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The other point is how Canadians have been hedging against exchange rate risk. According to the Bank for International Settlements, Canada’s real effective exchange rate — an index that includes our major trading partners and corrects for changes in price levels — increased by almost 50% between 2002 and 2012. This increase in the buying power of our dollar on world markets provided a significant boost to Canadian incomes. Of course, there was always the chance that these gains would be reversed — and indeed the real exchange rate has depreciated by 10% since 2012.

A simple hedge against depreciation is to buy foreign assets: if the dollar falls, then the value of assets denominated in other currencies will automatically rise. And buying foreign assets is what Canadian investors have done. Even as the exchange rate appreciation sharply reduced the value of foreign holdings, Canadian purchases expanded even faster so that holdings of foreign assets kept pace with GNI. This strategy has already begun to pay dividends: the decline in the Canadian dollar has already increased the value of foreign holdings by almost 40% of GNI over the past two years. It’s probably not a coincidence that estimates for national net worth have also increased by more than 30% of GNI during this time.

The eggs-in-a-basket metaphor is a much less useful guide for economic policy

Diversification makes eminent sense as a principle for asset management – and asset managers,public and private, have already learned this lesson. Given the current circumstances, many Canadians would probably be relieved to learn that some 69% of the assets managed by the Canadian Pension Plan Investment Board are located outside Canada.

But the eggs-in-a-basket metaphor is a much less useful guide for economic policy. Diversification has been the driving force behind any number of ill-conceived ‘”industrial policies” whose effect is to divert labour and capital away from the sectors where they are most productive. These efforts may succeed in producing an economy that is more diversified — but also less prosperous. It’s just basic economics.

National Post

Stephen Gordon is a professor of economics at Laval University.