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Inflation on Wall Street; deflation on Main Street

Chances are that when you visited your local Tesco Express to buy a sandwich and a soft drink for lunch, the queues were pretty much the same as they always are.  That, however, was not enough to prevent Tesco – the UK’s largest supermarket chain – announcing another big round of job cuts.  As the BBC reported yesterday:

“Supermarket giant Tesco says about 4,500 staff in 153 Tesco Metro stores are set to lose their jobs in the latest round of redundancies…

“It is also making some changes in 134 of its 1,750 Express stores, where customer footfall is lower.

“Changes in those stores will include ‘a slight reduction in opening hours during quieter trading periods at the start and end of the day, and simplifying stock routines’.

“Tesco is in the midst of trying to save £1.5bn as the competition between supermarkets intensifies.”

What is happening to Tesco is merely a reflection of a “retail apocalypse” that is eating its way through the UK retail sector.  As the BBC reminded us this morning:

“Average retail sales over the year to July rose by 0.5% – a record low according to the British Retail Consortium and KPMG.

“They said the ‘challenging retail environment’ was taking its toll on both the High Street and online.

“And grocery sales, which normally rise when the sun is out, were ‘lacklustre’.”

Although for political reasons, Brexit has to be throw into the mix as an explanation for the collapse in retailing (which began well before Cameron won the 2015 election; but has gathered pace since) Helen Dickinson, the BRC’s chief executive pointed the BBC to the bigger cause of the problem:

“Wage growth accelerated to 3.6% in the year to May, according to the Office for National Statistics. However, when adjusted for inflation, pay remains below the average recorded before the 2008 financial crisis.

“Average pay in May this year was £468 a week when adjusted for inflation compared to the pre-recession peak of £473 a week in April 2008.”

Nor does average pay tell the real story because UK pay statistics are distorted by a small number of very high earners at the top.  The UK “Median Wage” (the half way point, with 50% of workers above and 50% below) is around £6,000 per year lower than the average wage.  That is, at least half of the UK population are significantly less prosperous that they had been prior to the 2008 crash.  This has a huge impact on those retailers – like Tesco – whose profits come from volume sales.  Even a relatively small drop in footfall or spending – which the casual observer would not even notice – is sufficient to undermine profitability and drive job losses, store closures and insolvencies.

Unfortunately, (the largely London-based) mainstream media have deliberately ignored this primary cause of the growing collapse in favour of a series of secondary issues that also play a part, including:

  • Competition from online sales
  • Britain’s antiquated – but easy to collect – business rates system
  • High town centre commercial property rents (which are needed because our pensions are invested in them)…
  • And, of course, our old friend Brexit which, allegedly, is the reason enough people have stopped buying a lunchtime snack to bring Tesco to its knees.

The unfolding crisis is structural – it is the result of declining net energy.  The more energy (both direct energy and the embodied energy in all of the resources and capital we have to deploy) that we are obliged to spend on producing energy; the less energy remains for powering all of the activities that keep the economy growing.  Rather like climate change, however, the real problems are for the future.  At present, declining net energy is translating in the developed economies into an 80:20 economy in which the majority of the population experiences (at best) stagnating and declining prosperity while around a fifth (and shrinking) of people continue to enjoy a rising standard of living.  This top 20 percent includes the avaricious “one percent” whose access to the banking and financial system has resulted in the majority of the remaining (paper) wealth being sucked out of the economy.

With this in mind, it should come as no surprise that the situation on the other side of the Atlantic (where Brexit isn’t happening) is much the same.  As Quentin Fottrell at Marketwatch reminds us:

“The recent spate of bankruptcies in corporate America is taking its toll.

“In the first seven months of the year, U.S.-based companies announced 42,937 job cuts due to bankruptcy, up 40% on the same period last year and nearly 20% higher than all bankruptcy-related job losses last year… Despite record-low unemployment, bankruptcy filings have not claimed this many jobs since the Great Recession…

“The number of retail store closures in the first seven months of the year has exceeded the total number last year, according to Coresight Research data cited by the Associated Press. Coresight expects 12,000 stores will be closed this year: So far this year, 7,567 retail stores have closed their doors versus 5,864 for all of last year.”

The 80:20 society is perhaps most visible in California, where tech Godzillionaires occupy plush offices within a stone’s throw of a skid row that has sunk so low that human faeces lines the gutters and nineteenth century diseases have returned with a vengeance. In the UK the north-south divide allows the affluent class in the London-Cambridge-Oxford triangle and the archipelago of top-tier university towns to largely ignore the plight of the majority in Britain’s Brexit-voting ex-industrial, seaside and declining rural towns and cities.

The situation gives rise to serious problems when it comes to (mis)managing the economy.  From the dawn of the Industrial Revolution (the occasional shock notwithstanding) a single broad policy focus – sound money, full-employment, price stability, etc. – has generally benefited everyone concerned.  Increasing net energy and energy consumption per capita grew steadily prior to 1945, and then exploded soon after.  As a result most people saw their living standards improve even during periods when inequality between the top and bottom was increasing.  Since 2008, however, this approach to policy no longer works.  The package of low interest rates and quantitative easing has failed to stimulate the “real economy” where most people live and work.  Instead, most of the new (paper) wealth has found its way into the hands of the already wealthy… with the result that all of the anticipated inflation has occurred at the top.  The price of shares, fine art and collectables and luxury property have gone through the stratosphere even as the retail sector has collapsed and the number of homeless people and families relying on food banks has risen to crisis levels.

It is into this situation that central banks around the world look set to follow the US Federal Reserve’s recent decision to cut interest rates (with the tacit expectation that another round of quantitative easing will be along in short order too).  Certainly these measures have maintained the expansion of the financial economy; resulting in the longest period of expansion in modern times.  But doing more of the same in the hope that this time the result will be different really is insane.  As Panos Mourdoukoutas at Forbes explains:

“Easy money will fuel asset bubbles, but it won’t save the global economy from the next recession. That’s according to Ted Bauman, senior research analyst and economist at Banyan Hill Publishing.

“’The key lesson from historical experiences is that central banks can ease monetary conditions all they want, but they can’t force people to use easy money,’ says Bauman. ‘I take an old-school approach to monetary economics. People borrow money if it’s economically rational to do so. If consumers or businesses don’t see a positive benefit in borrowing money and using it to invest or spend, they won’t do it no matter how cheap the money is’.

“Simply put, monetary policy has lost its effectiveness at this point…”

To understand this, consider the point about sandwich queues that I made at the beginning of this article.  The queues look almost the same; but the small drop in volume is sufficient to undermine profitability.  The same is true with borrowing.  It is not that people are not taking out new loans or that businesses are not investing.  It is just that a sufficient proportion of the 80 percent have stopped borrowing to crush the non-food (i.e., discretionary) retail sector.  And with retail in freefall, orders drying up and manufacturing slowing down, far too few businesses are investing to keep the economy growing.  And since private borrowing is the means by which new currency is created, the collapse in the rate of borrowing is sufficient to cause a recession.

Even here, however, the inequalities that four decades of neoliberalism have inflicted means that the experience of the next recession will vary depending on which side of the divide you find yourself in.  Those at the very top – who presumably will continue to enjoy the fruits of the central bank magic money tree – will continue to experience asset inflation as they desperately chase after a declining pool of assets that continue to appear safe.  Those at the bottom, in contrast, will continue to experience deflation as businesses which depend upon volume sales are obliged to chase a dwindling pot of discretionary spending.

The only way in which a deflationary collapse can now be avoided is if the central banks alter course and channel newly printed currency into the real economy; most likely through some variant of the Green New Deal… in which case we will enjoy one last blow-out before descending into an inflationary collapse.  Either way; collapse we will.  Perhaps not this year; maybe not even next.  But there will come a time when the bankers, economists and politicians realise that there is nothing they can do to halt a widespread collapse of the western consumer economies.  And once they go, the Asian manufacturing economies that supply them will not be far behind.

The only thing that we could – but as with climate change we will not – take action on is the gross inequality between the masses and the elites.  Closing the gap might restore a sense of social solidarity in the face of growing adversity.  Continuing down the highly divisive road we are currently travelling can only end in tears.  Throughout history we have witnessed violent revolution when the masses go hungry even as the elites luxuriate behind the walls of their opulent palaces.  Time and again, the elites believed that their wealth would cushion them from the shock.  Time and again it has ended at the scaffold, the guillotine and the firing squad.  Continuing as if this time it will be different may yet prove to be our greatest folly.

As you made it to the end…

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