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Just the beginning

Even crashing economies unravel slowly.  This is because of a plethora of buffers from small amounts of personal savings at the bottom to central bank and state bailouts at the top.  It is for this reason that I referred to the early weeks of the Covid-19 lockdown as a kind of “phoney war” – a sort of holiday at home during which people were still dining out (or rather in) on their last pay cheque.  Since then – and despite the bailouts and furlough schemes – we have seen more than two million jobs disappear in the UK alone (more than 40 million in the USA).

Hopes for a “V-shaped” recovery depend upon all of those workers finding new jobs the moment the pandemic is over.  They also depend upon businesses and households embarking on a spending spree that makes up for the lost months of depressed consumption.  But the real world just doesn’t work that way.  Thus far, unemployment has largely fallen on the most precarious sectors of the economy where employers are used to being able to hire and fire at will, and where workers have little choice but to put up with low pay and poor conditions.  Nevertheless, the collective decline in spending power is sufficient to rule out a summer spending binge.  Many of the things we didn’t purchase, moreover – meals out, nights down the pub, haircuts, etc. – are gone forever; nobody is going to cut their hair twice to make up.

The crisis does not end with a relaxation of the social distancing rules either.  As governments come under increasing pressure to withdraw the various support schemes that were put in place back in March, businesses will face some unpleasant decisions which had been put on the back-burner.  Many of the costs of doing businesses – debt repayments, rental costs, business rates and especially the wage bill – have been postponed for the duration of the emergency.  As the economy opens up, however, thousands of businesses will be weighing these costs against the sales they will need to make just to break even.  And with many of us suffering post-lockdown “coronaphobia” a period of downsizing and delayering will likely follow.

In this sense, the various “rescue” measures may turn out to have only delayed an economic depression which was already gathering pace before SARS-CoV-2 began to spread.  If the state offers to pay 80 percent of your wage bill for the duration, why not delay the inevitable trip to the insolvency specialists for a couple of months?  And if the state offers to bail out your airline, why not wait to see if there is a post-pandemic rush for holidays abroad?

The problem is that in a neoliberal global economy, most businesses are only profitable at the margins.  Airlines rely on full planes – and purchases of extras like sandwiches, drinks and luggage space – to make a profit.  Filling half the plane or failing to sell those key extras means bankruptcy.  The same goes for every area of retail.  Even if – and it is a big if – the same number of consumers return, unless they spend the same amount, the business remains unprofitable.

Most businesses will likely wait to see whether they can survive in the post-pandemic environment.  There are signs, however, that some businesses are already looking to cut their costs and rid themselves of their least profitable outlets.  The BBC, for example, reports today that:

“The coronavirus pandemic has claimed another 3,600 UK jobs after the Restaurant Group, Monsoon Accessorize and Quiz announced major restructures.

“The Restaurant Group, which owns Frankie and Benny’s, expects to cut up to 3,000 workers after confirming plans to shut 125 sites. Monsoon Accessorize has announced 545 job losses and the closure of 35 shops. And fashion chain Quiz has put its stores into administration because they are not currently ‘financially viable’. Some 93 jobs will be lost through the reorganisation.

“The Restaurant Group said the closures would fall mainly on its Frankie and Benny’s restaurants, but other chains such as Garfunkel’s and Chiquito will also be affected. Meanwhile, Monsoon Accessorize said its current structure was ‘unviable’ following the lockdown.”

Something similar is happening in the USA on a much larger scale.  A report by Coresight Research suggests that some 20,000-25,000 retailers will fail by the end of 2020. And – as is the case in the UK – the closures in an economy which is largely retail-based and consumer-driven will create a cascading effect.  This is not just the result of the lost purchasing power as former shop workers fall back on inadequate social security payments.  There is also the knock-on impact on suppliers and landlords, many of whom will also fail as the income from the retailers dries up.

Nor does it end there.  According to Katia Dmitrieva, Reade Pickert, Alex Tanzi and Cedric Sam at Bloomberg, millions of higher-paid white collar jobs are now threatened as a second wave of redundancies begins:

“Close to 6 million jobs are potentially on the line, according to Bloomberg Economics. That includes higher-paid supervisors in sectors where frontline workers were hit first, such as restaurants and hotels. It also includes the knock on-effects to connected industries such as professional services, finance and real estate.”

There is some hope that as job losses begin to hit middle class white collar professionals the wider impact will be dampened because they can fall back on savings.  This hope may, though, prove false.  Prior to the pandemic, Nicole Lyn Pesce at Marketwatch reported that:

“It seems like everyone is just trying to make ends meet.

“One of the latest hashtag games making the rounds on Twitter invites social media users to provide pithy and honest answers to this open-ended statement: ‘With my next paycheck I will…’ While these games generally draw amusing memes and witty zingers, many of the responses trending… were pretty bleak, with ‘still be broke’ being the general consensus…

“This reflects just how many Americans are living paycheck to paycheck. Depending on the survey, that figure runs from half of workers making under $50,000 (according to Nielsen data) to 74% of all employees (per recent reports from both the American Payroll Association and the National Endowment for Financial Education.) And almost three in 10 adults have no emergency savings at all, according to Bankrate’s latest Financial Security Index.

“Even many in the upper class are seeing their six-figure incomes slip through their fingers. The Nielsen study found that one in four families making $150,000 a year or more are living paycheck-to-paycheck, while one in three earning between $50,000 and $100,000 also depend on their next check to keep their heads above water.

“And MarketWatch readers had a lot to say about this popular story from 2019, which showed how a $350,000 salary in an expensive city like San Francisco or NYC might barely qualify as middle class.”

In part this reflects the bind in which obtaining a high salary requires that you spend more money – borrowing for an education, buying a car, renting a new house, purchasing more expensive clothing, etc.  In part it reflects the cost of coping mechanisms – therapy, booze, drugs, casual sex, etc. – that people in high-stress occupations turn to to unwind.  In part it merely reflects the human tendency to outgrow our incomes; no matter how high they are.  Either way, the point is that we should not count on educated professionals to be any better placed to cope with the unfolding economic crash than poorer blue collar workers were.

Eventually, and despite the best efforts of governments and central banks, the collapse in demand will revisit a banking and financial sector which never fully recovered from the crash in 2008.  Most obviously, banks are going to need to write off a lot of bad debt as millions of credit card, car hire and mortgage payments fail to be made by millions of unemployed workers who can no longer afford them.  Less obviously, pension funds which depend upon high-paying income streams such as from the rental of commercial property (to businesses that are going bust in droves) are fast running out of reserves.  As Chris Flood at the Financial Times reported last month:

“The weak financial condition of seven US public pension plans threatens to deplete their assets by 2028, leading to severe risks for the living standards of thousands of American employees and retired workers.

“Many US public pension plans had not fully recovered from the 2007/08 financial crisis before coronavirus struck, triggering turmoil across financial markets. The correction in the US stock market has increased the long-term structural problems across the entire US public pension system, particularly for the weakest funds.”

Thus far in the UK, the growing pensions crisis has taken the form of individual disputes between groups of workers and their respective employers, as pension fund trustees seek to cut the benefits that workers paying into the scheme will eventually receive.  Behind the scenes, however, the pensions industry is a microcosm of the economy as a whole.  In order to keep paying existing beneficiaries, it requires current investors to pay more in while agreeing to take less out at the end.  It can only be a matter of time before the various currently isolated groups of workers begin to realise that they are on the wrong end of the same crisis.  More importantly, it can only be a matter of time before they realise that they are on the wrong side of a Ponzi scheme and withdraw from their employers’ pension schemes entirely.

States may have various pension protection schemes intended to protect pensioners from the collapse of their pension funds.  But states are playing the same kind of Ponzi scheme; in this case asking current and future taxpayers to pick up the cost of current and previous bailouts.  In a growing economy this might have worked.  In the stagnating post-2008 economy it resulted in distortions and social and political unrest.  In the post-pandemic shrinking economy it is likely to be unsustainable – as the tax base shrinks; continued government borrowing can only come at the cost of economy-crushing interest rate rises.  The alternative is direct state currency printing which may work for a while, but will ultimately devalue the currency on international exchanges resulting in economy-crushing inflation in states like the UK which depend on imports and consumer spending.

None of this will happen quickly; economies seldom collapse overnight.  As with the chain of events which preceded the 2008 crash, it may take months if not years before the full economic impact of our response to the pandemic becomes clear.  And typically in an economy which grew dangerously unequal decades ago, it will only be at the point when states and central banks are finally out of ammunition that the elites will acknowledge the problem; by which time it will be too late.  The inevitable may not be imminent… but it is still inevitable.

As you made it to the end…

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