There is a lot of talk this week about the Federal Reserve’s plans to stimulate lending through quantitative easing. I suggest seeing here, here, or here for explanations, but in short, this is the Federal Reserve creating $600 billion and using it to buy Treasury notes (i.e., debt that was previously issued by the US government) from banks. Doing so gives the banks money, which they (in theory) will lend out, thereby stimulating the economy. So how will this affect the sport world?
If things go as planned, the sport industry will benefit just like other businesses will benefit. If lending increases, businesses make more widgets, jobs are created, unemployment dips, and consumer spending increases… teams will benefit by getting more of the discretionary dollar. Theoretically, all US teams will benefit equally in respect to the recovery pace of the markets in which the teams operate. But for leagues with teams in Canada, and those teams have an advantage.
One of goals of quantitative easing is to stave off deflation and get inflation back to 2% or so. If it’s “too successful,” however, adding $600 billion to the money supply could lead to rampant inflation. Either way, QE is likely to weaken the US dollar against foreign currencies, perhaps by as much as 20%. This isn’t necessary a bad thing – a weak dollar means cheaper US exports, which means more goods produced in the US, which means more jobs and more (relative) wealth for Americans.
Canada, to the surprise of some Americans, actually is a different country with its own Canadian currency. Canadian teams pay their players in US dollar salaries to be competitive with the majority of teams in the league, and average player payroll makes up about 60% of expenses across the major sports. So although the largest team expense is in US dollars, most of Canadian teams’ revenues are in Canadian dollars (local gate revenues, sponsorship from Canadian companies, local media rights, etc). For sports like hockey, where teams are extremely dependent on gate revenues, the exchange rate is an even bigger problem.
When the loonie increases in value compared the US dollar, the buying power of Canadians teams increases. For most of the last 60 years, the Canadian teams have been at a disadvantage because of the relative weakness of their currency; as recently as 1/18/2002, the loonie was worth only US$0.62. This means that in order to cover a player’s US$3m salary, the Chicago Blackhawks have to bring in US$3,000,000 in revenue, but the Vancouver Canucks must bring in CAN$4,838,710.
Since 2007, there has been greater parity between the two currencies, with the loonie lately flirting with a 1:1 exchange rate. This has helped level the playing field (yeah, a sports metaphor in a sport article) for Canadian clubs. If the latest QE efforts lead to a further weakening US dollar, it could mean greater on-field and financial success for Canadian teams.
[edited for clarification of terminology used]