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A “Phoney War” of sorts

At 11.00am on 3 September 1939 Britain declared war on Nazi Germany.  Within minutes the air raid sirens started wailing.  Panicked civilians reached for the gas masks they had been issued with, and desperately sought shelter from the anticipated onslaught.  A few – mainly middle class suburbanites with gardens, who had been issued with Anderson shelters – had some cover.  Most – particularly the urban working class – had nowhere to run because the government in its wisdom had decided that providing underground shelters would be bad for morale.  Nevertheless, the government and the people firmly believed Stanley Baldwin’s warning that “the bomber will always get through.”

Not everyone was condemned to stand helpless beneath the falling bombs, however.  In the years leading up to the conflict, a scheme had been devised to resettle urban mothers and children to rural regions where aerial bombardment was less of a threat.  Within days, railway stations became scenes of organised confusion as children were herded into carriages to take them away to safety.

The trains not used for moving women and children to the relative safety of the countryside were quickly commandeered by a British Expeditionary Force hurriedly mobilised and transferred to France to meet the anticipated 1914-style German advance through the Low Countries.

And then nothing!  The waves of bombers never arrived.  The panzers rested in their repair shops.  While the French hunkered down behind the Maginot Line, the British Expeditionary Force dug in along the French-Belgian border; miles away from any Germans.  Even the U-boats – which had to navigate the North Sea around Scotland to gain access to the Atlantic – were more of a nuisance than a threat.  Vital supply lines remained open.    For most Britons – save for the young men gradually conscripted into the armed forces – business carried on as usual.

In January 1940, butter, sugar and bacon were the first foods to be (relatively generously) rationed.  Full-scale rationing only began after the fall of France, when U-boats were redeployed to the captured Brittany ports.  The most severe rationing was not to come until 1942 and early 1943 when the supply routes from the USA were very nearly cut.  To the average British family, the autumn and winter of 1939-40 was little different to the winter before.

Something similar can be said of the past month of lockdown in the face of the Covid-19 pandemic.  Deaths – outside care homes – have been mercifully low; far lower than public health modelling had suggested.  Moreover, causes of death have shifted dramatically, with fewer road traffic and workplace deaths, but more accidents at home.   Net additional deaths may prove far lower than had been feared.  New hospital facilities which were hurriedly constructed in anticipation of hundreds of thousands of critically ill patients stand almost empty, as “shielding” and “social distancing” have dramatically lowered the infection rate.  So much so that many among the SW1/Westminster Bubble crowd have begun asking how much longer will it be before we can restart the economy and get back to normal.

The debate around this has, thus far, been politically charged.  Framed in terms of “saving lives versus saving the economy,” the left has largely argued for more lockdown and more state intervention while the right argues for an early restart of the economy.  Ironically, though, both sides are probably correct – just not in the way they imagine.

Certainly, too early a reopening of the economy – particularly if testing and track-and-trace remains shambolic – risks the dreaded “second wave” as infection rates accelerate upward once more.  On the other hand, the “real economy” of global just-in-time supply chains is already faltering as countries lock down and borders are closed.  Don’t believe me?  Just ask any mother currently stuck indoors with a sick child how difficult it has become to get hold of a bottle of Calpol.  Medicine shortages – in this case, paracetamol normally imported from India – have been exacerbated by the collapse of supply chains leading to big price hikes (the normal market mechanism for reacting to shortages) although this general crisis is still being reported in parochial terms.  A prolonged lockdown will result in far greater disruption to life support systems such as food supply and the supply of equipment required to keep the lights on and the communications network operating.  In short, this is not an either/or debate – both courses of action are potentially life threatening; and we can be thankful that someone else will have to weigh the balance.

Rather like the British Army holed up along the Belgian border in the winter of 1939-40, one reason for the simplistic “either/or” debate is that we are totally unaware of (and ill-prepared for) the storm that is about to break over us.  In terms of lost production, the last month has been akin to an extended Easter holiday.  Most of us had jobs – albeit often poorly paid ones – going into the lockdown.  The food “shortages” which arose were not due to inadequate production or our lacking the money to buy food, but because of a woeful lack of government planning to switch food from the wholesale to the retail supply chain.  Food producers have been forced to throw food away despite shortages on the shelves for want of sufficient egg cartons or because competition regulations prevent cooperation among distributors.

Initial economic disruption was the result of people self-isolating ahead of their government.  While ministers were encouraging people to go to concerts and horse racing festivals, the more cerebral among us were avoiding crowds wherever possible.  And enough of us did so to exacerbate an already dangerous retail apocalypse which had pushed non-food retail stores and restaurants to the brink of bankruptcy long before fruit bat stew became a novel Chinese delicacy.  Transport suffered in a similar manner, as people correctly judged that trains, buses, boats and aeroplanes were effectively human-scale petri dishes in which Covid-19 would easily spread.

Initially, lockdown was great for a minority of non-essential metropolitan types who discovered that they could just as easily do their jobs over the internet than in a crowded office.  This, of course, was far easier for the lucky few who live in large enough houses to have a dedicated “home office” and a partner to look after the kids.  Much harder if you happen to live in a small flat and you also have to somehow educate and entertain increasingly bored children whose schools have closed for the duration.  Lockdown has been far harder on those workers whose jobs are not considered essential, but cannot be done at home.  A large part of the more than a million (and rising) new Universal Credit claimants come from this group; whose employers have decided that laying off the workforce is preferable to jumping through the hoops required to take out a government-backed loan or to meet the conditions of the furlough scheme which reimburses 80 percent of the wage bill.  In many cases, businesses were already loaded up with debt – which they were just about managing to service – before the pandemic began.  There is little appetite in these businesses for even more debt from which they may never escape once the emergency is over.

What gives the current situation a phoney war feel is that the consequences of these growing crises has yet to hit home.  A large part of the goods we have been able to purchase (mostly online these days) was shipped from China before their lockdown.  Shortages (e.g., paracetamol) only began to emerge from mid-March.  And while China is beginning to open up again, it will take six weeks or so for those supplies to arrive here.  Moreover, lockdowns elsewhere around the world are beginning to disrupt supply chains even further, and global competition for supplies is driving prices up.

Similarly, most of us have been living on the wages paid to us before the lockdown.  The million or so people claiming Universal Credit at the beginning of April will have had one last payday, together with any savings they accumulated, before having to face the travails of life on just £92.50 ($115.25) per week compared to £305.20 ($380.25) for someone on the Minimum Wage or £547.00 ($681.51) for someone on the average wage.  Whichever figure you take, that is a big drop in spending power for several million people; most of whom have little idea how to adapt to the sudden change in circumstances.

Managing on £92.50 per week means cutting household spending to the bone.  It means cancelling health club and TV subscriptions as soon as possible.  It means trimming phone/broadband services to barebones (landline, broadband and pay-as-you-go mobile).  It means selling the car while there is still time.  Tobacco and alcohol are unaffordable; as is most processed food.  Batch cooking helps eke out the food ingredients that can be afforded.  Work/best clothing has to be stored, while cheap casual clothing is worn around the house.  Heating is mostly unaffordable as is lighting, so living in a single room and warming yourself rather than your home becomes necessary.  Personal hygiene also has to take a hit – more washing in cold water/fewer hot showers; more plain soap/less designer shampoo.  Keeping electricity and gas use to an absolute minimum is essential to avoid being stuck with a painfully expensive bill at the end of the month/quarter.  Paying off outstanding credit card and overdraft debt is a priority as compound interest will rapidly crush you.  In short, living on £92.50 is possible but it isn’t easy.

For a wider economy whose profits are made on the margins, this sudden loss of consumer spending power is potentially devastating.  Two million job losses at the average wage means £900,000,000 per week (£46,800,000,000 per year) of discretionary spending removed from the economy.  That adds up to a lot of business failures and, in turn, to even more jobs lost and even more business failures.  Even worse, the critical infrastructure that has so far survived the lockdown will be unaffordable if millions of households that are unaccustomed to managing on poverty income levels end up defaulting on their bills at the same time.  As Nathalie Thomas at the Financial Times reported at the end of March:

“Energy UK, a trade body for electricity and gas suppliers, has approached the government about a loan scheme as utility companies report that customers are cancelling direct debit payments, according to several people familiar with the talks.

“Analysts fear that if bad debts surge, more companies could be forced out of business in an industry that had already suffered a torrid few years before the Covid-19 pandemic.”

Contrary to lazy media assumptions about greedy energy suppliers, most companies have been subsidising domestic supply with the profits from foreign holdings.  Taken in isolation, domestic energy supply would be loss-making – which is one reason why so many start-up suppliers have failed in recent months.  In the event of widespread non-payment, we risk a variant of the “energy death spiral” in which companies have no choice but to raise prices even though this can only cause even more defaults. 

It is more likely that government will be forced to nationalise critical infrastructure like energy, telecommunications and water and sewage in the event that widespread non-payment results in bankruptcies.  But nationalisation comes with problems of its own.  The creation of new currency to fund critical infrastructure risks runaway inflation if it is not balanced by the tax system.  This ultimately means removing even more discretionary spending – in the form of higher taxes – from the economy in order to finance critical infrastructure.  Nor would nationalisation happen in isolation.  In practice it is likely to come after the government has exhausted much of its power to create currency to provide the various bailouts currently being touted.  Even if the government trades currency for equity – as has been proposed with airline bailouts – in a massively depressed economy, the shares held by government may be next to worthless.  And eventually, there comes a point where governments exhaust their ability to print money out of thin air simply because other states, banks and businesses cease trading in the exhausted currency.  When that happens, we end up in an economy similar to that of the post-war Soviet Union in which everyone had access to a mountain of Roubles, but all of the shops except the foreign currency stores were empty.

One reason why some SW1/Westminster Bubble types – including the new Labour leader – are talking about opening the economy up once more is that they are more aware than most of the possibly irreparable damage that a prolonged lockdown will cause to our vital supply lines.  The reason mostly leftist commentators are able to get away with claiming this is putting the economy ahead of human lives is that they lack the insight to understand that the real economy is, quite literally, a matter of life and death.  If you don’t believe me, try going without food and clean drinking water for a few weeks.  And if that economy collapses under a weight of defaults, bankruptcies and worthless state currency, it will be too late to restore it again; perhaps ever.

To an extent, though, these leftists are also correct.  It may well be that the only reason Covid-19 infections and deaths are falling is because of the lockdown measures.  Lift the restrictions too quickly and we might have to go through this all over again.  And while hopes are being held out for a vaccine, thus far nobody has developed a safe vaccine for any of the corona viruses; there is no reason why this one should be any different.  But even if a vaccine could be developed, it might be another 18 months before testing can be followed by mass production.  By then, the economy is likely to be little more than a smouldering ruin.  A workable treatment – one that would save at least the lives of those who don’t have underlying conditions – offers the best hope for an early end to social distancing; but even that might be months away. 

For the moment – like the ordinary folk of Britain during the winter of 1939-40 – we are experiencing a phoney crisis.  The majority of deaths are in care homes, where they are largely out of sight and out of mind.  The early concerns about hundreds of thousands of people dying for want of ventilators have not been born out; probably because the people were ahead of the government in isolating themselves.  The threat of the dreaded “second wave” is, however, all too real.  And if the infection, sickness and death rates spike upward after a premature restart of the economy, all of the fears about critical infrastructure being overwhelmed may come true.  But for the moment, the full horrors of a collapsing economy – which would also overwhelm critical infrastructure, just in a different way – are similarly theoretical.  For the moment we are dining out (or rather dining-in) on the profits, savings, wages and supplies of a bygone economy.  When – starting next month –spending power collapses, the holiday (at home) atmosphere of the early lockdown will quickly disappear, as maintaining life’s essentials becomes increasingly difficult.

It could well be that May – as for our grandparents in 1940 – will be the month when a massive storm breaks over us and puts an end to our illusions within just a few weeks.  In the absence of a miracle cure – something that medicine has consistently failed to deliver for any disease – almost everything that we have taken for granted about life in a developed economy is about to come to an end… and none of us is prepared for the kind of economy that will follow.

As you made it to the end…

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