Thursday, 16 February 2012

Public Sector Insolvency and Interprovincial Rivalry

We're really seeing eye to eye: The gap between us is like the space between these cliffs - not very big.

For weeks we've heard the drums being pounded by stern news articles headlined by bad expressions: "Ontario is in big trouble." "Ontario is in the fiscal soup" "Ontario needs to take its medicine" "Ontario about to get its wake up call". The headline writers hoped that their rhetorical flourish was going to shake the population and its freshly re-elected premier out of the apathetic sleepwalk that got us here. That hope was as misguided as me sitting here hoping to be raptured into heaven and leave my pile of clothes on the floor.

No, it was all an exercise in flogging a dead horse with a dead horse. If you read the news, you saw this coming ages ago. This is why the release of the Drummond report yesterday was not a bombshell.

It was not a death knell.

It was not ground breaking.

It was a former public servant and bank CEO telling 14 million people, most of whom were not listening, that the provincial financial ship has run aground. In other words, what many of us who live here have known and have been writing about for years.

I don’t know what he got paid, but it doesn’t really matter, because our population that does pay attention is not stupid. No disrespect to Drummond, but everyone with their eyes open has seen the financial realities he smacked his brick of paper on the table to wake his compatriots up to in the offing for years. After all, we live in a weak-kneed, head-in-the-sand kind of society, headed by the weakest-kneed, head-deepest-in-the-sand kind of politician par excellence, Premier Dalton McGuinty.

Here are some recommendations for free, not the six figure fee Drummond no doubt charged for his services, that you don’t need to sift through seven hundred pages to dig up. I have no fiscal calculations but I bet they would put a solid dent in that 16$ billion deficit Ontario is grappling with, if not outright eliminate it

-3 bucks to take the 404 South of Steeles Avenue, starting as soon as we can get a toll bridge built.

-2 bucks to take the Gardiner Expressway into Toronto East of the 427.

-Mandatory $150,000 pay cap for all senior public servants. No more million dollar hospital CEOs and University presidents, and no more 300k a year useless premier!

-10 bucks user fee per doctor visit. Why not? I went to the doctor today. I could have paid ten bucks. And I don’t even make a lot of money! Why was it free? People on welfare spend upwards of $300 a month on Rogers bundles for Christ’s sake!

-Immediate consolidation of public and catholic English language school boards. I’m tired of the whining about history and the constitution and the box you check to direct your tax dollars to which board. You want publicly funded religious schools? Vote with your feet and move to another jurisdiction that has them. Oh wait, there are none.

-Raise the corporate tax rate by 2%

-Raise the provincial income tax rate by 2%

-Raise resource (mines, minerals, forests) royalties

-Levy congestion charges based on home and work place postal code distances

-Sell off the part of the LCBO that will allow beer and wine to be sold in convenience stores, which would not turf the lickbo employees out but would allow a nice boost to private enterprise and more choice for consumers so we could have similar systems to Quebec and BC.

-Start taxing lottery winnings

-Immediately wind up and grandfather existing police, teacher, firefighter, and public servant Defined Benefit Pension plans and replace them, going forward, with Defined Contribution Pension plans

As long as the gang of “steady as she goes, status quo into oblivion” Liberals are at the helm in Ontario, you can count on exactly zero of my ideas being implemented. Why would they? They step on too many special interest groups’ (public unions, sunshine listers, commuters) toes whose votes the Liberals covet with their fake rose-coloured glasses collectivist thinking. So I don’t know why they manufactured all this buildup and suspense around Mr. Drummond’s report. They are fundamentally incapable of making hard choices or (god forbid) offending anybody. This government will make the stupidest and rashest of decisions (e.g., cancelling a natural gas plant in Mississauga to save one seat) even when it totally exposes them for the spineless, shameless panderers they are. So I don’t place too much stock in them doing anything it says to do in this non-binding report. As many observers have already pointed out, the Liberals already stated they are ignoring one of its major recommendations, the axing of full day kindergarten.

That’s the bad news.

The good news is, no matter what happens, life will go on in Ontario. Much as it has gone on in Italy, Spain, and yes, even Greece. Several comments were calling us the Greece of the north in the report aftermath. These are people who think a tear-gassed, rioting street corner in Athens is an entire country. Fourteen thousand islands. Do you think people are starving or something? (Ok, food bank use is probably up but I would still travel to Greece tomorrow if I had a chance. Somalia or Afghanistan? Not so much)

The developed world will continue to enjoy standards of living far beyond anything remotely imaginable fifty years ago, even if bond traders in New York and London push up its governments’ borrowing costs. And I’m not saying that’s an outcome I want – but again, look at the reality-avoidance paradigm we live in. My recommendations (which would cause very, very little pain) are ignored because they close off certain people’s sweet deal loopholes which benefit nobody else.

As for the plethora of commenters and pundits exhorting Ontario’s lost and deprived youth to “pack up the truck and head west before its too late” because there’s “no future here”, I wonder how it can be legal to print such drivel. Alberta has the highest public sector wages and the highest per-capita public sector costs and spending in the whole country. So all these red-meat conservatives in Western Canada who love to trash McGuinty maybe should take a look at the “conservative” premier of Alberta who just put out a deficit budget that would make her most profligate of colleagues Mr. McGuinty blush. A deficit budget – at a time when a province is reaping more bucks from its oil than ever – what does that tell you?

If Alberta had implemented a fund like Norway for a portion of its oil and gas profits, it would have $100 billion in cash right now that it could be making another $5 billion a year off of. Jeffrey Simpson at the Globe pointed this out last week. Former premier Peter Lougheed, a real conservative, had established such a fund (the heritage fund), but because it was repeatedly raided by subsequent fiscally irresponsible fake conservative premiers, there is not even $15 billion in there today.

Of course, nobody cares because in Alberta everyone’s hiring, every one’s making lots of money, and everyone’s having lots of babies. So that’s the new Canada, where things are really happening. However, if people in our country ever researched anything they would know that several US jurisdictions and foreign countries have also experienced similar gangbusters growth fuelled by petroleum in the past, and are either forgotten, declining, hurting, and across the board definitely not “centres of gravity” today. It’s pretty simple to grow when you’re cashing oil cheques – the stuff is valuable and sells better than anything, even hotcakes. But what happens when the oil is gone and all you did was party?

Everywhere in Canada there are lots of opportunities to work, start businesses, get educated, do and see fun things, and raise families. This is a great place to live. But what do I know? Listen to the media pundits who tell you anywhere east of Saskatoon is now third world. Listen to conservative trolls on forums who talk as if Alberta was really skilled and disciplined and not just a place who drills and pumps loonies out of the ground. Head west and freeze your ass off all winter working on derricks, or in bitumen strip mines, or on seismic lines, or in gas plants and vinyl plants and petrochemical plants and fertilizer mines, living in portables and overpriced, treeless, car-dependent subdivisions. Or you could get a job driving tankers or goods across flat land from one butt-fudge eyesore town with a Husky and a 7-11 to another. It’s really disillusioning to drive for hundreds of kilometres a day and not be able to procure yourself any food except milk duds and beef jerky and chew. But go west! Cause here in McGuinty-land, we’re just a food stamp regime one step away from skid row now.

No wonder I had to resolve in 2012 to swear off media.

Sunday, 5 February 2012

Financial Advice 101 - Avoid CPP and CMHC at all costs

Because They're Being Driven Into the Ground With the Complicity of the Government!

Lacking Credentials is on hiatus, but even with my current media and headline avoidance strategy, the total BS swindle job that is taking place on the subjects of CPP and CMHC orchestrated by the media and the government is just too absurd not to address.

Suddenly its becoming apparent that our demographic gears are grinding to a halt. The facts are well known: CPP (the Canada Pension Plan) was created when life expectancy was 72, now its 81, CPP was created when the worker retiree ratio was 4:1, now its 2.5:1 heading towards 2:1, the retirement age of 65 was chosen in 1934 in USA/1965 in Canada – when fewer people lived that long.

So our country's powers that be will follow every other developed country and raise the retirement age by two years. In other words, instead of driving straight off the cliff they will drive to the edge, turn right or left, drive on the edge for a little while, and then take the car off the cliff. This is the political strategy very in vogue in Western countries right now known as “kicking the can down the road.”

Stephen Harper brushed off concerns about the reform of CPP at Davos with one of his usual dismissive, paternalistic, economic jargon-BS filled quotes, which I’m sure will be an infamous example of ‘the third Reich will last a thousand years” -like hubris sometime down the road. In case you haven’t heard it yet, I am referring to this Jan 27 statement: “The Canadian Pension Plan (CPP) is fully funded, actuarially sound, and does not need to be changed.” This is a bold proclamation. Let’s do some laypeople calculations and use some really liberal numbers to test its validity. Say 12 million Canadians out of 35 million are headed for retirement in the next 5-10 years collecting the CPP max of about $8500 per year for an average of 15 years till death (67 +15=82 years old)

Wow!That equals about 1.4 trillion dollars, which means the CPP is underfunded by almost 50% of its future liabilities even after this “tinkering” proposed reform. So instead of brushing us off with bromides, why doesn’t the government unveil the complex and opaque formula it uses to calculate people’s CPP payments? Why don’t I have any power as an investor, who put $66.21 into this damn Ponzi scheme on his last pay cheque through no choice of his own, to know what the CPP Investment Board invests the 950$ billion fund in and to decline to contribute when they invest in a chain of plastic crap dollar stores in the US Southwest (which it really did last year). I’m also sure a dangerously high proportion is invested in energy/oil sector companies – how do you guarantee the stability/sustainability of that? Well, you don’t, because as John Michael Greer pointed out in his excellent Archdruid report yesterday, oil scarcity is not a “problem” to “solve”, it is a “predicament” to be “dealt with”. I don’t care how “savvy” or “experienced” the investors on the CPP investment board are, the way to dial down the expectations of this ridiculous program is to admit the numbers have been totally fudged for awhile and pay everyone not yet retired back the sum they paid in. Sure it would cause an uproar, but your full principal returned interest-free sure beats losses that will have your pension paying you back 5 cents on the dollar.

Everyone has a notion “they paid into this program” and are therefore entitled to it in its current form, and its simply no longer true. It is true that you've paid into it, but if you were hoping for an income stream, you better try beat the market yourself, cause these guys aren't going to do it for you.

My intention today is not to undertake a complex discussion on the intricacies of pension reform, but to show the ineptitude of Canadian governments' administration of Canadian financial institutions. Exhibit B is the recent discovery that the big 5 banks have been purchasing additional mortgage insurance from CMHC and selling the insured mortgages as securities. What does that mean? When you buy a home and have less than 20% of the purchase price to put down, you must purchase, for several thousand dollars, insurance on the mortgage from the Canadian Mortgage and Housing Corporation which is a government bureaucracy that covers you if you default because you're considered high risk. Makes sense, right? Its different from the US government mortgage insurance beasts Fannie Mae and Freddie Mac which have now effectively backstopped the entire US housing market on the fake dollars IV drip they get from Bernanke over at the Fed. No, the Canadian system seems like a reasonable regulatory precaution to reduce risks to our cartel of big banks who are supposed to be ethical and well regulated and the envy of the world, etc.

But here's the rub. CMHC has a $600 billion cap on the exposure its allowed to the Canadian housing market. It was previously 450 but they lifted during the 2008 financial crisis. Now its getting close to the cap again (I think its around 520), except the amount is not going out from buyers taking out insurance who need it (who are actually required by law to have it), its from banks double-backstopping existing low-risk mortgages with the taxpayer's credit (because despite its fancy name, that's who CMHC represents) and then selling those securities as ironclad, AAA investments.

It's not like this bombshell disillusions me (you only need to research the term "fractional reserve banking system" if you still are under the impression that banks actually have any money), it's that banks making record profits are compromising people's ability to get into an extremely over-inflated housing market (which the banks pushed). The bank can demand you take CMHC under all sorts of pretexts, even if you have the 20%. So how will they defend declining people when it was they themselves who caused the insolvency of CMHC by abusing the taxpayer-funded bureaucracy for purposes for which it was not intended. In Canada companies think because they employ lots of people in their customer service departments they can get away with abusing their cartel priveleges - see Rogers and Bell, billing for internet data usage when you streaming youtube costs them exactly nil. Except this is like them requiring you to take insurance for going over your usage which is a system based on fraud anyway then selling it to somebody else as an asset.

Want financial advice? Own your home and manage your assets as soon as you can, so you can get the hell away from these conniving financial institutions and their enablers in government who are unable or unwilling to put a stop to the serial corporate defrauding of Canadians.