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The myth of “the new normal”

The warm sunny days leading up to the Easter holidays are quickly fading from memory.  Then, despite the threat of a global pandemic, there was optimism in the air.  People came together in a manner not seen since the neoliberals seized the reins of power in the 1980s.  It was as though we were all waiting for some common threat to bring us together.  The gradual shutdown of “non-essential” employment revealed for all to see who is and who is not important in the grand scheme of things.  And it turned out that the truly important people were mostly the ones on low wages; while the very highest paid among us could retreat to their front rooms without having any noticeable impact on the rest of the world.  There was considerable support and admiration for those who work on the “front line” delivering health and social care services; people who put themselves at significant additional risk even as the rest of us isolated ourselves.  Less so for the billionaire business owners who went cap in hand to the state for a handout.

It turned out that there was a magic money tree after all; and the state soon began distributing its fruit with abandon.  Far from being unable to intervene in the economy for the public good, it turned out that with the right amount of public pressure, elected politicians and permanent bureaucrats could be made to finally do the jobs that we have been paying them to do.  Faced with the threat of economic Armageddon, even the staunchest freemarketeer could see the benefits of state subsidies.

The impact on the environment was obvious for all to see too.  Not just in the NASA satellite images showing the dramatic fall in greenhouse gases and toxic pollutants; but in the clean air all around us.  Skies were brighter and bluer than anyone could remember now that most of the world’s aeroplanes were grounded.  Cities were no longer shrouded in a yellowish brown toxic haze from millions of exhaust pipes.

What it all added up to, we were told, was a determination that we would not go back to normal.  Instead, there was to be a “new normal” in which the state finally took responsibility for public affairs and began to govern in the public interest.  No more would we put up with the most important workers being paid the minimum wage (or less) while useless billionaires flew private jets to offshore tax havens.  Indeed, in the brave new world ahead there would be a lot less flying as we all began to take climate change seriously.  The new normal, they said, was to be brighter and greener than the world we were leaving behind.

That was before Easter…

As the (strange and disorienting) holiday (at home) feelings that had warmed the hearts of the metropolitan liberal class gave way to a sense of anxiety about the aftermath, the myth of the new normal began to break down.  The establishment media led the charge to open the economy just as it had led the charge to lock it down in the first place. Worrying about the economy was no longer “putting profit before people’s lives.”  An extra couple of weeks off around the Easter holidays was one thing; the prospect of months or even years of isolation while the world awaited a cure or a vaccine was too much to bear.

And so the SW1 crowd began demanding that governments publish their plans for restarting the economy.  Meanwhile government ministers drew up plans to withdraw the state – lavish corporate welfare excluded, of course – from the day-to-day running of the economy.  Austerity, albeit spoken about only in whispered tones for now, was back on the agenda.  Someone was going to have to pick up the tab for all of the public borrowing to pay for bailouts… and it most certainly wasn’t going to be the SW1 crowd.

Their version of the new normal, though, may be as much a myth as the bright green and economic equality versions.  In the UK more than two million workers have officially become unemployed as a consequence of the pandemic and the lockdown.  The true figure will be higher because some groups, such as people in relationships and older workers nearing retirement will be unable to or will choose not to claim.  A similar picture has emerged in the USA, where nearly seven million people have signed up for unemployment benefits since the lockdown began.  And again, the true number will be much higher.  What that adds up to is a massive loss of spending power from an economy which was already enfeebled before SARS-CoV-2 put in an appearance.

Even if states had not enforced a lockdown, our collective choices to avoid crowded places, restaurants, public transport, to work from home and to shift to shopping online had already caused the global economy to grind to a halt.  Add in the supply chain disruptions caused by China’s lockdown and we had a recipe for disaster back in February.  As with all such disasters, however, there is a time lag between a chain of events beginning and the final shock waves receding.  And the shockwaves of this disaster are only beginning to be felt.

The oil price went – technically – negative last month.  That is, someone back in the days before the pandemic took out a futures contract on oil at a price around $60 per barrel.  Although that person (or persons) had technically agreed to buy that oil, they had no intention of doing so.  Rather, they were gambling that when the contract became due they would be able to sell the oil on to someone for a slightly higher price.  What they couldn’t foresee was the impact of our collective retreat from economic activity on demand for oil globally.  Even the ten million barrels per day cut agreed to by Russia and Saudi Arabia was nowhere near enough to bring supply back into line with collapsing demand.  Last time I looked hedge fund managers were not equipped with massive oil storage facilities; which is why the holders of these futures contracts were prepared to give the oil away.

The real world problem that crashing demand created was simply that global oil storage had filled up.  Instead of delivering oil, the world’s tanker fleet was to be deployed as floating storage.  The US and Chinese governments began to refill their strategic reserves.  Nevertheless, the slump in demand has pushed some drillers to stop pumping and some refineries to stop refining.  And while that may sound good from an environmental point of view, it is catastrophic for a real economy that depends upon diesel to keep essential goods and services flowing.

To address the near failure of the global banking and financial system in 2008, central banks chose to hold interest rates so low that when adjusted for inflation they amounted to interest-free credit.  Companies could – and did – borrow for nothing in order to buy back shares on which they would otherwise have to pay higher dividends.  That was good for the companies and good for corporate CEOs whose remuneration was linked to their company’s share price.  It was, however, a disaster for investors.  For the ever shrinking group of ultra-rich godzillionaires who now own more than half of the world’s nominal wealth, finding somewhere safe to park their ill-gotten gains became increasingly difficult.  Sure, share prices were rising; but corporate buy-backs meant that there were fewer of them.  Property, collectibles, fine art, vintage cars, yachts and private jets could take up some of the slack; but again, scarcity is what makes such thing valuable.  Institutional investors – such as insurance and pension fund managers did not even have these nominally safe havens.  Worse still, their business models were developed in the heady years after World War Two when a return on investment of between 5 and 10 percent could reasonably be expected.  In the post-2008 environment, safe investment in 0.5% government bonds meant bankruptcy.  The “search for yield” was on.

Both private and institutional investors were obliged to take far greater risks in order to maintain pre-crisis rates of return.  One such risk was a hydraulic fracturing industry which routinely spent billions of dollars to produce millions of dollars’ worth of oil (any attempt to raise the price simply crashed demand).  In order for this to continue, the companies involved had to issue high-interest “junk bonds” which they could service, but could never hope to repay.  Like musical chairs, so long as the oil kept flowing, everyone could pretend that one day in the future the debt could be repaid.  And as long as junk bond investors continued to receive a monthly interest payment, nobody was in a hurry to blow the whistle on the scam.

Crash global economic demand – for example, by locking down an economy in the face of a pandemic – however, and things quickly begin to go sour.  Once the wells stop pumping and the drillers stop drilling it isn’t just oil that stops, cash stops flowing too.  It wasn’t just the shale drillers who have been loading the world up with junk bonds.  Every other business sector which needed investment post-2008 turned to junk bonds for finance.  And the financial alchemists in Wall Street and the City of London were more than happy to build a mountain of derivative investment vehicles on the back of the income from all of those junk bonds.  The result in the twelve years since the crash is that we have inflated an even bigger “everything bubble” to replace the housing bubble that nearly destroyed the global economy in 2008.  This time around everything that was too big to fail will likely prove to be too big to save.

Little wonder, then, that the metropolitan liberal class has finally woken up to the imminent threat to its way of life.  Largely sheltered from the austerity inflicted on ordinary people, this class – accounting for around 30 percent of the population – was able to pretend that things had returned to normal after 2008.  The growth of foodbanks, homelessness and in-work poverty could be dismissed as so much fecklessness among lower classes who only had themselves to blame.  No wonder most of this class are still perplexed about why so many “deplorables” chose Brexit and Trump rather than more of the old “normal.”

It is, however, the lack of purchasing power at the bottom coupled to the concentration of nominal wealth at the top, which makes our current situation so precarious.  The everything bubble, the crumbs from which sheltered the metropolitan liberal class from the bitter fruits of 2008, ultimately depends not on the wealth at the top, but the marginal purchasing power at the bottom.  And that, in turn, depends upon a functioning real economy of goods and services.  Even if the economy reopened tomorrow, the millions of newly unemployed workers have removed sufficient demand from the economy to make a collapse inevitable.  Even the people who didn’t lose their jobs are not about to rush to eat in restaurants and fly off to exotic destinations until someone removes the threat from Covid-19.  Short of mobilising the Easter egg police to force us all to spend, there is trouble ahead.

Most likely, demand will be crushed for months to come.  Indeed, given that interest rates and taxes can only go in one direction from here, even if people have got spare cash, they will likely save it for a rainy day rather than squander it on a post-lockdown binge.  And for what it is worth, millions of us are already worried about our finances, businesses are reneging on their rent, and thousands of households have been cancelling direct debits.  That’s all before the full effect of the pandemic on the economy has begun to unfold.

While some commentators have argued that government spending billions to support employment and to bail out companies will generate inflation, the immediate threat is of a globalised deflation.  Not least, because much of the nominal wealth in the financial markets is no more than a claim on the real economy.  Shares, for example, are only valuable if someone wants to buy them.  When everyone runs for the exits, the price rapidly falls to zero.  The same goes for all of those collectibles whose prices have been inflated by the godzillionaires.  They may keep their value in the long term – and land has always proved a good investment down the centuries – but anyone who anticipated trading them for cash in an emergency is about to be shocked by the lack of buyers.

A massive reset of asset prices looks likely at this point; and the knock-on will be a period of depression that will make the early 1930s look like a golden age of prosperity by comparison.  It seems very likely that the post-pandemic politics will be an even more divisive version of socialism for the rich and capitalism (i.e. austerity cuts) for everyone else.  And the SW1/Washington Beltway crowd are adept at pitting everyone else against each other when austerity is in the air.  The question we have to ask is what kind of “new normal” do masses of impoverished people turn to in such conditions?

The “new normal” will not be bright green; because green new deals are too – energy and financially – expensive.  More likely the future will be brown as we turn to the last of the accessible fossil fuels in a desperate attempt to stave off the worst of the coming collapse.  Even before the pandemic, every attempt to put green new deal policies before highly unequal electorates has resulted in pro-fossil fuel right wing governments being returned to power.  Indeed, in France, even a tiny hike in the tax on diesel fuel was enough to trigger a wave of protest that persists to this day.

Nor should anyone seriously imagine that social democracy will return after the pandemic.  With the last embers of the social democratic left – in the shape of Corbyn and Sanders – leaving the political stage at the beginning of April, the parties of the right are fully entrenched – the only question remaining is whether we are to be governed by the neoliberal (Democrat/Blairite)right or the nationalist populist (Trump/Johnson) right.  Indeed, the policies of the neoliberal right may well end up propelling us into the arms of a far worse nationalist right for a generation.

Materially, we will have no choice but to emerge into a “new normal.”  But be careful what you wish for.  This isn’t Hollywood; there is no law that says that the good guys have to win in the end.

As you made it to the end…

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