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This doesn’t end well

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Thousands of patients are queuing on trolleys in the corridors of overstretched hospitals.  NHS managers have appealed to the public to only seek hospital care in a genuine emergency.  Those genuine emergency patients have been told to take taxis to A&E because of a shortage of ambulances.  Meanwhile, ambulance paramedics say they fear for people’s lives as the NHS struggles to cope with demand.  None of this is news about the Covid-19 pandemic; they are all news stories from December last year.  The difference this winter is that the additional biosecurity measures taken in response to the Covid crisis have added to what has become the routine winter overwhelming of the NHS.

Preventing the NHS from being overwhelmed was one of the key reasons why government has inflicted draconian lockdowns and restrictions on the population in response to the Covid outbreak.  But only a complete imbecile could have failed to anticipate the winter chaos that is only now unfolding.  Decades of “efficiency savings” have cut the NHS to the bone, while a combination of training times and the Brexit deterrent to foreign workers has left the NHS woefully short of the skilled employees needed to meet the additional demand.  As we discovered to our cost last spring, it is simple enough to convert buildings into “Nightingale hospitals” but finding the people to run them turns out to be beyond us.

So we have failed on one of the three aims of responding to the pandemic.  The NHS is being overwhelmed before our eyes and, with care homes no longer easily available to free up beds, things can only go from bad to worse as the winter really sets in.  What, then, of the other two aims of responding to the pandemic?

It is hard to argue that the government has succeeded in preventing the spread of the virus.  Despite the restrictions imposed on people – including various “circuit breakers” and additional lockdowns – the spread of the virus appears to be going from bad to worse.  So much so, indeed, that experts are now questioning the proposed five-day Christmas relaxation of the rules between 23 and 27 December:

“When government devised the current plans to allow household mixing over Christmas it had assumed the covid-19 demand on the NHS would be decreasing. But it is not, it is rising, and the emergence of a new strain of the virus has introduced further potential jeopardy.

“Members of the public can and should mitigate the impact of the third wave by being as careful as possible over the next few months. But many will see the lifting of restrictions over Christmas as permission to drop their guard.

“The government was too slow to introduce restrictions in the spring and again in the autumn. It should now reverse its rash decision to allow household mixing and instead extend the tiers over the five-day Christmas period in order to bring numbers down in the advance of a likely third wave.”

Only in the case of the third aim – maintaining a functioning economy – can government take some superficial comfort.  Because of the depth of the economic recession (defined as two quarters of negative growth) – which saw GDP fall by 24 percent – the economy was bound to bounce out of recession as soon as the first lockdown came to an end.  But while the summer growth ended the technical recession, GDP was still far below its 2019 level.

Things might have been a lot worse.  Surprisingly for a Tory government which spent the previous decade inflicting austerity cuts, the government discovered that there is a magic money tree after all.  Even more surprisingly, instead of simply handing bail outs to the corporations, the government introduced a furlough scheme through which the government pays 80 percent of the wages of employees who are unable to work during the pandemic.  This has helped keep unemployment (which has risen above 800,000 this year) far lower than might otherwise have been the case.  At the same time, various grants and government-backed loans together with mortgage holidays and moratoriums on evictions and rent arrears cases have prevented thousands of bankruptcies… for the time being.

In April I pointed out that we were – and to a degree we still are – in a kind of phoney war.  The global economy functions as what physicists call a “complex, adaptive, dissipative system.”  It is like a precision, hi-tech machine which anything more than cautious skilled interventions can rapidly break down.  But far from a cautious, skilled intervention, the measures taken by governments around the world in response to the pandemic were the equivalent of whacking it with a sledgehammer.  And that has some pretty serious consequences for all of us.

The first and most obvious casualties are the hospitality and retail sectors of the economy which, in the UK, provide more than 10 percent of total employment.  The retail apocalypse that had already been growing in the aftermath of the 2008 crash became a tsunami while most of us were cooped up in our homes to avoid spreading the virus.  Neil McCoy-Ward’s recent walk-through of my home city gives a flavour of the damage inflicted.  But even this pales into insignificance compared to what is happening in London – which may well become the first of the global cities to collapse.

Mirroring what seems to be happening across the global economy, the giant corporations are shielded for now by access to bailouts and interest free loans.  It is the small and medium size businesses – which employ the majority of workers – which are taking the hit.  And lest you think it’s only shopping and eating out, consider that your pensions and savings depend upon the rents from all of those now empty commercial properties.  Moreover, unlike the big corporations, those SME businesses are also the ones which do not avoid corporation tax and business rates.  This is a headache for local councils that are close to bankruptcy already; and it more or less guarantees that your council tax will be increasing for years to come.

Nor does the slow motion train crash end there.  These retail outlets stand at the end of long supply chains which are also adapting to the shocks inflicted upon the economy.  The establishment media has finally noticed the impact on shipping, reporting the global shortage of empty shipping containers.  In the UK, Brexit has added to this problem as importers seek to stockpile goods ahead of a possible no-deal Brexit at the end of the month.  But the problem is global – too many containers, together with the ships that carry them, are in the wrong place as a consequence of the disruption to supply chains.  In some instances – such as for the owners of oil tankers – this is not a problem because their ships can be used as floating storage for the excess resulting from the massive drop in demand across the economy.  It is a bigger headache for cruise ship owners who can neither attract sufficient passengers nor afford the costs of keeping liners moored in port.  Tucked behind south-facing headlands along the English Channel are fleets of cruise ships enjoying the relative shelter from Atlantic westerlies without the requirement to pay mooring fees:

The ships moored off Teignmouth in Devon (above) last weekend include the cream of the British cruise liner fleet, including the Queen Mary and the Queen Elizabeth II.  For now, their owners have remained solvent.  Other cruise ship owners have been less fortunate as insufficient income forces them to scrap their ships in one of the biggest acts of real wealth destruction in modern history.  So what, you might say.  Only a small and largely wealthy minority of us go on cruises, and for environmental reasons, fewer cruise liners are probably a good thing.  The trouble is that just over the horizon in that photograph are several cargo ships whose owners are also not getting paid and who will also have to scrap their ships if the economy does not open up soon.  And this is also a global problem.  As Costas Paris at the Wall Street Journal reported last month:

“Cargo ships and cruise liners are being scrapped in growing numbers as operators hit by the fallout from the coronavirus pandemic look to turn their unemployed vessels into cash in the recycling market.

“Car-carrying vessels and iron-ore haulers lead the burgeoning fleet heading for demolition. Cruise ships, still idled by the restrictions imposed at the start of the pandemic, are joining the lineup at ship-breaking yards, where the vessels are pulled apart for their steel.”

Unlike the fictitious wealth destruction that happens when nominal asset values disappear into the ether in a financial downturn, what we are witnessing is the destruction of genuine wealth in the real economy; in this case cargo ships that, were it not for the response to the pandemic, would still be profitably moving cargoes around the world.  And perhaps more importantly, their loss will be an impediment to any attempt to revive the economy once someone finally declares the pandemic to be at an end.  Less ships and growing demand translates into higher shipping costs and thus higher prices for consumers whose collective purchasing power will take years to return to 2019 levels.

Nor is shipping the only supply-side crisis waiting in the wings.  Despite a small increase in demand, the price of oil is still languishing far below the price needed for producers to break even.  And so producers – particularly the US frackers who produced all of the growth in global oil extraction in the last decade – have been shutting down wells, laying off workers and scrapping equipment.  But in spite of this, tankers around the world are still being used as floating storage for oil which our Covid-restricted economy has no immediate use for.  And as with shipping, if and when we get around to bringing the pandemic to an end, we face a nasty oil shock in a matter of months.  As oil geologist Art Berman explained in a recent panel discussion at Peak Prosperity:

“For those of us who follow the way we measure this; I mean, basically, you have to drill wells to produce oil. That seems fairly basic, but what has not happened over the last year now is that the number of wells added has fallen. In fact, the total number of wells drilling is roughly a quarter of what it was a year ago. You can look at reports from the government from the department of energy and say, well, yes, production is down from 13 million to 11 million, but it’s going to stabilize. That’s what we’re told. That’s not great, but it’s not too bad. Well, the problem is that the reason we’ve stabilized is because we shut in so many wells when the economy was closed and there was no storage left. Now those wells have been reopened. That’s not going to last very much longer. What I’m telling you is that we’re drilling enough wells to support about a quarter or a third of the oil production we had before all of this. Well, long before COVID, but certainly, if you want to use that as a benchmark fine. The arithmetic is fairly simple. There will come a time and I don’t know if it’s June or July of 21, but it’s in that range when the production is going to go down to a third of what it was before. It’s inevitable that that will happen.”

It was a spike in oil prices following the peak of conventional oil extraction in 2005 – incidentally the year the UK became a net importer of oil and gas – which triggered the chain of events that brought down the global banking and financial system in 2008.  That crisis was never resolved.  Instead we added trillions of dollars of additional debt to prop up the system.  Last time around it was governments and central banks that bailed out the system.  This time around it will be governments and central banks which will need bailing out… and in the absence of space aliens, it is hard to see who will ride to the rescue this time.

As you made it to the end…

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