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When the dam breaks

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In my last post I underestimated the speed with which the UK government would U-turn and plunge England into a second lockdown.  After all, just a fortnight ago Chancellor Rishi Sunak told MPs that even a two-week “circuit-breaker” would be enormously damaging to the UK economy.  Only after modelling (from the same modellers who were proved to be wildly pessimistic earlier in the year) suggested tens of thousands of Covid-19 fatalities within weeks, was Sunak persuaded to drop his opposition to the new English lockdown from 5 November to 2 December.

This end date may, perhaps, provide a little comfort to struggling retailers and their employees, so long as the R0 falls below one by 2 December; although ministers have hinted that the lockdown will be extended if the R0 does not fall low enough.  If the shops, bars and restaurants are permitted to open up for the three weeks prior to Christmas, then some, at least, may be spared bankruptcy.  This said, if government maintains pre-lockdown regulations limiting the number of customers and enforcing early closing times, then the economic damage will still be catastrophic.

Various support packages which have been in place since March have also been extended into 2021 in an attempt to shore up the economy and, one assumes, to minimise the impact of the UK leaving the European Union at 11.00pm on 31 December 2020 – very likely without a trade deal, and certainly no more than a skeleton agreement.

The innovative furlough scheme – which bails out a proportion of workers’ wages rather than companies directly will not be curtailed as had been planned.  In addition, so-called “mortgage holidays,” “credit card holidays” will also continue.  The term “holiday” is misleading; as the BBC explains:

“During this period interest will still accrue on what borrowers owe.”

As compound interest continues to work its magic, so people’s ultimate monthly repayments are going to be a lot higher when the pandemic is declared to be over than they had been at the start.  And this begs the question that, if they were struggling to service their debts at the start, how are they going to meet the higher payments at the end?

The answer, of course, is that many of them are going to default.  The lucky few will still have jobs to go back to when this is over.  But hundreds of thousands have already been cast to the Universal Credit wilderness where people struggle even to feed themselves.  The idea that they are going to prioritise credit card and mortgage repayments ahead of feeding their kids is fanciful at best.

Something similar is set to occur for the businesses which have availed themselves of government guaranteed loans to businesses.  As the BBC reports:

“Businesses borrowing from banks will leap more than fivefold in 2020 compared to last year, according to analysis from the EY Item Club.

“The economic forecaster found that net borrowing from banks rose to £43.2bn between January and August from £8.8bn for 2019.

“Firms have been adding to their borrowing in order to survive the pandemic as many have seen sales slump…

“It expects the total stock of loans from banks to businesses to increase 11% to £493bn by the end of the year.”

As with the schemes to support household borrowing, these business loans are ultimately based on the assumption of the fabled “V-shaped” recovery; that there is huge pent-up consumer demand in the economy just waiting for the restrictions to come to an end.  This though, was not what happened when the first lockdown was lifted and when the summer weather helped keep the virus at bay.  June saw a leap in retail sales; but one far too small to make up the lost ground in the first quarter.  And despite the government’s “Eat Out and Spread Covid About” scheme, economic growth fell back again in July and August.  Even the most optimistic forecasters are looking at 2023 as the most likely year in which GDP returns to December 2019 levels.

Long before that, the massive debt mountain that has been built in response to the pandemic is likely to have burst, with consequences which will leave 2008 looking like a walk in the park.  As economist Grace Blakeley notes:

“So far, debt-laden economies in the Global North like the US, the UK and Ireland have managed to avoid a financial crisis as a result of the pandemic – but a senior official at the Federal Reserve has warned that looming bankruptcies could still trigger one.

“Governments have stepped in to defer consumer loan and credit card payments, act as guarantor for bank lending to small businesses, and pump almost unlimited liquidity into their domestic corporate sectors, which were already over-leveraged before the pandemic struck. But each of these measures rests on the assumption that firms and households will ultimately be able to repay the loans. If the problem is simply that consumers and businesses are struggling to access cash, then this would be the sensible option. But if we are headed for a depression in which many of them will barely be able to cover their bottom lines, let alone repay all their debts, then all the new lending in the world won’t make a difference.

“The fact that banks coordinating the government’s ‘bounceback loan’ scheme in the UK have already stated that between 40 to 50 per cent of the small businesses receiving these loans will default when the scheme ends warns of trouble to come. Moreover, the central assumption of the Office for Budget Responsibility – echoed by international institutions like the IMF – is that unemployment will climb to 12 per cent and remain in double figures well into 2021.”

The deeper question this raises is who is going to get bailed out…and how?

In the fairy-tale version of banking that we teach to children, banks act as mere intermediaries; looking after depositors’ money and loaning it at interest to borrowers.  In reality, a commercial bank simply creates new currency each time it creates a loan.  In the modern world, this is how almost all of the currency in circulation is created.  A major downside of this is that the rate of borrowing has to continue to grow just to prevent recessions.  Worse still, in the event of a major crisis like, for example, a global pandemic that governments have no clue how to respond to, businesses and households may not simply slow their borrowing, but may seek to pay off their pre-existing debt.

Because the banks charged interest on all of the new currency they created – even at today’s historically low levels – there is always more outstanding debt than there is currency to repay it.  Even if we all resolved to get out of debt tomorrow, we couldn’t because there is not enough currency to do it.  But the attempt to go debt free would have such a dampening impact on economic activity that we would be plunged into a deep depression.

This, more than any regard for individual businesses and households struggling during a pandemic, is why governments are extending protections to borrowers and propping up businesses and employment, while the central bank is working hard to keep interest rates at 0.1 percent.

In the event of a wave of defaults, then, government will have no choice but to act.  Unfortunately, its instinct is likely to be to bail out the banks which made the loans rather than the businesses which had to borrow to stay afloat.  In effect, governments would borrow currency created out of thin air by the same banks it is seeking to bail out.  In the meantime, thousands of businesses and millions of households would be defaulting on their debts because of a deep depression largely resulting from the government’s mishandling of the pandemic.

According to the neoliberal world view this ought not to matter.  Using the analogy of a forest fire, neoliberals talk about “creative destruction.”  Just as after a fire, space is created for the sun to shine through and allow new growth, a recession supposedly clears out inefficient businesses; paving the way for competitive start-ups to grow and thrive.  So long as there is a healthy banking and financial sector to make new loans to these new start-ups, we will return to growth and full-employment shortly thereafter.

To quote the famous line of Captain Edmund Blackadder, there is one tiny flaw with this argument…

Far from clearing out the giants which prevent the sunlight from reaching the forest floor, bailing out the banking and finance sector is likely to morph into a generalised bailout of rentier monopolies, creating a neo-feudal economic landscape in which digital piecework becomes the norm.  As Blakeley explains:

“The Bank of England, the Bank of Japan and the European Central Bank have all scaled up their own asset purchasing programmes, expanding both the size of the programmes and the range of assets they are prepared to buy. These central banks are also relying on the ongoing provision of dollar liquidity through the Federal Reserve’s swap line network, which has become all the more important given the dramatic expansion in dollar-denominated loans held by nonbank institutions outside the US, now thought to be worth around 14 per cent of global GDP. The trillions of dollars’ worth of loans, grants and guarantees that have been generated by central banks and treasuries, in an unprecedented show of public policy firepower, quelled some of the panic in financial markets, but they have not solved the problem. In fact, piling new debt on top of old, unpayable debts will simply defer the inevitable reckoning for another day. The general tendency across most markets will be towards consolidation, as smaller, weaker businesses fold under the pressure, or are swallowed up by their larger rivals. Some corporations will not only withstand but even gain from this crisis. Many of the world’s largest businesses were sitting on huge cash piles before the pandemic hit, providing them with the cushion they need to weather a period of falling revenues. Others – Amazon, Netflix and some of the social media giants – actively profited from the increase demand for their services in response to the lockdown…

“The legacy of the corona crash will be the concentration of economic and political power in the hands of a tiny oligarchy, composed of senior politicians, central bankers, financiers and corporate executives in the rich world. The challenge we will face when this crisis subsides will be to wrest control back from those who have taken advantage of this moment to increase their power and wealth.”

Lacking a theory of energy, Blakeley falls into the same trap as mainstream economists in assuming there will be a functioning economy to wrest back.  Because energy – of which labour power is but a miniscule form – is the true source of value, the dwindling amount of surplus energy (after the energy cost of securing useable energy has been deducted) to the economy has passed the point where continued growth in the developed states is possible, no amount of financial alchemy is going to prevent permanent decline… only a new, useable, highly energy dense, energy source can do that; and at the moment, no such energy source exists.  As Tim Morgan notes:

“The first take-away here is that no amount of financial gimmickry can much extend our long-standing denial over the ending of growth in prosperity. The energy dynamic which drives the economy has passed a climacteric. The pandemic crisis may have anticipated this inflexion-point, and to some extent disguised it, but the coronavirus hasn’t changed the fundamentals of energy and the economy.

“The second is that the downtrend is going to squeeze the prosperity of the average person in ways that are likely to be exacerbated by governments’ inability to understand the situation, and to adjust taxation and spending accordingly…

As a consequence:

“Calls for economic redress – including redistribution, and, in some areas, nationalization – are set to return to the foreground in ways to which a whole generation of political leaders may be unable to adapt.”

Exactly when this occurs is a matter of conjecture – as Morgan has warned; we should not mistake inevitability for imminence.  After all, few of us in 2008 would have imagined massive quantitative easing underwriting an otherwise unviable fracking industry to deliver a decade of additional energy into the system – failing to do much for growth, but delaying the day of reckoning.  Nevertheless, the day is fast approaching when the bubble of unrepayable debt finally bursts.  Après ca, le deluge

As you made it to the end…

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