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.