Episode 272 - Whether you’re a founder, investor, or policy watcher, you don’t want to miss this candid conversation on where Canada is winning and where we risk falling dangerously behind.
Matt - this was a great podcast, looking forward to hearing more about the details of the Stablecoin offer.
On the 'currency concern':
Canada has a currency because we 'choose to' for the most part, and it's generally not a function of 'export transactions' or even foreign reserves in the financial sector.
It's the 'currency of the economy' irrespective of USD seigneurage status. Almost all internal transactions are in CDN, taxes, salaries etc. - all in CDN.
Canadian exports have been denominated in USD for decades and foreign holdings are about 66% denominated in USD, a figure which has been roughly stable over time.
None of that is really changing that much - and to wit, over the last 30 years, CDN has actually grown substantially (more than doubled) as a reserve currency globally from a little over 1% to a little under 3% - which means there's quite a healthy international demand for CDN.
This is due to the relative size of our economy, it's consistency, political stability and especially 'natural resources' aka the understanding there's a baseline to support our economy in good times and bad.
Canada could chose to use USD, it might make some transactions easier, but probably on the whole it would not be beneficial, but crucially - there doesn't seem to be any impending or growing impetus for that to happen. Our relationship vis-a-vis the US doesn't really drive that decision.
By the way in the US, the trend since this current Administration is definitely 'weaker dollar' - and that's a hard measure, not reading the tea leaves of their strategy which is hard to fathom. I think they probably prefer some weakness because it helps exports but that's hard to know for sure. We can however assert with confidence that the chaotic tariff policies, and other arbitrary interventions, have spooked intentional investors and there is a very real effort to seek yield elsewhere. Money is moving out, not in. Over the last 25 years something like $25T has poured into the US as Foreign Direct investment and the new 'rebalancing' - either orderly or chaotic - means that has only one way to go. We've seen FTSE etc. pick up as a result of that. The shift is not enormous but pronounced.
Also - as a reminder - capital flows have to follow trade flows - they are the 'economic inverse'. The US is a net importer of goods, which means an 'exporter' of currency. Those dollars have to 'get out there somehow' - and that's how they get out. You can also see how that affects foreign direct investment - aka where are all those international net-exporters going to park all their USD savings? Well, likely in the US. Conversely, China as a net exporter would have difficulty engendering a position in 'reserve status' at very least because they are 'consumers of international currency' and 'emitters of stuff'. The RMB that floats out there tends to get sucked back into the Chinese economy - and of course that's not accounting for all of the other reasons RMB is not a reserve currency and won't likely ever be.
Their 'actions' on Stablecoins and Crypto are more related to the crypto-specific sector, avoiding oversight form their own government and US sanctions - it's not a macro tool or policy of their Central Bank for example. An RMB Stablecoin is probably not a threat to anyone.
All of the geopolitical factors point very well in the direction of 'decent international demand for CDN'. The factors which might adjust that are the stablecoin issuance (it's hard to predict) and maybe some investment flows - but that's all very difficult to fathom and not much has happened yet that would have us believe there's a 'risk'.
But most of that is not primary concern in the choice of having a local currency for the economy anyhow. There are a number of advantages to having sovereign monetary policy, obviously the ability to set interest rates (which can never bee too too far off US Fed rates) but probably the most important being the ability to issue debt in local currency. That's huge. The notion of having to issue debt in a currency that one doesn't control is an very risky, and when that happens it's usually a sign of a collapse in faith of the economic legitimacy of the system and/or of the regime - like in Argentina or Greece.
There are many examples in the world for precedent. Notably - the Nordic countries aka Norway, Denmark, Sweden all maintain their own currencies and of course Switzerland. While Norway is an Oil backed economy and Switzerland is also 'special status' all of them have done pretty well in that choice. Contrast with Spain, Italy, Greece (aka not so good economies) opted into the Euro for what they believed would be 'cheaper debt' - which was true, but the Euro is necessarily a 'strong currency' which also has undue German influence, and they also very aggressively try to keep it that way - meaning - those peripheral nations have lost the ability to devalue, and many argue have fallen into a trap. In fact - some consider the German-controlled 'Strict Euro' to be a primary inhibitor of the European economy. The creators of the Euro even suggested that 'It could not work without fiscal integration' - which requires political integration - and that the Euro as it is would lead to some kind of crisis which European leaders would then use as a basis for deeper integration ... but that inevitable crisis (about a decade ago) was met with populist Euro-skepticism. And so without meaningful change or reform ... it's not good.
All of that is to say, there are serious risks in not keeping monetary policy sovereign.
The last saving grace on all of this, is that deep finance is conservative, and nothing is going to happen quickly. If stablecoins do start to affect the nature of USD seigneurage and reshape what international currency is, well, we may have to react quickly, but other than some truly shiny new kind of idea that could 'make markets' in which case we might want to be 'first movers' (which is doubtful), it's likely that we have room to react if and when we have to. That's a viable strategy, as long as we are responsive.
Matt - this was a great podcast, looking forward to hearing more about the details of the Stablecoin offer.
On the 'currency concern':
Canada has a currency because we 'choose to' for the most part, and it's generally not a function of 'export transactions' or even foreign reserves in the financial sector.
It's the 'currency of the economy' irrespective of USD seigneurage status. Almost all internal transactions are in CDN, taxes, salaries etc. - all in CDN.
Canadian exports have been denominated in USD for decades and foreign holdings are about 66% denominated in USD, a figure which has been roughly stable over time.
None of that is really changing that much - and to wit, over the last 30 years, CDN has actually grown substantially (more than doubled) as a reserve currency globally from a little over 1% to a little under 3% - which means there's quite a healthy international demand for CDN.
This is due to the relative size of our economy, it's consistency, political stability and especially 'natural resources' aka the understanding there's a baseline to support our economy in good times and bad.
Canada could chose to use USD, it might make some transactions easier, but probably on the whole it would not be beneficial, but crucially - there doesn't seem to be any impending or growing impetus for that to happen. Our relationship vis-a-vis the US doesn't really drive that decision.
By the way in the US, the trend since this current Administration is definitely 'weaker dollar' - and that's a hard measure, not reading the tea leaves of their strategy which is hard to fathom. I think they probably prefer some weakness because it helps exports but that's hard to know for sure. We can however assert with confidence that the chaotic tariff policies, and other arbitrary interventions, have spooked intentional investors and there is a very real effort to seek yield elsewhere. Money is moving out, not in. Over the last 25 years something like $25T has poured into the US as Foreign Direct investment and the new 'rebalancing' - either orderly or chaotic - means that has only one way to go. We've seen FTSE etc. pick up as a result of that. The shift is not enormous but pronounced.
Also - as a reminder - capital flows have to follow trade flows - they are the 'economic inverse'. The US is a net importer of goods, which means an 'exporter' of currency. Those dollars have to 'get out there somehow' - and that's how they get out. You can also see how that affects foreign direct investment - aka where are all those international net-exporters going to park all their USD savings? Well, likely in the US. Conversely, China as a net exporter would have difficulty engendering a position in 'reserve status' at very least because they are 'consumers of international currency' and 'emitters of stuff'. The RMB that floats out there tends to get sucked back into the Chinese economy - and of course that's not accounting for all of the other reasons RMB is not a reserve currency and won't likely ever be.
Their 'actions' on Stablecoins and Crypto are more related to the crypto-specific sector, avoiding oversight form their own government and US sanctions - it's not a macro tool or policy of their Central Bank for example. An RMB Stablecoin is probably not a threat to anyone.
All of the geopolitical factors point very well in the direction of 'decent international demand for CDN'. The factors which might adjust that are the stablecoin issuance (it's hard to predict) and maybe some investment flows - but that's all very difficult to fathom and not much has happened yet that would have us believe there's a 'risk'.
But most of that is not primary concern in the choice of having a local currency for the economy anyhow. There are a number of advantages to having sovereign monetary policy, obviously the ability to set interest rates (which can never bee too too far off US Fed rates) but probably the most important being the ability to issue debt in local currency. That's huge. The notion of having to issue debt in a currency that one doesn't control is an very risky, and when that happens it's usually a sign of a collapse in faith of the economic legitimacy of the system and/or of the regime - like in Argentina or Greece.
There are many examples in the world for precedent. Notably - the Nordic countries aka Norway, Denmark, Sweden all maintain their own currencies and of course Switzerland. While Norway is an Oil backed economy and Switzerland is also 'special status' all of them have done pretty well in that choice. Contrast with Spain, Italy, Greece (aka not so good economies) opted into the Euro for what they believed would be 'cheaper debt' - which was true, but the Euro is necessarily a 'strong currency' which also has undue German influence, and they also very aggressively try to keep it that way - meaning - those peripheral nations have lost the ability to devalue, and many argue have fallen into a trap. In fact - some consider the German-controlled 'Strict Euro' to be a primary inhibitor of the European economy. The creators of the Euro even suggested that 'It could not work without fiscal integration' - which requires political integration - and that the Euro as it is would lead to some kind of crisis which European leaders would then use as a basis for deeper integration ... but that inevitable crisis (about a decade ago) was met with populist Euro-skepticism. And so without meaningful change or reform ... it's not good.
All of that is to say, there are serious risks in not keeping monetary policy sovereign.
The last saving grace on all of this, is that deep finance is conservative, and nothing is going to happen quickly. If stablecoins do start to affect the nature of USD seigneurage and reshape what international currency is, well, we may have to react quickly, but other than some truly shiny new kind of idea that could 'make markets' in which case we might want to be 'first movers' (which is doubtful), it's likely that we have room to react if and when we have to. That's a viable strategy, as long as we are responsive.
- JS