A Supply-Side Look at the Harper Defeat

Steve Forbes and John Tamny published separate commentaries recently at Forbes Opinions analyzing the electoral defeat of Canadian Prime Minister Stephen Harper to Liberal Party candidate Justin Trudeau on October 18.

Their analysis is sure to run counter to most political pundits who focus more on things such as personalities, turnout, campaign strategies, etc.

Both agree that a weak U.S. dollar was the culprit behind the poor performance of the Canadian economy in recent quarters. But Forbes believes that Trudeau is predominantly indebted to Federal Reserve chairwoman Janet Yellen for his victory. Tamny places most of the blame on the executive branch via the U.S. Treasury's responsibility as the mouthpiece for the dollar. He argues that U.S presidents get the dollar they want and with the administration of George W. Bush desiring a weak dollar, that is exactly what they got.

In an attempt to help pull the U.S. economy out of the 2000-2001 recession and to help boost American exports, the Bush Administration supported dollar weakness. Bush Treasury secretaries Paul O'Neill and John Snow were effective in talking down the dollar during their tenures.

Given the importance of the U.S. dollar to global commerce, the effects of a weak dollar reverberate worldwide. In particular, those nations that are resource-intensive such as Canada, Australia, Brazil, and Russia feel the most pain as commodities are priced and traded in U.S. dollars.

With the dollar falling in value, investors fled productive investment in favor of hard assets most resistant to the devaluation of the currency. Scare investment capital migrated to housing and other forms of real estate and to the production of commodities such as precious metals, nonferrous metals, and petroleum. The resultant boom was widely celebrated as a major boost to economic growth in the affected countries but it eventually proved illusory. The rise in prices tricked investors in thinking such commodities were in short supply when in reality supply and demand fundamentals could not explain such huge price movements. Commodities were not suddenly become scare, it was simply the dollar shrinking in value.

Canada saw a major boom in the extraction of metals and the production of crude oil, specifically from high-cost oil sands in Alberta. However, once the dollar began to strengthen from its 2011 low of roughly 1/1900th of an ounce of gold, the profitability of such resource extraction began to suffer. Investment capital started to flow away from the commodity sector and Canada's economy began a painful adjustment that continues to this day.

Unfortunately for former PM Harper, his political career fell victim to an unfortunate Mercantilist policy decision that was made some 15 years ago by his neighbor to the south.