Financial shorts – Second Monday in March edition

1.  Crack whores rebel:  Icelanders voted against a US$5.3 billion package to deal with part of the country’s financial mess.

“This is a strong no from the Icelandic nation,” said Magnus Arni Skulason, co-founder of a group opposed to the deal.

“The Icelandic public understands that we are sovereign and we have to be treated like a sovereign nation — not being bullied like the British and the Dutch have been doing.”

Sovereign Icelanders may be, but they are also broke.  If they don’t like it when people come looking for their money back – it ain’t bullying, BTW – then maybe they shouldn’t have been running the financial equivalent of a crack-house.

2.  More hidden cash turns up:  There may be a few million extra in provincial coffers when the financial year ends.  This isn’t a windfall or a gift.  It’s just what you get when you compare the actual amount of federal transfers in the current fiscal year - $1.264 billion – to the $988 million reported in Budget 2009 last spring.

Well, that’s if you use the Estimates which gives different numbers than the ones in the budget speech. The numbers in the budget speech are pretty much dead-on the actual federal transfers.

Someone should ask the finance minister to explain why he feels the need to keep two sets of books.

3. Counter-intuitive.  Okay.  Crude is up.  Gold is up and silver is is up as well. US dollar is down.  The American economy shed jobs but not as many as expected.  Some news media are reporting this as a good thing.  Basically, it’s more of the recovery-is-here-yada-yada crap they’ve been fed since this time last year.

If the dollar is down, and oil and gold are up, that’s a sure sign that not only is the US economy not in recovery, it’s virtually a guarantee it won’t recover while prices for things like crude oil are that high.

The American economy needs oil prices to be about half of what they are currently in order to see a recovery tale hold.  And when a recovery does start, it won’t keep going if oil prices shoot back up to their current levels.

In the meantime, stand by for an “adjustment’ sometime in 2010 or early 2011.  The “correction” won’t be as big as the collapse in 2008 but it will hurt.

It will especially hurt any government that doesn’t have its financial house in order.

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And while everyone was consumed in the latest psychodrama…

Some of you may have missed a couple of stories that highlight the impact  demographics – the aging population – will have on government budgets.

The federal parliamentary budget officer is warning that the federal government is facing a pretty serious “structural” imbalance that won’t be solved by simple budget cuts. As the Toronto Star reported:

Canada's falling birth rate coupled with baby boomers approaching retirement will "fundamentally" change the labour market for decades to come. In the next 10 years alone, the number of people who are retired compared to those still in the workforce will grow by 7 per cent – as much as it grew in the last four decades.

Retired workers pay less tax and draw more on programs like health care and seniors' benefits, driving up government costs.

Page said "permanent fiscal actions – either through increased taxes or reduced program spending, or some combination of both" will be needed to avoid ever-increasing government deficits.

The best line of all has a very familiar ring to it:

"The government's current fiscal structure is not sustainable over the long term," the report said.

Meanwhile, Quebec’s long standing pro-natalist policies won’t really deal with the very same problem in that province:

Bonne nouvelle : le Québec connaît depuis deux ans un petit baby-boom. Mauvaise nouvelle : il survient trop tard et sera donc loin d'être suffisant pour contrer l'effet de l'arrivée à la retraite de la génération du « vrai » baby-boom. Quand les bébés qui sont aujourd'hui dans leurs poussettes intégreront le marché du travail, ils ne seront jamais assez nombreux pour payer les pensions et les soins de santé de ceux qui s'appuieront alors sur une marchette !

Now these same issues will affect Newfoundland and Labrador, just as surely as the province never escaped the ravages of the current recession.

But how they will affect the province and what needs to be done are subjects for another post.

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Economic Recovery: Not exactly as illustrated

By definition, anyone connected to “economic development” in any provincial government or quasi-government organization must be so positive and upbeat as to make a Pollyanna look like someone about to climb into a warm bath and open a major artery or six.

That pretty much sums up the view in central Newfoundland where the regions major private sector employer is gone and there is nothing on the go even remotely as big:

"(If it was contrary to what businesses are reporting) you would see it in job losses, you would see it in lack of inventory," [Amy Coady-Davis, chair of the Grand Falls-Windsor town economic development committee] said.

"The turnover is there - it is right in front of your face. You can't fudge those numbers. Sales are up, they have said they're up, you can see that they are up."

Well, not exactly, at least if you judge by some numbers included the same Telegram article and which came from no less an authority than the town’s own economic development agency:

According to the economic development office in Grand Falls-Windsor, housing starts are down 50 per cent from 2008 - there were 118 units built then as compared to 53 units in 2009.

There you have it.

And if that wasn’t enough, consider the view from the local chamber of commerce:

Gerald Thompson, president of the Chamber of Commerce - which represents 209 businesses in Grand Falls-Windsor - tends to agree with the town's positive outlook.

He said they are getting far more positive feedback from members than negative.

"... Although there's been a number of small businesses that have closed in the last year, we still know that the people that have done business here in this valley, their percentages over last year are up.”

Of course, they are up. 

Some of the people who used to patronize those businesses that have closed up have moved their custom to the ones remaining.

And those companies that went out of business? 

Well, they aren’t members of the chamber of commerce any more – most likely – so their voices wouldn’t heard when the chamber does a survey of members.

Just to add to the whole surreal atmosphere of the article, don’t forget that the president of the chamber of commerce cited as proof of the great things the positive view from the people who build new homes.

Oh yeah.

Things are so great in that business people are building only half as many homes as they did in that artificial bubble the year after the mill closed.  That would be the year of severance cheques and all that extra, short-term cash.

What happens from this point onward will be entirely the result of whatever economic activity there is left now that the Abitibi mill’s corpse has stopped twitching.  Those who are tempted to look at places like Stephenville need to think again.  All those paper mill workers found other jobs, mostly in Alberta.  Those sorts of options don’t exist for the crew from Grand Falls-Windsor.

Nor is there a chance that the province’s remaining paper mill – there were three in 2003, incidentally – will take up any slack.  It is struggling to survive.  The company that runs the mill is reportedly looking for a 10% wage roll back from workers.

The professional pollyannas can be as bright-eyed and optimistic as the want.

The reality may well prove to be not exactly as illustrated.

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How bad is it?

You just know things are pretty tense in Corner Brook.

You can tell because the provincial government has been pouring on the happy-talk while over at the city’s major employer, the company operating the paper mill is looking for a 10% wage roll-back from employees.

The latest happy-talk is a hope-drenched a study on the oil and gas potential for the west coast.

According to the official news release, the study was commissioned based on an election commitment from 2003. 

That’s okay. 

We can wait while you go and check your calendars again.

Yes, it was indeed seven years ago.

The work on this particular report, though, was only done in 2008.  Check the dates on some of the consultation sessions;  that’s the only way to figure out the timelines for sure since most of the document has been scrubbed of dates. You can hunt around and eventually find the news release that kicked it off, from December 2007. 

That would make it a bit more than two years for this study to see the light of day.

After all that time and all that work, the recommendations are stunning: 

Ensure a regulatory and administrative environment to maximize investment in onshore and offshore exploration and attract industry operators and businesses to the region;

Ensure the protection of key natural resource areas, including Gros Morne National Park, the Humber Valley and the Bay of Islands;

Establish a clear environmental regime between the provincial and federal governments;

Continue to improve infrastructure in the region through investments in education, health-care facilities, transportation and commercial land availability;

Encourage the planning, regeneration and use of existing infrastructure, including that in Port aux Basques, Stephenville, Corner Brook, Deer Lake, Port Saunders and St. Anthony, to ensure it continues to support existing economic sectors;

Maintain and upgrade infrastructure specific to the needs of potential hydrocarbon projects, including wharves and air facilities at Corner Brook and Stephenville;

Facilitate the training of local residents to help them meet the demand for skills in this emerging sector;

Continue to invest in public education, health care, cultural and recreational opportunities to serves the needs of the region; and,

Continue to promote the western region as a place of opportunity for business investment and families.

In a nutshell:  fix the roads, spend money on things like education and health care, protect the ecologically sensitive and important bits (like Gros Morne)  and “promote” the potential in the area.

They are about as surprising as the recommendations made by the task force that spent 18 months trying to figure out how to keep more young people from leaving the province.  Its major conclusion:  create work for them so they can find jobs and stay here.

All standard. 

All patently obvious.

Nothing concrete and measurable.

Like explaining what is meant by “[e]nsure a regulatory and administrative environment to maximize investment in onshore and offshore exploration and attract industry operators and businesses to the region.” 

Maybe there is a tax issue here or problems with issuing permits. You won’t find anything in the report to explain what this means.

And the stuff that appears to be specific  - like the suggestion to “twin” selected portions of the Trans-Canada between Port aux Basques and St. John’s as needed – is actually just a confirmation of what has been government policy since 1988.  Under the roads for rails agreement, the provincial government used federal cash to do exactly that.  And yes, for those who need reminding that would be from the last time the Conservatives formed the provincial government.

So what are these study guys talking about 20 years later?

Not a heckuva lot, apparently, given that any administration at any time can claim:

• to have either already done that or,
• to be doing exactly what was recommended as it carries out the existing maintenance of the existing road.

Look in vain and you will not find a single thing in this 71 pages of pure bumpf is tied to  drilling more holes, finding oil and getting it into production.

Things seem to be pretty tense in Corner Brook these days.  That’s just as they have been in other towns in this province since 2003 when the major employer found itself in hard financial straits.

What’s most interesting since 2003, though, has not been the problems themselves but how the provincial government has reacted to each development.

The oil and gas study released on Monday seems to be very much par for the course, very much a sign of the times.

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The Imaginarium of Spin-doctor Marshall

According to finance minister Tom Marshall, estimated growth in the province’s population is due to people flocking home to find work.

“More people moving to Newfoundland and Labrador represents a further sign of confidence in our economy, way of life and the plan the Williams Government has put in place to continue along a path of stability and prosperity,” said Minister Marshall.

Okay.

They are being drawn to the province by its supposedly buoyant economic prospects, right?

Well, if that’s the case, the good spin-doctor of finance might want to explain why the employment levels in the province in November were actually lower than they were the year before.

Wait.

Don’t bother asking.

The answer is readily apparent.

People are leaving places like Alberta because there are fewer job prospects there than there used to be.

That’s a trend some people have noticed for some time now.  In other words, the growth in the provincial population over the last year and a half or so is actually not due to all the splendiferous tax cuts and other budgetary bunkum the provincial government spin machine claimed.

Even if some bank economists have been fooled  - badly – the reality is something other than what the provincial government claims and the conventional media dutifully reports.

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Danny Williams and the Philosopher’s Stone: Converting Principles to Cash

 

“It's giving away their future.”

Danny Williams on the NB Power sale

__________________________________________________________________

At the heart of a little flame war last week on one local blog came a rather surprising nugget of hard news that Newfoundlanders and Labradorians likely have never seen and may well never see covered at all – let alone in depth -  by local media.

Telegram blog writer Geoff Meeker noted a comment by Premier Danny Williams in the House of Assembly on April 30, 2008.  In answering an opposition question about putting $100 million into debt reduction for Newfoundland and Labrador Hydro, the Premier said:

It was a previous Liberal government that wanted to actually privatize Hydro. This particular government wants to strengthen Hydro, wants to make it a very valuable corporation: a corporation that will ultimately pay significant dividends back to the people of this Province; a corporation that perhaps some day may have enough value in its assets overall as a result of the Hebron deal and the White Rose deal, possible Hibernia deal, possible deals on gas, possible deals on oil refineries and other exploration projects, where hopefully we might be able to sell it some day and pay off all the debt of this Province, and that would be a good thing. [Emphasis added]

That’s right.

Danny Williams spoke publicly about selling off some or all of the province’s energy corporation to pay down public debt.

CBC’s provincial affairs reporter David Cochrane added to the discussion online and offered some additional insight into the Premier’s thinking:

We pulled him outside for a scrum to ask about it. Even before we asked a question he clarified his comments. He said he misspoke in the legislature. He wasn't talking about selling Nalcor. He was talking about selling the individual assets it acquires.

For example, if the Hebron stake is eventually worth 5-billion [sic] dollars and someone wants to buy, Williams said he would consider selling it to reduce debt.

That was consistent with past comments he had made when the government rolled out its plan to revamp Hydro into an energy company.

As established in the first part of this series – Control and Resources -  that isn’t what Williams had been saying consistently at all.

To the contrary, selling any asset of the energy corporation would run directly counter to the stated goal of acquiring control over the province’s resources and hence its development and future.  Being masters of our own destiny is tied directly to resource ownership.

But Cochrane was right:  Williams had talked about selling some or all of the energy corporation before.  As Cochrane showed, Williams had mentioned the idea in October 2005 in a story Cochrane had done on Ed Martin’s arrival as chief executive officer of the fledgling corporation that would be eventually known as NALCOR Energy:

Williams says his top priority is for the company to become an investor in every form of energy development – or, as he calls it, to get a piece of the action.

"I would like to see Newfoundland and Labrador Hydro gain a strong asset base, so in fact then the government of Newfoundland, as a shareholder, also benefits from that asset base," he said.

…

"If energy continues to grow in value as it is now, perhaps what we could now buy for a billion dollars could be worth $10- or $20 billion in 10 or 20 years' time, which means that those assets have a value whereby we could pay off our debt," Williams said. [Emphasis added]

The 2005 comment is not as clear as the 2008 version in the legislature but they are along the same lines. 

And certainly in 2005, Williams wasn’t splitting hairs over regulated (electricity) versus non-regulated (oil and gas) assets as Williams apparently did in the unreported portion of the media scrum in April 2008.  As Cochrane described it:

Williams did not say he would sell off all the assets (i.e power generation and transmission capacity). He was talking energy assets in the oil and gas sector.

Now while it doesn’t appear that Williams has said this “many, many times” as Cochrane asserted elsewhere in that comment, there is no question Williams has spoken of selling off some or all of the energy corporation in order to pay down public debt, if the price was right.

Nor is it the only reference to selling energy assets, even though the idea is not contained in the energy plan or the campaign manual.   In a clause of the New Dawn agreement, released in September 2008, one provision covers the potential sale of the Newfoundland and Labrador interest in the Churchill Falls (Labrador) Corporation:

On the one hand, the Williams administration has a clear policy connecting the principle of control of energy resources with ownership of equity stakes in energy projects.

Yet at the same time,  the Premier has spoken publicly about the potential that these assets could be sold to reduce public debt.

And on top of that, an agreement with the Innu Nation includes a specific provision covering the potential sale of the Newfoundland and Labrador majority shares in the company that operates the  Churchill Falls power complex.

Clearly the two notions cannot live in the same space.

Well, they can actually if one considers another statement by Danny Williams which describes another aspect of his political philosophy:

What I said before and I said going in, this is about principles, but it's also about money as well. At the end of the day, the promise and the principle converts to cash for the bottom line for the people of Newfoundland and Labrador.

That’s a comment Danny Williams tossed out in November 2007 during the racket about broken political promises with Stephen Harper.

Williams used the word “principles” in the familiar sense.  A “principle” is a fundamental rule.  A “principle” may also be expressed as a value like openness, honesty, or integrity.

The dispute was a matter of principle, in that sense; a promise made is a commitment to act that must be fulfilled.  If someone breaks his or her word without good cause or explanation, the relationships between people can no longer function.

But “principle” in the way Danny Williams used it on that occasion in 2007 identifies the “principles” as nothing more substantive than the basis for a claim of damages or the source of a grievance.  Relief or compensation can be had by identifying a sum of money, or, as Williams puts it: “the principle converts to cash.”

The notion is hardly surprising for a lawyer who spent a lot of time arguing for damages for his clients, even if there are few others who would – on the face of it – accept that principles of any kind can be transformed to coin.

Yet Danny Williams obviously operates on the belief that he has a political Philosopher’s Stone in his pocket.  Like its legendary alchemical predecessor that converted base metal to gold, this stone would convert electricity and oil into dollars.

The curious thing is that none of this has been reported clearly and consistently within the province.   It is doubtful that a majority of Newfoundlanders and Labradorians know anything but the old and familiar notion that links control of resources with the future. 

Yet there is no mistaking that the Williams administration has another policy firmly in place  - at exactly the same time - which would allow for the sale of resources in a fashion that directly contradicts the notion of control on which the administration claims popular support for its policies.

Little wonder in April 2008 then that Danny Williams responded so strongly when reporters asked him to scrum on his statements.  Again, as the CBC’s David Cochrane described it:

We pulled him outside for a scrum to ask about it. Even before we asked a question he clarified his comments. He said he misspoke in the legislature. He wasn't talking about selling Nalcor. He was talking about selling the individual assets it acquires. [Emphasis added]

In the end, the reporters in the scrum opted to report nothing of the comments at all, including the Premier’s “clarification.”

Regardless of what the reporters decided on that busy work day, the Premier’s comments and the unsustainable internal contradiction in them are obvious in both the Premier’s criticism in the legislature of Hydro privatisation on the one hand and then the expressed interest in flipping assets to pay off debt on the other.  It doesn’t matter how often the Premier said it.

The comments take on new importance though given the Premier’s recent attack on the sale of NB Power to Hydro Quebec. 

And at the same time, as the province faces tight provincial finances, the question of exactly what is government policy on energy, control and sale of resources to meet financial needs deserves to be answered clearly and unequivocally.

Such a question can only be answered, however, if someone deigns to ask it.

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AIMS confirms the population trends

The Atlantic Institute for Market Studies today released its updated 1998 demographic study for the Atlantic provinces. 

Not surprisingly they confirmed the demographics trends for this province over the next three decades that have been known publicly since the early to mid-1990s in this province.

"While slower growth and aging affect the labour force, and hence a region's ability to generate output and income, they also affect virtually all other aspects of the economy. They affect patterns of saving and household consumption, and hence investment. They have differential effects on sales, production, and investment levels in different industries, and their impact thus falls unevenly on different areas within a region. They affect the tax bases from which provincial governments must draw revenue, and they affect the demands for government program expenditures. Work carried out in other contexts suggests the feasibility and importance of anticipating the effects of population change on government expenditures."

Those trends and the financial implications for government are nothing knew for regular Bond Papers readers.

This sort of information is one of the reasons why this corner of the Intern long ago branded government spending as unsound and unsustainable.

It just took them three years to figure it out.

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And now from the “No D’uh” economics desk…

1.  OPEC is warning that sustained high oil prices coupled with a weakened economy – like say in the Untied States? – could push demand for crude oil downward. Oil demand may not reach the pre-crisis level in the near to medium term.

2.  World Bank head Robert Zoellick is concerned about the persistently high jobless numbers in the United States and the impact that could have on economic recovery globally. The unofficial jobless rate could be as high as 20%, according to former labour secretary Bob Reich.  Officially it is only half that.

3.  TD Economics forecasts that Canada will experience “tepid” growth over the next decade. 

"It is critical to recognize that things will not simply return to how they were," TD economist Grant Bishop says in the report published Tuesday.

Yes, Grant, we are all glad the gang at TD Economics figured out – finally – that the crisis meant change.  When things change they aren’t the same afterward as they were before the crisis. It just takes some people a while to figure that out, apparently.

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Another tumble coming

People may be cheering the rising loonie.

Some people may be rubbing their hands with glee at the current and forecast prices for crude.

Gold is wonderful, if you own it already.

But, note the references in those articles to “weak fundamentals” and the fact there haven’t been many “signs of a pickup in the underlying oil demand in industrialized countries”.

The same sort of underlying weakness  - particularly in the American economy  - is what fuelled the surges in oil prices before the peak in mid-2008.

Remember what happened after that, right?

Well, get ready again.

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An admission of abject failure

A quarter of a century ago, Doug House and the Royal Commission on Employment and Unemployment heard time and again of the the need to get rid of make-work programs. 

Qualifying people for federal employment insurance benefits promoted a culture of dependence and destroyed innovation and self-reliance.

Some 17 years ago, the province’s Strategic Economic Plan introduced a bold, new approach in order to bring about fundamental changes within Newfoundland and Labrador.  There’d be no more make work and government free gifts to businesses.  Neither one worked to produce sustainable jobs.

Less than a decade after the Royal Commission – with the change of administration in 1996, in fact -  things were heading back to the old ways of megaprojects and make-work schemes.

In 2003, there was a new crowd, who supposedly had a plan called the New Approach.  Some of it seemed familiar.  Doug House came back and then left again.

Nothing changed.

It’s still megaprojects,  make-work and more make-work and handouts to business, hand-outs to business, hand-outs to business, hand-outs to business and hand-outs to business.

Oh, and let’s not forget hand-outs to business.

And hand-outs to business.

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Missing in Action: the 2006 economic policy review

In 2006, Danny Williams decided he needed to take a second look at the economic development plans he was following.

"Over the past two years we have undertaken strategic initiatives that are significant planks in our economic development agenda," Premier Danny Williams said. "Now, halfway through our mandate, it is time to take stock of what has been initiated to date, and move to the next phase to ensure our development strategies are being carried out in an integrated, co-ordinated fashion, in line with our original goals."

He appointed Doug House to “lead the process”.

The process was supposed to lead to some called an “integrated provincial development plan”.

So where the heck is it?

Missing in action, apparently.

In April 2008, House quietly slipped back to his real job as a sociology professor at Memorial University. There’s absolutely no reference in his resume to what he did after the 2006 news release other than to mention he was a deputy minister.

There’s a mention in his biographical sketch of the work he did but no title for the final report or indeed any sign that there was a final plan produced after two years of work.  In fact the only thing House mentions in his bio is being a “key contributor” to the 2003 Tory party platform, although he doesn’t call it that.  Likely that was the chapter that paraphrased the 1992 Strategic Economic Plan.

Now maybe there’s a good reason for all that.  Maybe the plan doesn’t exist.  Maybe it doesn’t exist because of a fundamental difference of opinion between Doug House and some others  - or maybe just one big other - in the current administration. 

You see, going back to the 1986 report of the Royal Commission on Employment and Unemployment, House has been one of those who has rejected the megaproject model for local economic development.  You know megaprojects:  things like Hebron, Hibernia South and the Lower Churchill.

You can find a good description of the report – titled Building on our strengths – in House’s memoir of his time at the Economic Recovery Commission in the 1990s.  House defined what he viewed as the attitude of the Old Guard within the bureaucracy.  They combined the industrialization policy of the Smallwood era with the resource-management focus of the Peckford years.  The result was a focus on big projects Hibernia, Voisey’s Bay and the Lower Churchill which were – and are – often described as the “last chance” for the province.  This same Old Guard view rejected or was suspicious of the potential for  small scale industrial development, agrifoods, and aquaculture.

The Old Guard  - the attitudes that House fought against from 1989 to 1996 - also believes in an expanded federal presence in the province comprising things like a federal penitentiary and defence bases.

Now it shouldn’t take too much energy for someone to realise that the economic development policies of the current administration heavily favour large scale industrial development projects.  Other stuff  like forestry and agriculture and the list House mentioned don’t get nearly as much attention.  There is a bit of cash thrown at them in the budget but when it comes to capturing the attention of the real decision maker(s) in the current administration, if it isn’t really big it just doesn’t exist.

With all that as background, it’s really no wonder House left government.  What’s really amazing is that he stayed as long as he did. 

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The fault, dear Wade…

Wade Locke doesn’t like a story in the Thursday Telegram. He dislikes it so much he called a local radio talk show to set the record straight.

Locke didn’t accuse the reporter of misquoting him in exactly those words, but he did end the conversation with the radio host by suggesting that maybe his comments were deliberately misrepresented.

Locke said something along the lines that he couldn’t imagine anyone reading the comments and coming to the conclusion he was suggesting the economy might be headed for disaster.

Locke went out of his way in the Open Line call to repeat phrases along the lines of “the future is bright” and “the future is rosy.”

The root of the issue is in comments Locke made for a news release from the Atlantic Provinces Economic Council. The headline on the story by Peter Walsh reads “N.L. economy facing disaster: experts”. The rest of the story summaries the comments from Locke and fellow economist Scott Lynch.

Here’s exactly what APEC attributed to Locke before getting into the specific suggestions Locke and Lynch had for the federal government’s budget:

Depressed commodity prices continuing throughout the year and longer would have a disastrous impact for Newfoundland and Labrador from a fiscal perspective and for the continuation and expansion of major resource projects within the province. A continuation of the existing tight credit market conditions will adversely impact small export firms and fishing enterprises and will be felt disproportionately in rural parts of the province.

If the U.S. economy continues to lose jobs as it did last quarter, then real GDP would decrease by 5% on an annual basis, which would produce a significant deep and prolonged recession. Forecasts of U.S. growth at -2.5 to -3% with recovery in late 2009 assumes that the Obama stimulus package removes deflationary expectations and returns the economy to its trend growth rate. For this optimistic scenario (successful stimulus and late 2009 recovery) Canada could experience a 1 to 2.5% decrease in real GDP, with the earliest recovery in September/October.

However, should the U.S. recession reflect the 5% decline in real GDP then Canada, as a small open economy, will follow the U.S. and be faced with a significant period of rising unemployment and declining economic activity, with recovery occurring in 2010. If, on the other hand, the recession in the U.S. is closer to the pessimistic scenario, then this may produce a decoupling of the Canadian/U.S. trade relationship and in that case, predicting possible outcomes becomes very murky.

It’s hard to imagine anyone reading that and not coming to the conclusion the boys were suggesting there could be disaster out there.

In fact, that’s exactly what Locke said in the very first sentence:

Depressed commodity prices continuing throughout the year and longer would have a disastrous impact for Newfoundland and Labrador from a fiscal perspective and for the continuation and expansion of major resource projects within the province.

Locke’s problem likely isn’t with the Telegram, Peter Walsh – who wrote the story – or indeed with APEC.

Rather his problem is that his APEC stuff wasn’t on the same page as the line being pumped by Locke and the provincial government before Christmas. The government crew have been in lock-step with one of their favourite outside consultants on this economic bubble thingy since the get go.

They were matching up word-for-word before Christmas and Locke this morning and the APEC suggestions sounded almost like a replay of what the Premier delivered to the feds last week. [edited to clean up the sentence jumble; link added to Premier's comments.]

Number One thingy: reform employment insurance to give people more money for longer.

Number Two thingy: Build ships and dole out the money so Newfoundland shipyards can get the work.

Number Three thingy: Lower Churchill. Never mind that the thing is shaky, let’s get people out there cutting brush and doing stuff of some possible, theoretical kind.

The odd thing is that Locke’s APEC assessment is actually closer to the truth than anything else. If commodity prices stay down for the rest of this year, into next year and maybe a few years after that, then there will be disaster.

But it won’t be a disaster necessarily for Newfoundland and Labrador, as in the province. It will be a disaster for Newfoundland and Labrador, the provincial government.

There’s a difference even if some people tend to forget that in these “l’etat c’est moi” days. That’s not to say there won’t be problems in some sectors of the local economy. Tight credit is going to force the fishing industry to sort itself out once and for all. Lower prices for minerals will mean that mines will shut down for periods and lay people off.

And let’s not forget that a slow down in Alberta will mean that remittance workers will either roost here and agitate for government help or leave altogether, permanently.

But still, there are mines that will be working away. There’s a new project coming for Long Harbour and the oil industry will continue to do very well, despite lower prices and reduced production. After 2009, production will pick up again. If we look farther out, then Hebron will come along.

The disaster Locke noted in his very first sentence for APEC (unless APEC misquoted him terribly) is really one for the provincial government’s treasury. Their disaster is entirely self-made. They boosted spending based solely on highly unreliable commodity prices and foolish predictions of ever higher or constantly high prices. They did very little to pay down public debt (accumulated borrowings) or sock away money in a rainy day fund. The provincial government also committed to a raft of borrowing to support the oil plays.

That put the provincial finance minister looking at 2009 with a shortfall of over a billion dollars in cash and demands for higher spending. Downturns in the market put extra costs in there to cover pension shortfalls. The 21% wage increase promise looked great politically but it was way beyond the rate of inflation even in the headiest of commodity price days over the past couple of years.

That sounds pretty much like a disaster to anyone who cares to take a look at it either from an economic or public policy standpoint.

It’s hard to imagine anyone could look at that and not see the disaster waiting to happen. Now the disaster doesn’t have to happen if the government shifts its policy direction in a number of significant ways.

That would require people in power to look at the world as it is and take appropriate action. But if think we live in a bubble, you’d be almost guaranteed to head down the wrong track.

You’d keep smiling all the way to disaster.

And it would be your own fault.

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Local math prof stirs international economics controversy

Odds are no one heard of Antal Fekete.

The Hungarian-born emeritus professor of mathematics at Memorial University in St. John's isn't someone local media  look to for commentary on economic issues.

But through a series of articles published on his website - professorfekete.com - he's earned some measure of international notariety for his arguments about backwardation of gold, the problems of unsupported debt and the global economic crisis.

Backwardation is the phenomenon of spot gold prices being higher than futures prices.  That situation happens frequently in other commodities but seldom in gold.  The difference is that gold, once used as the ultimate support  for paper currency, is a monetary commodity.

It's also a clue that the commodity is, or is perceived as being, or will be in short supply.  Logically, no one would buy gold today at a price higher than it could be purchased in as little as two weeks time.  The only reason to do that would be in a case where there was some doubt about delivery in the future.

Here's the way Professor Fekete describes the situation in his most recent article:

We are facing a pathology of the international monetary system based, as it is, on irredeemable promises to pay. People are enjoined through 'legal tender' legislation to use these irredeemable promises as if they were the ultimate means of payment, even though they are not, and the world would rather use gold and silver as the natural and ultimate extinguisher of debt. But gold and silver have been coercively eliminated from monetary circulation for the competition they offered to synthetic debt-liquidating devices.

Mainstream economics pretends that the issue has been settled for once and all. It asserts that liquidation of debt through the coercively maintained payments system has no threat to the national and world economy. Yet what is happening is that the government keeps kicking the toxic garbage upstairs which keeps accumulating unobtrusively in the attic, only to come crashing down in its own good time to cause untold amount of social damage.

In the real world it is natural law, rather than man-made coercive laws, that prevail. The pathology of the regime of irredeemable currency has not been attended to, and day of reckoning has dawned. Our pathological monetary system has allowed the burgeoning of debt beyond all rhyme and reason. It has no mechanism to extinguish debt. It pretends that transferring debt to the banks, and ultimately to the government, is tantamount to extinguishing it. However, the truth of the matter is that only gold circulation is able to extinguish debt. When it is stopped in its tracks, as it is under conditions of backwardation, debt explodes. [Italics in original]

Fekete's theories have attracted global attention since gold started backwardising in early December.  That's the first time such a situation has occurred since the early 1930s by some accounts, let alone lasted for more than 24 hours.  As The Australian columnist Robin Bromby put it:

It wasn't just the internet sites. London's Daily Telegraph was reporting the gold markets being in turmoil, with traders saying it was extremely hard to buy physical metal in the form of coins or bars, a problem the paper attributed to the emergence of backwardation.

Fekete said the development showed a drastic drop in the velocity of gold circulation and was a repeat of the situation in 1931 when, in the face of serial devaluations started by the British, gold circulation seized up. And we all know what happened after 1931 -- 1932, the worst year of the Great Depression.

It's not like Fekete hasn't been predicting this for a while.  In June - before the peak crude price and long before the credit meltdown - Fekete forecast gold backwardation.

There are plenty of people around who will tell you what everyone else says.  Sometimes it's the ones who go against the grain who are worthy of more attention than they get.  Sometimes they are a bit more clued in that people forecasting more of the same. 

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Reality, what a concept: the global economic crisis version.

Only a few short weeks ago, some were wringing their hands over the imminent peril of the perils of inflation.  This was despite the obvious signs of a looming market "correction".

How long before they notice the scope of the problem and the current deflationary pressures?

Meanwhile the state-approved economist had another go at prognosticating in the Telegram on Saturday.  Sadly, the story isn't on line. [Afternoon update:  Courtesy of The Western Star.]

On top of his prediction last month that the the provincial government surplus will be as large or larger this year and originally forecast (and that prediction after the global meltdown started mind you) he is now saying that the economy will recover from the current crisis.

Well, of course it will. A penetrating insight into the obvious is that.

Outside of a few anarchists, everyone knows it will. Even in the 1930s after the Great Depression, the economy rebounded, eventually.

The question is not whether it will turn around but what will it look like when it does recover.

Pretty much like it did before - think 2006 with oil running at 80 or 90 bucks a barrel - apparently, since all the "fundamentals" that led to high oil prices are still there we are told in the Telegram story.

Really?

Well, at least, according to the state's favourite economist.

Like the ridiculous credit situation in the United States that fueled demand to heights never seen before. 

Yep.

That will exist after the current mess is over. 

After all, it is one of the fundamental causes of the demand spiral.

Now one of the things to bear in mind through all this is that in 2004 or 2005 you wouldn't have found an economist on the planet seriously suggesting oil at US$90 a barrel let alone US$150.  Those predictions didn't emerge until oil hit close to 150 and even then Goldman was thought a bit loopy to be tossing around 200 bucks by the end of 2008.  These days not too many are willing to buy into the current Goldman idea of oil being over $100 again next year.

That's because economic forecasts have a distressing tendency to rethink the future in terms of the here and now. As oil prices climbed above first 40 and then 50 and then 70 dollars, you started to see more and more revised forecasts for oil staying that those prices into the future.  A few months or years earlier and none of them seriously projected 50 let alone the heights it reached.

Apparently, it is taking some people a while to realise the scope of the current problem.  It isn't limited to the financial services sector and the automobile sector in North America, as if it was merely a couple of companies.  There is a broadly-based - fundamental - problem and as such it will have an impact both in time and across all sectors of the economy.  [Aside:  some analysts provide a refreshingly sober view of things, as in this video from CBC Here and Now.] 

You'd be silly to think we don't have a problem right now, but you'd be equally silly to think that a correction of this magnitude isn't going to alter some of the conditions that existed beforehand and which led to the current mess.  Fundamentally altering the fundamentals will likely produces a very different situation, and that likely doesn't mean one that will see oil shooting up to US$100 a barrel any time soon.  To be sure, let's make it plain that it isn't likely to occur again for a couple decades, much like the last time this sort of pattern  - high climb and then sudden price collapse - emerged.

Some companies will continue expansion plans.  This will especially apply to companies that are well managed or that secured their funding for expansion before the string of bank crashes.  Think IOCC in western Labrador.

That's proof of a well managed company, not any sign that the company believes in historically high prices for iron ore on into the future.  Rather the company management likely knows that by lowering costs whenever it can, the company is more likely to thrive even in lean times. That's how oil companies do it.

Smart business managers don't budget on the basis of historically  - and in some instances absurdly - high prices continuing forever just because they happened a couple of times.

Governments shouldn't do it either.

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Comfortable words

According to the provincial premiers, "Canada's economic fundamentals are sound".

Like we haven't heard that one before, and not from Dubya and Steve, either.

There's nothing like an international economic crisis to end the go-it-alone talk, either.

"We're here to indicate to Canadians that we're prepared to act as a united front. We're in good shape, which is not to say there aren't problems, but we're in the best situation in the world."

The premiers apparently agreed to drop inter-provincial trade barriers as one sign of viewing the country as a whole.

People in Newfoundland and Labrador are all too familiar with the go-it-alone stuff, but they've grown so used to the contradictions between the words and the actions, they'll likely wonder how come the two have suddenly matched up on the "we are all Canadians" side.

It's like telling a crowd of Provincial Conservatives in Corner Brook that "[t]his great provincial party has taken our province in a whole new direction towards 'have' status and self-reliance. No more give aways, no more begging from others.…" right after sending the latest round of begging letters to Ottawa.

Jack Harris coined a phrase that will go down in local political history.

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Whistling past the economic graveyard

The business world in a free market runs so extensively on psychology it's amazing that business schools around the world spend so much time on balance sheets, marketing and business plans.

Psychology is pretty much the reason why western government's responded to the American financial crisis with assurances that "the fundamentals" of the economy are sound.

However, in some instances, the efforts to describe the Canadian economy as somehow able to avoid any consequences of the move toward a recession south of the border became somewhat bizarre.

Take, for example, comments by Premier Danny Williams in an interview with the National Post:

"The fortunate thing about Newfoundland and Labrador and Saskatchewan in today's fragile economy is that our provinces are very, very well-positioned. We have strong economies, a lot of it based on natural resources, but we're going to weather this storm and weather it very well."

Finance minister Tom Marshall told reporters on several occasions that he doesn't see a problem find cash to build the Lower Churchill project. In other news stories, Marshall said he was concerned that lower oil prices would lower government revenues.

The Premier told VOCM listeners on Sunday night that the provincial "economy is growing very well."  That isn't accurate.  All economic forecasts - including the provincial government's own forecasts  - show the province having incredibly modest growth.  Some project the growth this year and next year will be scarcely above 1% and some have forecast growth at one half of one percent.  That is as perilously close to a decline as it can get.

At the same time, European countries are taking action to bail out where necessary and take other actions to avoid repercussions from the American downturn.  Odd is that, given that European countries are not as dependent as Canada generally or Newfoundland and Labrador specifically on the healthy American economy.

Iceland, once touted by some nationalists as a model for Newfoundland and Labrador to emulate, is in serious economic difficulty:

But in the financial world Iceland is now a hot topic of discussion for a different reason: many people suggest that it could become the “first national casualty” of the ongoing credit crunch. Until last year, Iceland’s economic track record in this decade had been phenomenal—its annual growth rate averaged close to four per cent over the past decade, and its per-capita gross national income is now higher than that of the U.S. This year, though, the country’s currency, the króna, has fallen twenty-two per cent against the euro; the economy has stagnated; and a global rating agency has put the nation’s three major banks on a credit watch. Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”

Take, as but one example, an article from the weekend Globe and Mail.  It included this comment one one manufacturer from Newfoundland and Labrador:

Mr. [Lorne] Janes, president of Newfoundland-based Continental Marble of Canada, is already getting the cold shoulder from his customers in Florida, Maryland and California. “The reply I'm getting now is, ‘Lorne, save the phone call, don't call any more until this sorts out,'” said Mr. Janes, whose 12-employee company manufactures equipment to produce moulded stone countertops.

Janes wouldn't be alone.  A Bond Papers post from last July highlighted the extent to which the provincial economy is dependent on exports - especially energy exports - the majority of which heads to the United States. In 2005, the last year for which information is posted online at the provincial government website, 52% of international exports from Newfoundland and Labrador headed to the United States.

As the United States economy slows, the effects on Newfoundland and Labrador will be felt directly and in some instances very strongly:

1. As demand for energy products declines, exports to the United States will also likely decline.  That will reduce provincial government revenue.
2. As the price of oil declines, provincial government revenue will decline accordingly.  If crude oil averages US$87 in 2008, the provincial budget will run into deficit to the tune of about $800 million.
3. Declining commodity prices and lessened demand for minerals, forest products and fish would affect the three traditional major economic drivers in Newfoundland and Labrador.
4. The American credit crunch - and the resulting tightening of capital available for major projects - will affect virtually all the major projects projected for Newfoundland and Labrador:

• The NLRC refinery project is already in serious trouble and may well be dead for all practical purposes.
•  Hebron is not yet sanctioned.  While many believe the project is underway, it is not.  Oil prices, increased costs and tight capital may delay project sanction.
• The Lower Churchill needs $9.0 billion in capital investment, capital which is growing increasingly scarce. The project currently does not have a single power purchase agreement.  PPAs are crucial for securing long-term financing. A decline in revenues from oil and gas developments and mineral production would adversely affect the provincial government's ability to cover the costs of doubling the provincial debt in order to build the project.

The Newfoundland and Labrador economy is not immune from the effects of a serious downturn in the American economy.  As much as politicians are tempted to say something different from that for political reasons, it would be far better to provide people with an accurate picture of the provincial economy and the interrelationship between international events and local economic well being.

The shock of finding out the truth if serious consequences follow will be far greater than if politicians didn't try to whistle a happy tune as they walk towards what - for some economic projects - might well be a graveyard of ambition. That shock will have far greater consequences than what would occur from telling it like it is right now.

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Your serial government at work

There's a northern "strategic plan" for Labrador.

Labrador is north, so that bit is redundant.

Well, unless the plan is for northern Labrador.

Anyway...

As the news release notes, this "plan" fulfils a commitment from the 2005 throne speech. That means it has taken two full years to generate this document.

That's a pretty long time, especially considering that things like a wind power project and Lower Churchill development have already started in the case of the latter, or been postponed (the former) while this plan was being developed.

So what's the thrust of the document? Well, there is the obligatory commitment to sweeping goals of making things "better". There is plenty of cash committed here and that likely is the real purpose of the document: spending in an election year.

Other than that, most of the initiatives in the plan are already in train or are the sorts of things that one might expect, like building schools where needed and improving access to health care.

There is a curious one under natural resource development:

Support Newfoundland and Labrador Hydro to conduct an ACOA funded assessment of technical options for natural gas developments off Labrador...

If Newfoundland and Labrador Hydro is going to get into oil and gas development, then that could be a good thing. It could be - conditional language - since we don't know what Hydro's role will look like or what the financial implications are.

In this specific case, the technical options for developing gas offshore Labrador could be explored and likely would be explored - if they have not been explored already - by the license holders.

It is curious that the Hydro corporation will be studying these options. But it is even more curious that studying the options requires federal funding through the Atlantic Canada Opportunities Agency (ACOA). Surely Hydro has enough retained earnings to fund the study.

Beyond that, though and aside from all the good things to happen in Labrador, this document bears all the marks of something completed over two years ago. Note the number of phrases which project ore shipments and employments levels...for 2006. In early 2007, those projections should be easy since the year is past. Hindsight is always more accurate than foresight.

This is your serial government at work.

Not only does it take two years to complete a "strategy", but the strategy contains no concrete measurable goals to judge success. Major strategic decisions on everything from a new hydroelectric project, delay of a wind power project and decisions on new mine developments in western Labrador are all taken before the "strategy" is in place. On top of that, document is actually held up through the bureaucratic process to the point where it is announced fully two years after it started.

Surely it would have been nice to develop an actual strategy, one that lays out the guiding principles for its various components like health care and resource development.

Surely it would have been nice to have those principles before decisions are made.

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Change versus more of the same: Stronach on competitiveness

From the Tuesday National Post, Belinda Stronach [Photo:belinda.ca] writes

Being competitive globally involves education, job skills, infrastructure, innovation, technology and regulation. It is an integrated package. Competitiveness is the result of a political philosophy that sets the balance between government and the private sector.
...
Competitiveness, jobs and national prosperity need to be the principal ballot questions for the next federal election. Whoever can best ensure our quality of life through economic growth deserves to govern. We have the priorities backwards. Other issues such as government accountability, lowering the GST and same-sex marriage rights are secondary to making Canada competitive for the future. Without that, there won't be money for anything else.

They should be the major ballot questions in Newfoundland and Labrador this October.

Who really cares if a particular politician or party wins all the seats and scores high in the polls?

None of that is about "jobs, jobs, jobs".

Then again, it turned out that the last provincial election wasn't about "jobs, jobs, jobs" either.

It's time for a real change.

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Change versus more of the same

While former Liberal cabinet minister Walter Noel does his part to support the victim mythology of Newfoundland nationalism, perhaps he should consider a new approach to economic development and Newfoundland and Labrador's economic place in the world.

Noel's problem appears to be with Newfoundland and Labrador's balance of trade.

He identifies the solution to a general economic problem as being more federal transfer payments. Right problem. Wrong solution.

All that Noel succeeds in doing is demonstrating how the current administration and the one Noel served in are fundamentally the same. Heck, the current administration offers the same answers that have never worked for administration after administration since Confederation.

Like that's worked.

The idea outlined in this op-ed piece from the Toronto Star is increased inter-provincial free trade. In other words, open up the opportunities for Newfoundland and Labrador companies to do business in the rest of Canada. Rather than building barriers, Newfoundland and Labrador needs to open the doors.

Since Confederation, Canadians have been hampered by an inter-provincial distrust of the power of free markets to produce economic and social benefits.

As a result, federalism has evolved into an inefficient system of provincial and municipal enclaves of economic autonomy. Provincial economic independence has created an interprovincial trading system that hampers productivity through barriers that curb the flow of goods and services.

These have impeded Canada's evolution from a middle to a modern power.

Canada cannot hope to compete globally when we have the kind of barriers to internal trade we have now.

There's a similar idea in this study by the Economist Intelligence Unit.

More of the same won't work.

It's time for Newfoundland and Labrador to change.

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