Debt and Destiny

The United States (US) is currently witnessing what can only be described as a day of reckoning. It has finally reached the point where it cannot borrow more money without the approval of all levels of the federal government. Sure it has been here before, but this time is different. There is a certain realization, driven home by the bond rating agencies and the recent stock market crash, that the US must face reality - it has financially outlived its welcome in the global sense. The concept of borrowing based on a national worth that exists based primarily on grossly inflated paper equities came to a sudden breaking point in 2009.

The US reacted to the stock market collapse by injecting massive amounts of borrowed money into the economy - commonly known as "The Stimulus". That money was borrowed from international players, such as China, who do not necessarily have the US's best interests at heart. The US gambled that a massive infusion of new borrowed dollars would spark the economy and kickstart consumption. It didn't work. There is an obvious reason why. The US as a nation and a people have come to the point where there financiers are going to call their loan. They have been living far beyond their means, consuming far beyond what they contribute in production, and expanding internationally far beyond their ability to sustain.

They now must face the abyss. There are only three ways to reduce and eliminate deficits - raise taxes or cut government operations, or normally both. We in Canada know this already. We did it back in the 1990's. The Americans are having a hard time bringing themselves to believe that they must bite the bullet like ordinary mortals, and pay the piper. There are of course many signs this will happen whether they like it or not: end of the space program in many ways; potential down grading of credit by international bond agencies; loss of clout to the Chinese internationally; and so on. The signs are all there, and should the US politicians continue their silly dance to avoid responsibility with their electorate the market will push them into place.

Here in Newfoundland and Labrador we face the same sort of questions - just not with the same, imminent urgency ... for now. We have an oil industry to draw from for the interim. We have mining activity. The problem is we are spending every cent as it comes in. Not unlike a child that receives an allowance and then runs to the store to spend every last cent - until next weeks allowance comes. We are not reducing our debt. Our gross debt continues to grow. Most governments count their debt as "net debt" meaning essentially minus the value of assets from gross debt and what is left is net debt. Unfortunately, this is not an accurate or sensible way to account for debt and strategic direction.

To put it another way, it would be the same as saying your house is worth $200,000 and your mortgage is $180,000 therefore you owe only $20,000. Of course that isn't rue, but on paper your net debt would be that $20,000. This is the same sort of accounting that created the financial disaster in the US. The mentality that inflation will increase the value of your asset forever more, and you can borrow against that "paper equity". The leveraging of debt upon debt. The house of cards. The old saying though is 'its only worth as much as somebody else is willing to pay for it'.

In this province our government continues to spend as if those assets it has put up to bring down its debt numbers are actually worth a whole bunch on the market. Everything is included from the value of schools, hospitals, etc. A big disadvantage we have compared to other provinces is the simple fact that most of our Crown resources/corporations have already been privatized. We do not have any real crown assets to put up as collateral other than Nalcor. The insurance industry is privatized. The liqour industry is primarily in private hands. The power industry, retail branch, is privatized. In other words our assets to borrow on have been well and truly mortgaged many years ago.

Now we face a strategic decision of whether or not to incur a massive new debt to our already troubling numbers - mainly the $6.5 billion Muskrat Falls project. Should we add 50% more to our debt? Will the international community allow us to without a federal loan guarantee? Should they even then? Is it not more prudent to borrow $600 million to renovate and improve the Holyrood facility. Would that not hold us over until a decade or so down the road when we can assess whether or not we really need the extra power, and if so by then we may have eliminated our debt putting us in a much stronger financial position vis-a-vis the rest of the world to borrow.

Last week the President of Nalcor came on the provincial openline radio show. He spoke of the debt for Muskrat Falls. His explanation was the debt wasn't really $6.5 billion. He said that Emera was paying for the link so you could take off  $1.2 billion from that number. Then he said the provincial government was taking an equity position of 35%, so really the cost was more like $3 billion. Note to the President of Nalcor - you are a Crown corporation. We own you. We are also responsible for your debt. How can a provincial government take a 35% equity position in a crown corporation's project that it owns 100%? Course its spin doctoring, but the worrying part is the lessons not learned. In this case the lessons blindingly ignored. We are not immune from economic reality. The very real disaster occurring to our south in the US could just as easily occur right here.

That leaves us with a very crucial provincial election in October. Not in any way a typical election. This election is about the future strategic direction of the province. Will it be debt ridden and vacated, or will it be debt free, confident and bright? It's all about the debt, and that makes it all about our destiny.

Muskrat Spin

Even in the dog days of summer our PC government, and their proxies, continue to try and spin the Muskrat Falls deal. It appears their strategy is to fill the airwaves with so many convoluted numbers and benefits that Newfoundlanders and Labradorians simply give up trying to understand the deal and slowly fade away. Recently the Vice President of Nalcor has been taking to the province-wide radio shows to extol it`s virtues. This coming Tuesday the President of Nalcor has booked a complete hour on Randy Simms' OpenLine show to do the same. We also have the ministers, most notably Finance Minister Tom Marshall, doing the same sort of daily radio appearances. Apparently this deal is not quite good enough to sell itself.

If you have been watching and listening since this deal came out you will have caught on to the many different angles used to try and sell this deal to the public. The first and biggest spin of course was the angle that it would cut Hydro Quebec out of the picture. The problem with this strategy is the province already has an excess of power that it can't use - so it wheels it through Quebec. The deal to wheel that power through Quebec is losing millions per quarter. It is losing so much money that Minister Skinner won't fulfill his promise to disclose publicly the amount it is losing each quarter. So like it or not Quebec is still in the picture.

Of course Quebec could be cut out of the picture if the sub-sea power cables could hold large amount of power capacity, and therefore sell more directly into the US or maritime market. The problem with that is they will only be able to transmit 500 MW of power, and Emera gets about 200 MW off the top in free power. Speaking of limits to the sub-sea cable transmission - remember the argument that should their be a massive power outage in Newfoundland we would be saved by our new found power link to the mainland? Instead of exporting power we could use those same lines to bring power in was the spin. Just one problem: Emera has the rights to that line for 16 hours of the day - so that leaves us 8 hours to import power (also during the middle of the night). The old "we will be saved  by being on the intercontinental grid " is just another silly spin in other words.

Then there was the "Green Option" argument. Remember hearing how Muskrat will make us 98% green. Well, the truth is if scrubbers were placed on Holyrood, for a mere $600 million, they would remove 95% of the pollution from Holyrood. That would be more environmentally friendly than damming a river and flooding large portions of forests. Of course they would say that Muskrat Falls would replace dirty oil with clean electric power, but are we really that upset with dirty oil. Holyrood uses about 1.3 million barrels of oil a year. We produce 100 million barrels of oil a year in the offshore. Seems to me that if we were so upset by using oil, to the point we would almost double our debt to stop it, we could just suspend offshore oil production for 4.5 days a year and that would cover all the oil we use at Holyrood for a complete year.

Then there is the price of oil at Holyrood. They argue it will continue to go higher, and the cost will continue to drive rates up. Question is though: is the cost of using oil at Holyrood the primary determining factor in rate increases? Finance Minister Marshall stated on VOCM Open line that it was. One problem with that greatest of spins: oil was $149 a barrel in 2009, and it is now less than $100. If the cost of oil was the primary determining factor in rate increase, as Marshall stated, should we not have seen a reduction in power rates of at least 30% in the last two years? Shortly after his call, another caller came up with the real reasons for the rate increases: wage increases; expanding work force; and pension contributions. His assertion was the cost of oil represented only 1% of the overall need for increases. Shortly thereafter, a woman working for Nalcor phoned in to say that the previous caller was wrong and it was actually closer to 7%. Bottom-line, the cost of oil used at Holyrood is an insignificant factor in rate increases. Despite the spin from the Finance Minister to use it as a crutch for Muskrat Falls.

Then there is the cry for more power. Nalcor and the government continue to insist we will run out of power by 2019 if more generation is not found. Nalcor`s own consumption graphs show a steep demand for power starting next year and continuing on until at least 2035. Randy Simms of VOCM often refers to this need for an increase in generation when he states "consumption has increased on average 2% per year". He started using this terminology after his personal meeting with Nalcor`s President. Problem with that line are the words "on average". Power consumption actually peaked in 2003 and is now at roughly the same point it was in 1992. To get that average Randy Simms speaks of you would have to go back to the 1970`s and factor in all those numbers to the present. It is just a disinformation campaign by the government to justify that which is in all other ways unjustifiable.

One last spin. Kathy Dunderdale maintains that should the federal government not give her a loan guarantee for the project, that she will go to the markets and have it financed solely through the province. Nothing could be further from the truth. Newfoundland and Labrador is already the most indebted political entity in Canada per capita. The province, by building this project, will add at least 50% more to that debt. The international finance community is already in a state of near panic over the levels of sovereign debt. In Newfoundland and Labrador it has a prospective client that has the highest debt per capita, spends every cent it gets from oil without significantly reducing its debt, has the lowest birth rate, has a declining population, and has virtually no government owned assets of any note to leverage that debt on. That doesn`t include the fact that Muskrat Falls, even by the government`s own admission, won`t make money. Just have a glance south of the border, at the current deficit and debt meltdown there, to understand we are in the days of a new fiscal responsibility - not fiscal insanity. Bottom-line, only the mafia would finance this deal without a federal loan guarantee.

There is only one man, sitting somewhere in Ottawa, that can end this spinfest. He has no political capital to gain from saying yes. He can stop all the other provinces from knocking on his door for the same. He can actually make a positive difference in the lives of the working people of Newfoundland and Labrador just by saying no. In the future people won`t look at him and wonder why he didn`t step in to stop the madness - say like the Upper Churchill contract. Prime Minister Harper, just say no, and stop the spin...please.