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A rude awakening

As various lockdowns come to an end – despite nothing changing about the SARS-CoV-2 virus itself – the establishment media are at pains to promote the mythical “V-shaped recovery.”  Queues of people, they tell us, have descended on English (Scotland, Wales and Northern Ireland are still in lockdown) highstreets:

“Pent-up demand has prompted queues at some shops as rules are relaxed in England after a three month lockdown.

“Long queues were reported outside Primark shops in London and Birmingham ahead of their 8am opening time.  The chain, which like other clothing shops has been closed since 23 March, does not offer online shopping meaning customers can only buy in the store.”

The establishment media has a long track record of urinating on our heads and trying to convince us it is raining.  And despite the myth of pent-up demand and the various anecdotal stories from a handful of consumers who took to the newly opened stores this morning, to remain profitable these stores need people packed in elbow-to-elbow and viral particle cloud to viral particle cloud just to break even.  Only at the bottom of the article do we get a more sober view of what is in store in the months ahead:

“The British Retail Consortium (BRC), the trade body representing the sector, warned that the unlocking was unlikely to provide any immediate boost for the sector. It wants the government to help stimulate demand with a short-term cut in VAT or a temporary income tax cut for lower-income workers.”

Even this is overly-optimistic.  By far the most important economic news story this morning was the BP announcement that it will not be extracting all, or even most of the 900,000 barrels of oil equivalent per day proposed in its previous report to investors.  The announcement was wrapped in the usual greenwash with which fossil fuel companies seek to disguise the unpalatable truth that they can only ever be “net-zero carbon” businesses by ignoring the carbon emissions from the fossil fuels they sell.  Nevertheless the true economic reasons for the change could not be ignored entirely.  As Anjli Raval at the Financial Times explains:

“BP’s long-term price assumptions are now down by around 30 per cent to an average of around $55 a barrel for Brent crude and $2.90 per million British thermal units for Henry Hub gas from 2021-50…

“Some investors, including Sarasin & Partners, have long said that the biggest oil majors’ use of overly optimistic long-term energy price assumptions has led to them overstate their capital, earnings and ability to pay out dividends.”

For all the guff about a faster switch to renewable energy, the BP announcement is more grounded in the realities of the post-pandemic economy than the nonsense being spouted in the establishment media.  What BP is actually saying is that the collapse in discretionary spending which is only now beginning will lead to a crisis of affordability across the economy which will render oil deposits which require a return of more than $50 per barrel uneconomical.  This does not preclude prices occasionally spiking into triple digits when post-pandemic supply shortages hit.  Rather, it is an acknowledgement that such spikes will be short-lived because the economy as a whole cannot bear the cost.

If oil was just another consumer product that we could take or leave, the BP announcement would be no more troubling than various airlines claiming to be on the verge of bankruptcy – the world would be largely better off without them.  But oil is still the life-blood of the economy; powering 90 percent of the world’s transport, including all of the heavy machinery used in agriculture and the extractive industries.  Wind and solar – the great green hope of the metropolitan liberal class – meanwhile provide just four percent of the global energy mix; all of it as electricity which is next to useless for replacing most of the essential primary sectors of the economy (the parts that kept going while everyone else was in lockdown).

Forget about your dreams of a green new deal or the establishment media versions of the happy-clappy “new normal” and think instead about an energy-constrained future; a bit like the oil shock in 1973 or the fuel protests in 2000 but with no “normal” to go back to.  What the BP announcement actually means is that in the course of the next decade a large part of the discretionary economic activity that occurred prior to 2020 will not be coming back. Instead far more of our efforts will have to go to maintaining essential goods and services.

This will not, though, be obvious to politicians and economists who mistake printing currency for creating real wealth.  Nevertheless, as the strain of lower prosperity bites – resulting from inflated prices of essentials, increased taxes and the withdrawal of public services and subsidies – we face a major shift away from the copious consumption of the second half of the twentieth century.  In the aftermath of the 2008 crash, the establishment media sold us the fiction that we were gradually getting “back to normal.”  Even now, as the rest of the population watches its prosperity evaporate, central bank currency printing and government bailouts are producing the biggest wealth transfer in history from the poor to the rich. Certainly for the 0.1 percent at the top the past decade has been an uninterrupted boom.  Prior to 2020 this could be sustained because just enough of the metropolitan liberal class – which includes most of the establishment media – had experienced enough of an increase in its prosperity to allow it to ignore the plight of the 80 percent or so whose prosperity has failed to return to pre-2008 standards; and especially the 20 percent at the very bottom who never recovered from Thatcher’s economic vandalism in the early 1980s.

Post-pandemic consumption will be severely impeded by a slump in borrowing.  With GDP down by 24 percent in March and April alone, we are not about to see masses of people rushing to take on even more debt no matter how low the central bank pushes interest rates.  Nor do the majority of people have sufficient savings to return to pre-pandemic levels of spending.  Pent-up desire there may be, but for many, demand – having the money to afford the things we might want – has already disappeared.

Businesses will no doubt be cautious about the future.  So long as government subsidies are available, they will remain in business in the hope that something will turn up.  However, many are already renegotiating rents, closing stores and laying off workers in anticipation of the coming collapse in demand.  The millions who have lost – or are about to lose – their jobs as a consequence of the lockdown may eventually find alternative work.  But businesses are not about to go on a hiring spree for the foreseeable future.

This leaves government as the one agent which might, just, cushion the blow which is about to fall.  Unfortunately, the politics of the current situation augur against it.  Because governments mistake GDP figures – largely based upon central bank alchemy in the financial markets – for true prosperity, they tend to assume that the public can withstand much higher taxation than is actually the case.  As Tim Morgan explains:

“… global taxation has remained at around 31% of GDP over a very lengthy period, leading governments to assume that the fiscal burden on the public has not increased. But tax has increased relentlessly as a proportion of prosperity, reaching an estimated 50% worldwide by this measure in 2019, compared with 41% in 2010, and 33% in 2000. In countries (such as France), where the incidence of taxation as a fraction of prosperity is far above global averages, this has already given rise to significant popular discontent.

“During 2020, most governments will experience a sharp fall in tax revenues, but are likely to endeavour to push their incomes back upwards in subsequent years. This is likely to encounter popular opposition to an extent which governments may fail to understand, for so long as they persist in the mistaken belief that GDP is an accurate reflection of public prosperity, and hence of the real burden of taxation on individuals.”

This is likely to be a particular issue for local governments with limited borrowing powers and no central bank to create new currency out of thin air.  Expensive projects already begun, the run of the mill corporate welfare payments for outsourced public services and even the salaries of bureaucrats will only continue to be affordable by raising local taxes.  The problem with this is that the pool of people too poor to pay taxes is growing even as the minority at the very top pay expensive accountants to find loopholes to allow them to avoid taxes.  The result is that an increasing tax burden will fall on the shoulders of those who are mostly only just getting by.  Politically, raising taxes at a time when most people’s living standards are falling is unsustainable.  Having seen giant corporations queuing up for multi-billion pound state handouts apparently conjured out of the ether, the public is unlikely to buy the “we’re all in it together” BS that they fell for after 2008.  This time around voters will insist on a combination of additional public spending and tax cuts which can only be bought at the cost of a massive reduction in the state itself.

Prudent governments – both local and national – would take the opportunity of the pandemic to reassess the various spending commitments made prior to the lockdown and based on the assumption that economic growth would continue forever.  High speed rail links, additional airport runways and new roads have no place in an economy whose demand for transport was falling long before SARS-CoV-2 arrived.  Investment in more mundane – but essential – activities like keeping the lights on, providing clean water and ensuring there is enough food for everyone is going to be far more important.

Across the economy, things that seemed essential in February are going to be increasingly unaffordable luxuries in our energy-constrained future.  Meanwhile many of the things we have been encouraged to think of as “essential” – continuous electricity and broadband, out of season and pre-prepared foods, multi-channel television, car ownership, etc. – will rapidly become the new luxuries.

It will be a rude awakening for all.  But, ironically, those at the very bottom are better prepared than most for the shock that is coming.  Those who have been forced to endure a decade of pin balling in and out of various under-paid, part-time, zero-hours and gig economy jobs, interspersed with periods on the wrong end of a toxic social security system have already given up many of the “luxuries” that the metropolitan liberal class still views as essential.  The poor will suffer too, of course.  As the price of food, clean water, heat and lighting increase there will be little if any income left over.  But the big psychological shock will be to a middle class that rapidly finds that its employment is surplus to requirement and that everything it took as certain in life is collapsing around its ears.

As you made it to the end…

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