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The art of painting lipstick on a pig

Financial journalists are engaged in a form of psychological warfare with the wider public today.  With a few notable exceptions, the aim is to paint as rosy a picture as possible to the unwashed masses whose pension contributions and continued borrowing are the only things keeping the bubble inflated.  Unfortunately, though, the real economy has a nasty habit of intruding in what might otherwise be an uninterrupted flow of good (but largely fake) news.

This is where the notable exceptions come into play.  On this side of the Atlantic, the trick has been to frame every item of bad economic news through the lens of Brexit.  On the other side of the pond, Donald Trump must be held to blame for bad economic news.  This is plausible enough simply because both Brexit and Trump have had a negative impact on trade; and thus can be held partially responsible for increasingly stormy economic headwinds.  Behind the political froth, however, is a structural economic crisis that is simply not going to go away.  This is the crisis of falling net energy (or rising energy cost of energy – ECoE) which means that no matter how the high priests of central banking manipulate the financial sector of the economy, we have now (in the absence of some energy miracle) reached the apex of human industrial growth.

While most of us have learned to see the economy in monetary terms, our money is only really a claim on future energy.  Technically, taxation and legislation is what gives a fiat currency its value – you can only pay tax in the national currency; and you must accept it as legal tender.  In reality, though, it is the steady supply of goods and services that gives currency a real value.  If the energy cost of supplying those goods and services rises – because the remaining resources and fossil fuel deposits on Planet Earth are much harder to extract than was the case even a decade ago – then either the supply will fall because producers cannot afford to extract them; or demand will fall because consumers cannot afford to buy them.  Either way, having a wad of cash to hand will be of little use once the supply has disappeared… at which point the value of the currency falls to zero.

In the real world, of course, we are highly unlikely to experience an overnight collapse in the supply of everything that keeps the economy running.  More likely, given the experience of the last couple of centuries, we will continue to experience a choke-chain interaction between finance and the real economy.  How this works is that new fiat currency is borrowed and printed into existence and invested in the real economy.  The increased demand for stuff busts the investment in extraction and manufacturing around the planet.  Enthused by the short-term returns on financial investment, financiers pump even more currency into the economy causing it to “overheat” – in effect to outrun the capacity of the real economy.  Shortages occur as demand outstrips supply.  Prices rise and investment dries up.  Eventually the bubble bursts and the system resets.

In the past, this process would lead to what economists call “creative destruction,” in which the least productive and profitable businesses go bust; making room for more efficient businesses.  Underpinning it all, however, was a growing supply of cheap (in financial and energy terms) concentrated energy in the form of fossil fuels that powered every part of the real economy.  In just 20 years (1953-1973) as the world economy switched from coal to oil, GDP and trade grew as much as they had done in the previous 150 years.  Not coincidentally, this was the period in which global oil production grew exponentially.  Far more oil has been extracted since, of course.  But between 1973 and 2005 the rate of extraction slowed considerably as net energy steadily fell.  The result was the various manifestations of economic slowdown – the inflation of the 1970s; the severe depression of the early 1980s; the growing financial bubble crises since 1987; and, of course, the great financial accident of 2008 and the depression that followed.

Even today we continue to extract more fossil fuels and more mineral resources than ever before.  The difference since 2005, however, is that we have depleted almost all of the cheap, high-quality deposits.  If the world consisted solely of the developed western economies, we would already be a decade into a process of degrowth.  Instead, emerging markets – most notably China – that provide cheaper labour and worse working and environmental standards have kept the bubble growing for another decade.  The neoliberal wet dream that Chinese consumption would somehow rise to western levels in order to kick-start a new age of prosperity is, however, impossible; precisely because that level requires a much lower energy cost of energy than Planet Earth can now provide.  Worse still, recent news that China’s economy – even by its own dubious figures – is slowing indicates that even the days of emerging market growth are coming to an end.  As surplus energy economist Tim Morgan wrote recently:

“Hidden behind increasingly desperate (and dangerous) financial manipulation, the world as a whole has been getting poorer since ECoE hit 5.5% in 2007. As more of the EM economies hit the ‘downturn zone’ (ECoEs of 8-10%), the so-far-gradual impoverishment of the average person worldwide can be expected to accelerate.

“After that, various adverse consequences start to impact the system. The financial structure cannot be expected to cope with much more of the strain induced by denial-driven manipulation. The political and geopolitical consequences of worsening prosperity, exacerbated perhaps by competition for resources, can be left to the imagination. Economic systems dependent on high rates of capacity utilization can be expected to fail.”

To some extent, financial media have been obliged to cover this gathering storm as second quarter figures from around the world paint a picture of a gathering slump in the real economy.  As the reports come in, we discover that this month alone Australia, China, Germany, Ireland, Japan, Singapore, Spain, Uruguay and the UK have all reported sharp downturns in production and supply.  Evidence of the growing global slowdown is most obvious in the transport sector, where the movement of goods has slumped.  As Morgan Forde at Supply Chain Drive reports:

“This month, multiple organizations that track the trucking industry reported the sector is heading toward, or is already in, a recession…

“Earlier this year, economists forecast a potential slowdown in the trucking industry in 2019. DAT data predicted a negative impact of tariffs on the freight market… Now however, this trend has begun to slow down and DAT has reported dramatic decreases in load volumes across the spot market as well as in its van, flatbed and reefer load-to-truck categories.”

Nor is the slump limited to the haulage industry.  As Patrick W. Watson at Forbes notes:

“Just as an army moves on its stomach, an economy moves on ships, trucks, and planes. They carry the goods whose purchase adds up to growth.

“Nowadays many goods are digital, delivered electronically. But we still need lots of physical stuff which must travel to the customer.

“Fewer goods in motion mean lower growth… and that’s exactly what is happening…

“Lower freight volume is a symptom of a disease that’s getting worse.”

Ironically, because of the US dollar’s position as the reserve currency and despite Trump’s trade wars, the US economy is the current (and temporary) beneficiary of the global downturn as investors flee to the least dangerous place to bank their wealth.  However, US employment figures aside, the fact that the world’s central bankers are signalling the end of rate hikes and quantitative tightening (with the growing expectation of rate cuts and further stimulus later this year) it ought to be clear to anyone who is paying attention that some big storm clouds are gathering on the horizon.

Not, of course, that this will stop the media from portraying what is happening as anything but a little local difficulty.  Just as the collapse in British non-food retail sales in recent years has been presented as a triumph of online retailing (even though online retail remains a relatively small proportion of total sales) so radical shifts in consumption patterns can still be painted in a positive light.  Consider, for example, that as the prosperity of the majority of the British people continues to fall, they are less likely to spend what remains of their discretionary income on non-essentials.  And as they retreat from the copious consumption of the pre-2008 years, the non-food retail sector is hit hard.  So it is that the British Retail Consortium report a decline in sales and footfall in the year to June:

“Footfall declined by 2.9% in June, compared to the same point last year when it declined by 0.9%…

“On a total basis, sales decreased by 1.3% in June, against an increase of 2.3% in June 2018. This decline drags the 3-month average into a decline of 0.1% and the 12-month average to an increase of 0.6%, the lowest since our records began in December 1995.”

British consumers are getting poorer, and this is increasingly evident from their patterns of consumption.  Bizarrely, Andy Bruce and Jonathan Cable at Reuters attempt to put a positive spin on evidence that we have stopped buying new stuff altogether:

“British retail sales rebounded unexpectedly in June, driven by sales of antiques and second-hand clothes, raising hopes that a downturn in the second quarter could be softer than previously expected.”

There are several reasons for welcoming the unexpected boom in the sale of second hand clothes; not least the benefit to the environment.  But attempting to portray a switch to shopping at charity shops as a sign that the economy is doing better than expected is stretching things. 

Nor is the increased sale of antiques a positive sign.  Antiques are one of the few physical places where worried investors can park their wealth.  Historically, fine art and collectables have provided a safe haven in periods when financial investment in shares and bonds have been uncertain.  It may well be that the growth in sales of antiques in the UK also has a Brexit dimension insofar as they may provide some relief from the anticipated currency crash that will likely follow a no-deal Brexit in October.  Nevertheless, antiques and collectables have inflated worldwide since 2008 as investors have sought safe places to park their cash.  Rising antique sales at a time of political uncertainty and when the real global economy is slowing dramatically are more likely an early warning that an economic slump is coming.

Exactly when, is a moot point.  I have argued before that the interaction between the real and the financial economy is like a game of musical chairs.  The slowdown that we are witnessing in the real economy is akin to the chairs being removed.  But the hints at rate cuts and stimulus – and their eventual appearance – are the sound of the central bankers’ keeping the music playing.  After all, none of the bankers, or the politicians and economists, or even the financial media wants the music to stop playing on their watch.  And so each will play their allotted part in painting lipstick on what is looking increasingly like a big fat and ugly economic pig; in the hope that when the bubble finally bursts, someone else will be in charge.

As you made it to the end…

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