At the same time, the US derives its “exorbitant privilege” from this situation. The demand for US assets constrains the growth in credit and exchange rate risk premia charged by markets on rising US debt. This effectively limits the increase in external borrowing costs, thus removing an incentive to curb borrowing.
Distressing as that is, it is a reality Canada had to face. And our currency moved downwards, reflecting – not causing – the drop in our economic prosperity and the need to adjust. When shocks like this hit us from time to time, movements in the external value of the Canadian dollar help ‘buffer’ the shock and smooth the process of adjustment.