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Dining at the virtual restaurant

Among the more pernicious lies put about by the government and its apologists in the mainstream media is the one that blames the retail apocalypse on online shopping.  For while it is true that online retailers have experienced a small increase in traffic, this in no way accounts for the huge falls in High Street retail sales.  Nowhere is the lie more obviously exposed than in Britain’s hospitality industry where profits are a rarity and bankruptcies are increasing by the day.

Among the high profile casualties are the Prezzo restaurant group, which has announced the closure of 94 restaurants and 500 redundancies.  More recently, Conviviality, which owns Bargain Booze and Wine Rack, and which supplies more than 25,000 restaurants, hotels and bars, is filing for administration following an “unexpected” £30 million tax bill.

These, though, are merely the tip of a much bigger iceberg.  According to Caroline Davies in the Guardian:

“One in three of the UK’s top 100 restaurant groups are lossmaking, a rise of 75% in the past year as the casual dining crunch continues with little respite in sight… A combination of higher staff costs, rising business rates and falling consumer confidence have conspired to slash profit margins and force high street closures.”

Nor is it just eating out that is suffering.  Campaign group CAMRA reports that 18 British pubs are closing every week as a result of an increasingly harsh economic environment.  Colin Valentine, CAMRA’s National Chairman says:

“Pubs are now facing a crippling tax burden, exacerbated by the perfect storm of the last business rates revaluation and a high level of beer duty. From these new pub closure figures, it is clear that a fundamental change is needed if the British pub is to survive for future generations.”

While Toys R Us, Maplin and New Look can reasonably point to online competition as a factor in their decline, no such excuse can be given for restaurants and pubs.  This is because, despite its many achievements, the tech sector has failed to find a means of dining and drinking online.  Dining out and going to pubs was something that we used to do in the past, but are increasingly struggling to afford today.  And the government and its apologists cannot blame it on Amazon.

Even the obsequious BBC is obliged to concede that, among six potential causes of the retail apocalypse are increasing overhead costs and the ongoing squeeze on wages:

“A big factor has been a fall in discretionary spending, spurred by rising shop prices and weak wage growth.

“A near 15% fall in the pound since the Brexit vote has pushed inflation over 3% – way above the Bank of England’s 2% target. This has made imported goods more expensive, with those costs passed on to consumers.

“Couple that with the fact that wages have been rising at a slower pace than inflation – and shoppers have less disposable income to spend in stores and restaurants.”

Overheads, however, are treated as if they grow out of the ground organically rather than being the very deliberate policy of a government whose modus operandi is to ask other people to pay for its policies.  Most obviously, the decision to raise the so-called National Living Wage places a particular burden on low wage and tight margin businesses like restaurants and pubs.  Less obviously, increases in Britain’s antiquated business rates system (which taxes businesses on the square metre size of their premises rather than a, more rational, proportion of their profits) has added significantly to the cost of High Street retailing.

On top of these pressures is the Bank of England’s decision last November to begin hiking interest rates into a recession – a practice that has reliably triggered previous recessions and shows every sign of producing another in the near future.  Companies and households that were just about managing to service their debts in the run up to Christmas have been forced to default in the months since.

These factors, however, are merely the immediate results of a more profound removal of money from the economy.  The process by which this has occurred is most likely invisible even to the government ministers responsible.  This is because, like the public at large, most politicians are entirely ignorant of how money is created.

There are just two (three if we add counterfeiting) means by which money is created.  There is the way most people think – that governments print it into existence.  The other (far more common) way is that banks create new currency every time they issue a loan.  Indeed, with the exception of actual notes and coins, government money printing is merely an extension of bank lending.  Governments borrow money into existence by issuing bonds that are auctioned to selected (i.e., you and I cannot buy them directly) banking and financial institutions.  Government then spends the money it has borrowed (which the banks had spirited into existence out of thin air) to pay for public services, pensions and subsidies.

In this way, the public and most politicians get the relationship between public spending and taxes (and bank loans and deposits) the wrong way round.  Our erroneous assumption is that government must raise taxes in order to pay for public services.  In the same way, we wrongly assume that banks must attract deposits before they can make loans.  So, with public spending far higher than income from taxation (which always happens in a depressed economy) it seems logical for government to cut its spending to match its income – the now infamous “household analogy.”

The result, however, is that by cutting public spending, government is cutting the rate at which new money enters the economy.  Together with tax increases this is an acceptable approach to genuine inflation (like the 25 percent rates experienced in the mid-1970s).  But hardly anyone alive today can remember what real inflation is like.  Removing new money from the system today means stifling what economic growth is still possible.

The situation would not be so bad if banks were lending sufficient new currency into the economy to make up for the money being removed by government.  But since 2008, banks have cut back on the amount of new loans they are prepared to make.  Not least because Britain has an army of “zombie” households and firms that are still unable to pay off the debt they took on prior to the crash.  Low interest rates have allowed these debts to become more or less permanent, since they allow monthly interest payments to be made even though there is little prospect of the actual debt being paid off.  Moreover, central bank stimulus has helped the banks manage this debt.  But both policies are now being reversed; causing the total spending power in the economy to plummet.

A final problem for retailers – and for the wider economy – is our misunderstanding of profit margins.  Had you walked into a branch of Toys R Us or Maplin the day before they closed, you would not have noticed anything unusual.  You would have seen a relatively steady flow of customers purchasing goods in more or less the same way as was happening prior to the firms getting into financial difficulty.  The same is true in the pub and restaurant sector – you would be hard pressed to tell a profitable from an endangered business just by looking at the number of customers.

But the retail sector has very tight margins that easily disappear in the face of relatively small shifts in customer behaviour and overhead pressures.  Just ten percent of pub customers ordering one less drink can be the difference between profit and loss.  Families choosing to eat out once every two months instead of once every month can have a devastating effect on restaurant profits.  These small shifts in behaviour are not readily obvious to central bankers and government ministers charged with managing the economy.

In this sense, pubs, restaurants and High Street retailers are currently acting as the canary in the economic mine; warning us that the economy as a whole is going to go the same way.  Adding higher interest rates, higher business rates and a raft of new unfunded employment overheads – like apprenticeship levies and automatic pension enrolment, as well as the National Living Wage – while continuing to suck money out of the economy serves only to exacerbate a recession that is gathering pace by the day.

By the time politicians and mainstream journalists wake up to the crisis that is unfolding, virtual pubs, restaurants and shops may be all that is left.

As you made it to the end…

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