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Another one bites the dust

Image: Matthias Rhomberg

Upmarket restaurant chains Gaucho and Cau have become the latest victims of Britain’s retail apocalypse after their management was unable to find a way out from under a mountain of debt and complex legal structures, according to the BBC.  What is notable about the failure of these restaurants is that it indicates that the apocalypse is beginning to impact more affluent professional groups in the UK population.  As the BBC reports:

“Cau, described by Equistone as an ‘aspirational casual dining chain’, was launched in 2010 and has 22 restaurants.  Gaucho, which specialises in Argentinean steaks and fine wine, has 12 restaurants in London, with another four in Leeds, Manchester, Dubai and Hong Kong.”

Your local Pizza Hut or Burger King, these restaurants most certainly were not.  And once again, their failure cannot be dismissed as the predatory switch of retail to Amazon since, at least for now, the tech giant has yet to discover a way of allowing people to dine out online.

The closures come on the back of monthly economic data that points to a slowdown in the UK economy.  According to the BBC:

“UK wages rose more slowly in the three months to May, despite a further fall in unemployment, official figures show.  Wage growth slipped to 2.7% from 2.8% in the three months to May, while unemployment fell by 12,000 to 1.41 million.”

This is further evidence that the British economy is losing high-paid/hi-tech jobs and replacing them with low paid/low-tech (i.e. labour intensive) work.  This, of course, means fewer people in the kind of professional positions that pay wages high enough to take the family out for a meal at Gaucho or Cau.

Meanwhile, the headline inflation rate only remained steady because of a spike in the price of oil, according to Will Martin at Business Insider:

“Britain’s headline rate of consumer price inflation (CPI) was 2.4% in the month of June, unchanged from the previous month. CPIH, the ONS’ favoured measure of inflation was also unchanged, steady at 2.3%.

“That was almost entirely down to the rising price of petrol, which has been triggered by steadily rising oil prices. Oil is now at around $71 per barrel, a level not seen since around four years ago…

“Without the increased price of fuel, the UK’s headline rate of inflation would likely have dropped last month, the ONS said, continuing a steady decline witnessed throughout 2018.”

In other words, Britain has been experiencing a period of deflation – hence the retail apocalypse – that is only masked by an increase in energy prices resulting from increasingly expensive imports and the ongoing decline in the UK’s domestic energy sector.

One potential solution to the problem is a reform of Britain’s insane local business rates (i.e tax) system, which taxes businesses according to the assessed value of the property they occupy rather than their net income.  Clearly this puts physical retail outlets at a significant disadvantage to online outlets that may not even require premises, or may operate from cheaper property away from town and city centres.

This, however, overlooks another central element of Britain’s slow motion economic collapse.  Because the UK is a net importer with a high current account deficit, it can only borrow – i.e. sell government bonds – for so long as the government has a steady stream of tax income to pay the interest on its bonds.  Crucially, taxes levied on property are by far the easiest taxes for a state to collect.  As Jonathan Eley at the Financial Times reports:

“The UK government is resisting pressure from retailers to reform business rates, saying that it has already made changes and that reforming international corporate taxation is a higher priority.

“Responding to parliament’s Treasury select committee, chancellor Philip Hammond said that a review of business rates in 2016 found ‘no consensus on an alternative base’.

“’Respondents agreed that property-based taxes were easy to collect, difficult to avoid, relatively stable compared to other taxes and had a clear link with local authority spending’, he said in a letter to Nicky Morgan, who chairs the committee.

“The rebuttal comes after growing calls from the retail industry for reforms that would help redress the disparity in rates between bricks-and-mortar and online shopping.”

Taxation tends to be overlooked as a central part of the gathering economic storm because it is assumed that a sovereign government can simply issue new currency to make up any shortfall in public spending.  This can be done either by issuing bonds (borrowing) or by simply printing new currency.  This is only true, however, if a country is a net exporter whose goods and services are in demand elsewhere in the world.  If a country, like the UK, is already in hoc to the wider world, it needs to raise taxes to prevent a run on its currency that would result in inflation on a scale not seen since the 1970s.

To avoid this, the UK government has to prop up the bonds that it issues above almost all else.  And that means that far from easing the burden of taxation on its businesses (and households) the UK government is going to increase taxes despite this being self-defeating in the longer-term.  Like every other government on the planet just now, advised by economists who are as clueless as astrologers, the British government is desperately hoping that someone will figure out how to get the economy growing again.

The answer, though, is that growth – particularly the growth rates enjoyed between 1953 and 1973 – is never coming back because we no longer have access to the number of spare “energy slaves” that were available back then.  There are still vast quantities of coal, gas and oil in the ground waiting to be tapped.  But the cost of bring them to the end consumer is now so high that energy is sucking value out of the wider economy.  Taxation is doing something similar, since it is merely repaying debt that was issued in the past against energy today.  And nobody seriously expects the massive centralised state bureaucracies that were built on the back of cheap and abundant fossil fuels to stop taxing us any time soon.

In addition to these two value sinks – energy and taxes – a third hangs over the UK economy like the Sword of Damocles.  Central bankers seem completely clueless as to whether they ought to raise interest rates to curb an inflation rate that is rising almost entirely because of energy prices, or to lower rates in order to halt (or at least slow) the demise of what remains of the retail sector (and the tax base).

Most likely, they will do both.  That is, they will raise interest rates in an attempt to prevent rising energy prices translating into generalised price increases across the economy… just like they did in the run up to the 2008 crisis.  Most likely, the result will be more or less the same.  Households and businesses that are already struggling in the face of higher taxes, stagnant income/falling sales and ever higher energy costs will be hit with an additional hike in the cost of debt servicing that will begin to tip them over the edge.  When the proverbial hits the fan, the central banks will attempt to cut interest rates back to zero and embark on another round of stimulus, which, if it escapes the bounds of the financial sector, will plunge us into precisely the kind of stagflation that they are trying to avoid.

The collapse of restaurant chains whose customers are drawn from the affluent professional classes tells us that – in Britain at least – the economic rot has already spread beyond the point where it can be contained.  What we are witnessing is a growing crisis of under-consumption that must inevitably result in bankruptcy for any organisation outside the energy, food, state and banking sectors.  And ultimately, only energy and food will remain as both banking and even the state (in its current form) become too expensive to be sustained.

As you made it to the end…

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