 SWF to the USD. (The Canadian dollar was between .97 and 1.07 to the US dollar in this same period.)

The SWF is now trading at 1.18 SF to the US dollar and 1.15 SF to the Canadian dollar.

At the moment Canada is in a position where, if we are smart, we can decouple our dollar, to a degree, from the potentially tanking USD without, for once, taking a huge export hit. Why? Quite simply, $80 USD oil and $720 USD gold and thirteen years of balanced budgets.

On the income side Canada’s huge resources of oil, natural gas, coal, assorted minerals and – though we are not allowed to say this – water – means that we are racking up trade surpluses with the US. But, more importantly, we are also exporting significant amounts of our resources to non-US markets.

At the same time, while the CPC is hardly the picture of fiscal rectitude one would hope it would be, so much money is flowing into the national coffers that deficit spending is a distant, and ugly, memory and surpluses are the order of the day.

Our banking system – while irritating and stodgy – at least had the wit to limit its exposure to dodgy securitized mortgages and while we have private equity folks we have not, as a matter of national business, bunged a lot of money in hedge funds. While some of our banks have exposure to sub-prime risk and assorted doubtful corporate paper, these risks appear to be manageable within the private sector without calls on either the Bank of Canada or the federal government.

Our national debt is declining, not fast enough; but declining.

Imagine if you will that you are a high net worth individual in the PRC. You are selling assorted widgets as fast as you can make them and you are being paid in USD. Your banking system and government are all buying USD debt instruments to recycle the cash and because they seem safe. Problem is that they are not particularly safe especially with money supply growth running at 14% and the Fed lowering rates half a point today. Do you want all your eggs in the American basket with that sort of currency risk and the inevitable inflation which follows a radical increase in the supply of money?

I think not. And I suspect that the PRC people are not alone in their concerns. But where to put the money if not the US. Europe and the Euro are hardly the solution simply because of demographics, governmental paralysis and the utter absence of serious resources. Japan? Not likely for many of the same reasons.

Emerging economies look a good bet save that you never can tell how far the Chavez disease will spread or how quickly the next revolution or coup will occur. Worse, many emerging economies have stock markets which make casinos look legit.

Enter Canada. A strong dollar. A growing aversion to the mere mention of the idea of budget deficits. A central bank which is not at all interested in anything but keeping the inflation rate down. And, most importantly, elephant sized pools of oil, natural gas and mountains of iron, copper, zinc, silver, lead and gold.

If a person from abroad was looking for a safe haven for his USD he could do worse than to convert them into Canadian shares, direct investments or even bonds.

Which brings me back to Switzerland: leaving your money in a Swiss bank at no interest but with no fees over the last 47 years would have tripled its value in US dollar terms. At essentially no risk. But a little judicious investment would have taken that number up, way up.

If the Canadian dollar parts ways with its American friend it is not at all obvious where it will end up. After all, oil could go to $100 a barrel and gold to $1000 an ounce. Our federal government might pay off the national debt early. And people looking for a safe place to put their money might discover the virtues of the relatively transparent Canadian markets and the extremely stable Canadian banking system.

At the moment we run a significant trade deficit with China 15 billion to 3 billion in the first six months of 2007. however, as China’s need for energy and raw materials grows that gap is likely to close. This is offset by our trade surplus with the US which was running at 8.7 billion in January of this year.

Put simply, Canada has every reason to believe that our economy will perform as well or better than any OECD economy over the next decade. And with that will come a stronger currency and our emergence as a true safe haven for money from abroad. Somewhat like Switzerland in the 60’s.