Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.
Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Monday, January 25, 2016

Liberals Breaking Faith

What, exactly, does the Liberal Party in Newfoundland and Labrador think it's doing. In all seriousness. When the people of the province went to the polls just a few short months ago, they were promised a change in all the ways and means the PC Party had been governing. A short two months later and it seems those lessons have all been lost, and "creative manipulation" is the phrase of the day, because "leadership" sure isn't.

Let's start with the election itself. Now anyone with a calculator and a copy of the budget estimates for 2015 would know that the province's current deficit would be about $2 billion. Yet, when the Liberals finally got their wish, and were elected, they trot out Dwight Ball and Cathy Bennett with the deer in the head lights look saying "oh, nobody could have known it was this bad". What a load of you know what. The truth is, unless the Liberals have the stupidest research staff on record, that they just outright misled the public to get their hands on the reins of power. Simple as that. Obvious as the nose on your face.

Then Ball and company come up with the beauty of cutting 30% from all government spending. They have to they claim, otherwise the province will be done for. Well, that may be true, but during the election they sold the people on not cutting government. They were just going to "manage better". Again, referring back to the calculator analogy, they just outright misled the public and for the same reason.

Oh, but they are conducting some kind of "review" of Muskrat Falls. The problem is that Muskrat Falls doesn't need a review - it needs to be stopped. While in Opposition Ball and his now Justice Minister decried the lack of legal grounds for the Water Management Agreement that made the project even feasible. Now? Now they continue to go forward with it despite the challenge to it's fundamentals in the Quebec Superior Court, and my own action here in our Supreme Court to have the matter examined for its constitutionality. The very same reasons why the Liberals questioned it in Opposition. Now I find myself fighting them in the Appeal Court, rather than having them jointly requesting the Appeal Court examine the agreement. Their disingenuous ways certainly aren't all that sunny for sure.

Finally, we have the case of a female fire fighter being sexually bullied by her peers. Brenda Seymour, volunteer fire fighter and councilor for Spaniard's Bay, has been subjected to porn during an otherwise all-male training session, as well as sexual commentary during the same session. She fought against it for which she was ridiculed and bullied by members of her community. Her fellow fire fighters resigned enmass to protest her protest.  In other words, they circled the wagons to protect their own behinds, but they also tried to persecute the victim so to say. A small-minded, offensive action that matched the small-minded offensive treatment she suffered while in training. The story has made national news headlines.

The moral of the national story on Brenda Seymour is that Newfoundlanders are old fashioned bullies, sexist, and crazed enough to have their own children carry signs defending the men who refused to stand up for a fellow fire fighter being subjected to porn. An ugly and disgraceful mess. No doubt a time for a male Premier to stand up and show leadership right? Wrong. Ball disappeared into the wood work like Casper the friendly ghost, and instead had his female Finance Minister issue a memo saying "now-now boys, no porn during training". I twist the gist of it a bit, but you get the idea. The point is when leadership is required the Leader leads. That's not happening.

I suppose in some ways we shouldn't be surprised. Dwight Ball didn't exactly set the Liberal Party on fire when he became leader. Their was, and remains, no charisma in his bones. He's not that kind of leader, but what kind of leader is he then? The Liberal Party itself didn't set the province on fire with its visionary plan for the province. The opposite in fact was true. They weren't elected, the Tories were unceremoniously ejected. The Party, as a government, has just vanished into the weeds of the bureaucracy. It's readily apparent they don't have a clue about how to lead, or in fact how to govern. The 18 month public consultation on how the provincial deficits/debt can be tackled is a prime example. It almost reminds me of the PC's hiring a consultant to study if the government is hiring too many consultants. It's that ridiculous. And, that's the way they're looking - ridiculous.

All in all it looks like the Liberals might as well enjoy the next four years, because they're going to be a one term government. A one term government doomed to be mired in misery and ridicule as they pay the price of deceiving the electorate to gain those lofty heights of power. The price they will pay for breaking faith with the people.

Sunday, January 17, 2016

The Reckoning

For every action there is a reaction. Nothing could better describe the times we live in. There has been plenty of evidence around us for at least two years, and for the more in tuned even decades, that our way of life is coming to an end. Not our life, but our "way" of life. Our actions have caught up with us. Now comes the inevitable reaction.

While technology can build civilizations, it will also eventually alter them beyond recognition. For example, the automobile transformed the world, but it also cursed it. The car required gasoline to operate. Gasoline required oil. Oil required exploration. Exploration required environmental damage and cash. Cash required borrowing. Borrowing required capital. And therein lies the curse - there was never enough capital to cover the borrowing. Action, reaction, and on it goes. Eventually there must be a day of reckoning. A day when a house built of cards can no longer sustain another card being placed upon it. That day is today.

Today, the perfect storm, or the day of reckoning, involves unsupported financial instruments smashing against bottomed out interest rates, monopolistic oil cartels crashing against technologically caused oil gluts, grossly over inflated stock markets imploding over falsely supported bottom lines, and the world dividing between Eurasia and the Rest. There are of course other factors like demographics, and environmental concerns which are just as, or even more important. The bottom line is that all those fantastical instruments used to drive our society forward were never really built on anything at all. Imaginary sums of wealth, supported by paper contracts, but nothing else. A lawyers dream and an accountants nightmare.

In the days ahead we can expect to witness: a world-wide stock market crash; a world-wide currency crash; a world-wide crash in all goods associated with production (including oil); and mass deflation in economic activity, but mass inflation in costs. The last one is a bit of a kicker - mass deflation causing mass inflation. How is that possible? A good example of this is post-world war II  Germany. At the end of the war it took a wheel barrel full of German marks to by one loaf of bread. All economic activity had essentially come to a halt. The economy had deflated. There was nothing left to value the German mark against, so it became valueless. As it became valueless, the amount of marks needed to by one item increased. The more valueless it became, the more marks were needed to buy that item.

Essentially the world faces the same today. The economies of the world are deflating. If they were measured by a standard that didn't utilize essentially paper to back their value, then they would have been completely deflated decades ago. In essence, the world borrowed time to grow by dropping the discipline of the gold standard. That allowed growth, but it was always a "phony growth". It was always a bubble waiting to burst, or a margin waiting to be called. Now China and Russia are calling that margin. They are establishing a gold backed currency economy that will cause the rest of the world's economies to collapse. It will initially cause their's to collapse as well, but they are in a much stronger position to survive the collapse (or economic war if you like).

Russia's debt to GDP ratio is an astoundingly low 16%. China is at 55%. India is at 65%. The United States government debt to GDP ratio is 89%, while Japan's is 250%. The story then becomes not who can win an economic war, but rather who can survive an economic war. Clearly, Eurasia is far better positioned to "rise from the ashes". It is that rise that is all important. Initially, every economy in the world will collapse. However, the "New World Order" that arises from what's left will be determined by those in the best financial position when the collapse happens. That's a logical assumption given a purely gold standard to restart would not take into account that which had been previously expended, debts that been previously owed, and the fact that gold is not everywhere in the world - and this is a new world on a world scale.

Suffice it to say that Eurasia is pulling the trigger on the "Old World". It claims it isn't and that it's suffering as much as any other nation, but that's simply a mask. A mask that will provide it the legitimacy to rise to the fore front of the "New World Order", and claim its leadership. That you can be certain of. So while Eurasia gives us a friendly slap on the back, seeking a spot to put the knife into, we should remember the reason it can do so is us. We collectively built our civilization on false pretenses, and we knew it. They simply used our own gluttony against us. They simply allowed us, even facilitated in us, doing it. If you can't stop the end you might as well learn from it.  

In this province the cries are loud: "What can we do?" In truth, as I said to any number of people who have asked me that same question privately, the only thing left to do is suffer. We had a ten year window to make maximum use of oil revenues to address chronic, systemic debt. Instead, the government of the day spent like a teenager with a new, unlimited credit card. It placed us in a position of no return. As a very few of us urged people not to be kids in the candy shop, the "credible experts" said there was no tomorrow. Now tomorrow is here. It is the day of reckoning for everyone. That means you.

Sunday, December 13, 2015

How bad is Newfoundland's Budget Crisis?

Newfoundland and Labrador is in the "mother of all" budgetary crisis. It is not a pretty picture. For those that don't quite get all the government lingo: a deficit is the annual loss caused by spending more than you bring in a fiscal year; the debt is the accumulation of all the money borrowed to finance those accumulated deficits over the years; operating budget is the base cost of running government operations in a year; capital budget is the cost of building facilities in a given year; and gross debt is the amount of all debt the government owes and must pay back. That's a bit of a simplification, but it does the trick.

Back when the 2015-2016 budget was crafted, the government projected $6,659,952 (billion) in operating expenses and $1,143,743 (billion) in capital expenses, for a total of  roughly $7.8 billion in expenditures. To fund those expenditures the government projected oil revenue to be $1,157,671 billion based on a base price of $62 (US) a barrel for Brent Crude. With oil at that level, the government predicted a $1 billion deficit. As a result of the recent election defeat of the government, a new deficit figure of $1.8 billion was released. In other words, the new Liberal government is saying the province has lost approximately $700 million in revenue.

The problem is things are much worse economically then they were at budget time. Oil has hovered at roughly $40-45 a barrel for most of the fiscal year, and has been trending downward (at $37.70 now). Yet, despite the collapse of the province's largest single contributor to revenues, the government has done...nothing. Here is a very illuminating example:

2013/2013 - oil revenue   $2.25 billion      Total government spending -   $7.6 billion

2015-2016 - oil revenue  $1.2 billion         Total government spending-    $7.8 billion

If that set of numbers shocks, well, it should. Now, that figure for oil revenue above was based on $62 a barrel. Just shaving off approximately 30% from that number for oil's actual prices, and we are down approximately $360 million - which leaves oil revenue for this fiscal year closer to $800 million. You have to travel back to the year 2007 to find a time when oil revenue was this low in recent history. In that year, oil was budgeted to bring in $996.5 million. The kicker is this: total budgeted spending for that year, including operating and capital, was $5.2 billion - $2.6 billion less than what is being spent today.

All of this takes on a pretty ugly picture when you consider that debt servicing charges (interest,etc on our debt) was budgeted to be $652 million this year alone. Furthermore, our combined capital and operational gross debt is now $13.9 billion. That is only $1 billion less than the perilous period of 1997-98.

So what can be done? Or, what has to be done? Both nothing and everything. The nothing portion is capital expenditures. The province can no longer afford any capital expenditures. Sound radical? Consider that capital expenditures have been in the $1.1 billion range for a few years now. That's no longer doable. That means: no new hospital for Corner Brook (or anywhere else); no new Waterford mental health facility; no new penitentiary; etc. In other words, any election promises that were related to these projects are out - they were never honest in the first place.

Raising taxes of all kinds and types will be the feature of the next budget. Sin taxes. Income taxes, Taxes on your taxes. You get the idea. However, even taxing all these areas, the government can only pray to come up with maybe $150 million, and that would mean huge personal income tax increases. After all, Ball just vetoed increasing the HST by 2%, which could have meant about $150 million for the provincial coffers. Still, that would have been a drop in the bucket for what's necessary to keep this government where its at.  Cutting civil service jobs has been ruled out by the Liberals. Salaries and benefits of provincial employees accounted for about $905 million in this year's budget. The salaries in the health sector and education sector are administered by the respective authorities. The word is they account for about 75% of the $4 billion that the province issues in grants to the authorities to run their health/education organizations.

It has to be a tempting, if not an absolute necessity, to review these employee expenses. The civil service is way too large for a province this size. The Liberals claim they will reduce it by attrition - which is a fancy way of saying once people retire they will eliminate those positions from the province's structure. Sounds great in the ideal world, but the budget crisis needs immediate heart surgery, not rehab. It can't wait that long.

Muskrat Falls is another one that must be looked at. The government has spent its part on the project already (not including over runs), so that $3 billion is gone from general revenues. However, Nalcor is holding $5 billion in investment accounts that it borrowed under the Federal Loan Guarantee. As far as I know that $5 billion hasn't been accessed yet. The province could cancel the Muskrat Falls project, work a deal with their new buddies in Ottawa to return the funds while avoiding default, and the gross debt of the province would shrink to about $8.8 billion. Such a move would dramatically improve the province's long term economic health, and perhaps forestall the otherwise inevitable credit downgrades coming our way. In addition, should Nalcor lose the current Quebec court case (now waiting for the Judge's decision as it was heard in October) Muskrat Falls annual revenue generation will drop by approximately 80% require a tripling of power bills to allow the project to break even year after year. All in all, Muskrat Falls needs to be the first victim of the financial sanity axe.

In summary, Dwight Ball is on the record as not wanting to harm the economy by instigating drastic tax hikes or mass layoffs. He's on the record as not wanting to shut down the Muskrat Falls project (he wants to "manage it better"). He's on the record for assisting iron ore companies to buy out other iron ore companies in Labrador. All these things are just pure fantasy. Complete non-sense. The truth is, bonding agencies will force the government to cut its spending - drastically. Banks will likely do the same. Newfoundland and Labrador was completely mismanaged during the years when oil revenues to the province numbered in the billions. Now, that luxury, as stupid as it was, is no longer available to politicians. Now the chickens have come home to roost. It's simple math. How bad is Newfoundland's budget crisis? It's systemic and it's catastrophic. That's how bad it is.