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Flaherty should cautiously cheer “short Canada” crowd

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Jim Flaherty is wishing "bad luck" to foreign investors who are betting against Canada. I hope, for the Canadian economy's sake, that he knows better than to really mean it.

The Canadian finance minister's quip Monday about foreign speculators' recent short-selling of Canadian assets (most notably a massive net short position in the Canadian dollar) – "I wish them bad luck" – is probably good politics. Publicly, he wouldn't want to undermine the confidence of the country's small mom-and-pop investors by actually talking about the very good reasons why foreign investors have cooled on Canada.

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But good policy is something different. While none of us are cheering for a Canadian slump to justify the speculators' pessimism, Canada could do without foreign investors' infatuation for a while if we want to get our economic house in order.

Canada's two biggest economic albatrosses – an overdone housing market and an overvalued currency – have an ample foreign-speculator component to them. Foreigners flocked to both in search of a relatively safe harbour to park their money, and in doing so, exacerbated some made-in-Canada problems that are now holding domestic economic growth back.

The big speculative net short position in the Canadian dollar is evidence that opportunistic speculators are at least preparing for a serious unwinding of foreigners' Canadian positions. Still, the dollar's decline has been stubbornly shallow; it remains within spitting distance of parity with its U.S. counterpart, still well above where most experts would peg its fair value. (Note that foreigners have continued to buy Canadian dollars to pay for Canadian government bond purchases, where net foreign purchases totalled $10.9-billion in the first quarter, adding to the whopping total of $46.5-billion in 2012.)

A deeper (and wholly justified) correction in the currency is needed to kick-start Canada's struggling export sector, and thus deliver some much-needed stimulus to an economy with few other potential growth engines on the horizon.

No one keeps firm statistics on how big the foreign-investor contribution has been to the overheating of Canada's housing market, but the general agreement is, it's big. For example, some estimates (not backed by any hard evidence, mind you) put foreign investors at more than 30 per cent of Toronto's condo boom, which still fills the city skyline with construction cranes. Their presence has inflated prices and thus household debt, which is recognized by both Mr. Flaherty and the Bank of Canada as the country's biggest economic risk. The market is in need of a healthy correction to take the pressure off; a cooling of interest among foreign buyers would speed up the process.

Let's remember, too, that speculative investment capital is fickle, short term and not generally the stuff on which real, concrete economic expansion is built. The country needs real growth and investment, not distortions getting in the way of economic recovery. Mr. Flaherty may not want to say it for public consumption, but right now, if some of this frothy money left, the benefits would outweigh the costs.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow him on Twitter at @ParkinsonGlobe.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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