Federal Reserve Chairman Ben Bernanke sent yet another signal that the world’s most powerful central bank is on course to launch a second round of “quantitative easing,” probably as soon as Nov. 3. “Quantitative easing,” though it doesn’t involve literally “printing” money, has the same effect: It’s a way to increase the money supply. And that means the US dollar is headed lower.

QE2 will happen because there are no other realistic options to address a sputtering US recovery. Any sensible fiscal solution would wither in a sclerotic legislative system. And the Fed has already exhausted traditional tools to stimulate demand through monetary policy.

The Fed’s traditional tool is to stimulate the economy is useless; the fed funds rate has been near zero since late 2008. But the central bank will, with the simple stroke of a computer key, increase the credit in its own bank account. It will use this new money to buy whatever assets it likes: government bonds, equities, houses, corporate bonds or other assets from banks.

The price of the assets the central bank buys should rise, and the yield–or interest rate–on that asset will fall. These interest rates radiate out to the rest of the economy. They affect the cost of loans paid by companies, the cost of mortgages for households and the return on saving money. If the Fed is putting a bid under long-term securities companies, for example, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be replaced.

As the money created by the Fed finds builds up as deposits, banks’ funding positions should improve and make them more willing to lend. Another effect is that this new money leads to higher consumer prices, incentivizing people to buy now rather than later.

But the Fed has little experience judging the economic impact of quantitative easing. And there are many risks involved with an even bigger Fed balance sheet. The central bank could lose money on its purchases, money that will ultimately have to be underwritten by taxpayers either with higher future taxation or by creating even more money.

But go too far and you destroy the value of the currency, risking out-of-control inflation and hyperinflation. If you’re not aggressive enough quantitative easing won’t work to change other interest rates in the economy and stimulate demand. Nobody knows how much is too much and how much is not enough.

Canada’s Hard Currency

We do know that the threat of the Fed “printing” more money has weakened the dollar–the Fed, it seems, is actively pursuing weaker currency. And commodity prices have taken off. These are positives for the Canadian dollar, which is already near parity with the US dollar as of Friday afternoon.

It’s clear, based on our experience, that many US investors have fled the Canadian market, most simply because of disgust over the trust taxation debacle. Four years ago this month, on Halloween Night 2006, Canadian Finance Minister Jim Flaherty unmasked the minority Conservative government’s Tax Fairness Plan, which proposed to begin taxing income trusts at the entity level. A law was passed in the spring of 2007 that made Jan. 1, 2010, the expiration date for the Canadian income trust era.

But Flaherty’s sour milk has turned into a class of sweet-smelling, high-yielding corporations, disciplined by their recent experience as income trusts to support investor-friendly cash payouts amid even the worst economic conditions. There have been difficult choices, even among the strongest, but on whole what was once a universe of high-yielding trusts is now a universe of high-yielding corporations.

There’s no more use cutting off Canada and its great wealth-building and risk-management potential for US investors.

Canada is the world’s second-largest producer of uranium, the second-biggest exporter of natural gas, the second-biggest exporter of wheat and it sits on the largest pool of oil reserves outside the Middle East. Domestic growth and the strength of the currency still rely on what’s still the biggest bilateral trade relationship on the planet, but Canada’s economy is rapidly orienting eastward, toward the potential of China and India and other emerging markets. This new demand, on top of the ballast represented by US trade, makes Canada unique among developed economies.

The Great White North has bounced back faster and healthier than its peers, a fact that led the Bank of Canada to become the first G-7 central bank to raise interest rates, by 0.25 percent in June. Two more increases, in July and September, have the BoC’s target overnight rate at a still-low 1 percent. It’s likely, given the slowdown of the latter half of the second quarter and the early part of the third, that the BoC will hold the line when it meets again next week.

But Canada’s central bank how has at its disposal an important policy tool should the economy show signs of weakness: It has room to cut its overnight rate. There’s no need for currency-debasing money-printing or easing of any quantities. And Finance Minister Flaherty said two days ago that Canada will be the first G-7 country to balance its budget by 2015. That makes Canadian debt more attractive to investors interested in countries with sound fiscal positions; the flow of capital is certain to benefit all boats.

Editor’s Note: For additional information on this topic, check out Roger Conrad’s latest report on Canadian Income Trusts.