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It’s the third wave that sinks you

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Harsh as it may sound, the retail and hospitality sector of the economy which has suffered most immediately under the Covid restrictions was also the least productive.  For those who follow conventional economic models, then, the damage currently being wrought on that sector is of little concern.  Shops and cafés are among the easiest start-up businesses, and require little staff training to get up and running.  Thus, even though the Covid restrictions have so far resulted in 819,000 fewer employees on payrolls since February, with the right package of support and training from the government, the sector ought to bounce back once people are free to shop once more.

That is the same conventional view which failed to see the 2008 crash coming, and which has failed to restore the economy in the subsequent 12 years.  An alternative model, grounded in the real world of people, resources, energy and the environment tells a different story.  According to this perspective, the global economy experienced a major slowdown in the mid-1970s when global oil extraction ceased growing exponentially.  The reason for this was simply that we extracted the cheapest and easiest oil first.  From the mid-1980s, new but more energy-expensive fields such as the North Sea provided sufficient new energy to the economy to allow one final debt-based decade of growth.  But when conventional oil extraction peaked in 2005, the energy and price shock to the economy threw the system into reverse.  Central banks raised interest rates, making much of the outstanding debt unserviceable.  As firms and households defaulted, so the whole rotten edifice of derivatives and the so-called shadow banking system fell apart.  Only massive central bank stimulus and near zero percent interest rates prevented a complete collapse.  But the fundamentals – too high energy cost of energy, shrinking energy per capita, and resource depletion – could not be overcome simply because the global economy has run out of energy-cheap energy.

This is not simply about the energy cost of oil and gas at the well head or coal at the mine.  As Gail Tverberg explains, Saudi Arabian oil can be extracted at a break-even point around $40 per barrel.  But Saudi Arabia requires a price above $80 per barrel to fund the infrastructure, desalination plants and air conditioning which makes the Saudi Arabian economy possible.  Less obviously, the UK is in the same boat.  Since the mid-1980s, a new UK economy has been constructed around a money laundering City of London which depends upon oil and gas revenues to maintain the value of the pound.  Since the UK became a net importer of oil and gas in 2005, its economy has divided between the 20 percent or so of the population in London and the archipelago of top-tier university towns which have maintained their standard of living, and the 80 percent whose discretionary income has been crushed.

In the aftermath of the 2008 crash, as the London-based government inflicted austerity cuts across the economy, a divided Britain had emerged.  While London remained the most prosperous place in Northern Europe (itself the most prosperous region of the EU) the wastelands north and west of London contained nine of the ten poorest places; with Cornwall and Wales comparable to levels of poverty in Bulgaria and Romania.  In this 80 percent region of the UK, the retail apocalypse has been gathering pace for decades as people’s discretionary spending – the amount left after the bills have been paid – has fallen remorselessly.  While not the sole cause of the UK’s particular woes, this prosperity disparity between the cosmopolitan middle classes and the broader population provides the basis for the vote to leave the European Union in 2016 and the collapse of Labour’s “Red Wall” last year.

The economic impact of Brexit though, is already being eclipsed by the impact of the Covid restrictions imposed by governments which made little if any attempt to understand the economic consequences. This is perhaps inevitable in an age where most people think of the economy only in terms of the banking and financial sector.  To those at the top, all problems can be solved by borrowing or printing new currency into existence and then throwing it at whatever problem needs solving.  But for the remaining 99.9 percent of us, the economy is visceral; it is what provides us with the food we eat, the clean water we drink, the clothes we wear and the employment we depend upon.  And in a complex, energy-dense, dissipative and globalised economy, any disruption of the trillions of chaotic economic transactions that occur every day threatens to bring the entire structure crashing down around us.

This – although poorly articulated – was the main concern of those who feared the consequences of leaving the European Union.  Even at this regional level, the economy operates chaotically.  That is, although the EU authorities and national governments provide a legislative framework for economic activity, the economy operates almost entirely on the basis of “market forces.”  Just as you and I make private choices about the work we do and the things we buy, so too do all of the firms which make up the economy.  Suddenly throw spanners – such as new border controls or additional tariffs – into the machine, and it will likely breakdown in a manner which cannot be predicted in advance.

In the case of Brexit though, the adaptive nature of the economy was believed by those who successfully argued to leave, to be capable of bouncing back.  And since the pro-leave half of the population were more concerned with issues of sovereignty and culture, most were prepared to accept what looked like a short-term economic hit – which in any case would likely fall on the middle classes – in order to “take back control” of the organs of democracy.

With just weeks to go before Britain leaves the EU, we are already glimpsing some of what is to come.  Firms have sought to stockpile supplies ahead of the anticipated disruption at the ports from New Year’s Day.  The result has been the kind of grid-locked traffic jams that are expected to become commonplace as too many trucks attempted to pass through ports that the government has negligently failed to expand in time.  But even this first wave of economic disruption to wash up on British shores is being overtaken by the much bigger Covid second wave.

One reason for the congestion at ports is that international Covid restrictions have severely disrupted global shipping to the point that shipping containers are in the wrong location.  Although a much greater problem, this is similar to the egg box phenomenon at the very beginning of the lockdowns in the spring.  Then, Britain had a surplus of eggs because restaurants, hotels and schools had been closed.  At the same time, demand for eggs at the supermarkets rapidly resulted in shortages owing to a mismatch between the giant egg containers used in the wholesale supply chain and the small boxes used in the retail chain.  Currently, there are loaded ships that cannot dock to unload while empty ships have no cargoes to pick up.  And in the background, the least profitable shipping companies are scrapping ships.

Nor is it just shipping that is experiencing economic disruption.  As  E. Mazareanu at Statista reports:

“The impact of the novel coronavirus (COVID-19) can be seen on every sector of the most affected countries as well as globally. For the week starting December 7, 2020, the number of scheduled flights worldwide was down by 46.1 percent compared to the week of December 9, 2019. The impact of COVID-19 on the Chinese aviation reached a peak in the week starting February 17, 2020, with flight numbers down by 70.8 percent…

“Coronavirus pandemic hit the passenger aviation much worse than cargo aviation because of lockdowns and bans restricting international travel across the globe. As a result of persisting COVID-19 shocks, passenger aviation is expected to lose roughly 314 billion U.S. dollars in 2020…”

As Statista’s research department explain, this second wave to hit the economy is largely due to collapsing demand:

“The economic damage caused by the COVID-19 pandemic is largely driven by a fall in demand, meaning that there are not consumers to purchase the goods and services available in the global economy. This dynamic can be clearly seen in heavily affected industries such as travel and tourism. To slow the spread of the virus, countries placed restrictions on travel, meaning that many people cannot purchase flights for holidays or business trips. This reduction in consumer demand causes airlines to lose planned revenue, meaning they then need to cut their expenses by reducing the number of flights they operate. Without government assistance, eventually airlines will also need to reduce lay off staff to further cut costs. The same dynamic applies to other industries, for example with falling demand for oil and new cars as daily commutes, social events and holidays are no longer possible. As companies start cutting staff to make up for lost revenue, the worry is that this will create a downward economic spiral when these newly unemployed workers can no longer afford to purchase unaffected goods and services. To use retail as an example, an increase in unemployment will compound the reduction in sales that occurred from the closure of shopfronts, cascading the crisis over to the online retail segment (which has increased throughout the crisis). It is this dynamic that has economists contemplating whether the COVID-19 pandemic could lead to a global recession on the scale of the Great Depression.”

This was why governments and economists optimistically imagined a “V-shaped recovery” back in the spring.  If the virus had been successfully contained and treatment protocols developed, the global economy could quickly return to normal.  With some additional government and central bank support, demand could be returned to 2019 levels.  With a few notable exceptions though, this is not what happened.  Governments lost control of the spread of the virus and as winter approached healthcare systems reached capacity.  New lockdowns and ever tighter restrictions were imposed in an attempt to do the same thing over again and produce a different result.

As autumn wore on, a demand crisis slowly morphed into a supply crisis.  In the UK, for example, new car registrations have slumped by nearly a third (30.7%) compared to 2019.  Business registrations have been particularly hard hit, falling by 45% on 2019.  Light vehicle registrations are also down 21.5% on 2019, as transport companies adapt to changing patterns of demand.  HGV registrations are down 40%.  Some, at least, of this decline is a result of firms and households mothballing existing vehicles.  But natural wastage is inevitable as vehicles breakdown or come to the end of their working lives.  It also means that vehicles that have already been built are sitting in parking lots somewhere, waiting for demand to increase; which, of course, means demand for more vehicles to be manufactured has already slumped and may take years (if ever) to return to 2019 levels.

It is not just vehicles that are not being replaced.  As demand slumps across the economy and as firms struggle to maintain cash-flow, selling or scrapping premises, equipment and vehicles gathers pace.  Across the US shale plays, for example, drilling rigs have been scrapped, skilled technicians laid off and oil wells shut down.  As early as July, the impact of the pandemic measures was already being felt across a range of commodities.  As Frik Els at Mining.com reported at the time:

“Covid-19 has impacted the mining industry across the globe as lockdowns and travel restrictions forced companies to halt or scale down operations and suspend work on projects while re-opening plans are scuppered by fresh outbreaks…

“In total, $8.84 billion in mining revenue is classified as at-risk and S&P Global identified, as of June 25, disruptions to 275 mine sites in 36 countries…”

Although most of those operations were able to restart, longer-term weaknesses in global commodities supply chains were exposed and will accelerate as the full effects of the pandemic response are felt.  As Bernhard Tröster and Karin Küblböck in a paper in the European Journal of Development Research explain:

“The sudden breakdown in economic activities has led to a sharp drop in incomes and aggregate demand. The global economy is forecasted to shrink by − 4.9% in 2020 (IMF 2020b, June Update). In particular, the demand for crude oil and other energy commodities have declined as they are directly and indirectly consumed in almost all sectors across the economy. Base metals such as copper, iron ore or zinc are closely linked to the demand for manufactured goods. Therefore, both types of commodities are highly sensitive to short-term slowdowns in economic activities due to their high-income elasticities (Baffes et al. 2020). But also cash crops such as coffee, cocoa and cotton typically react to slowing global demand…

“The global spread of COVID-19 represents a massive challenge for developing countries. Beyond the health crisis, and an economic crisis due to lockdown measures, many countries face additional economic turmoil linked to their dependence on commodities. Commodity markets have reacted strongly to the COVID-19 crisis with price movements, reflecting changes in supply and demand in commodity markets due to the policy measures to contain the pandemic, but also due to activities of financial actors on commodity derivative markets. The combination of simultaneous supply and demand shocks with economic contraction at the domestic and international level is unprecedented…”

The longer the response to the pandemic persists, the greater the prospect of capital destruction as temporary shutdowns morph into permanent closures.  In time some, at least, of the lost production can be restored.  But with even the most vulnerable of us in the developed states not expected to be vaccinated until Easter, and with the prospect of new and more virulent strains overtaking us, the risk of severe supply-side shortages grows with each passing week.

Alarmingly, in a repeat of the incompetence shown over Brexit preparations, when challenged, the UK government had made no credible assessment of the economic impact of the Covid restrictions it had imposed.  As Andrew Woodcock at the Independent reported last month:

“Boris Johnson is facing a substantial Tory revolt over his plans for new coronavirus restrictions, after a government assessment of their economic impact failed to win over sceptical backbenchers.

“MPs in Westminster said the document – issued on the eve of Tuesday’s crunch vote – did not answer the demand of the Covid Recovery Group (CRG) for a full cost-benefit analysis of the damage the three-tier system will do to businesses and jobs on a regional basis.”

Even those concerns have been overtaken by events.  Despite arguing against a second lockdown, the UK government introduced one.  And despite attempting to open the economy up over Christmas, the government has announced new restrictions followed by new lockdowns in January 2021.  And once again there has been no credible assessment of the impact of this on the UK economy or on how the global response to the pandemic will further impact the UK.  Not that the global political class has demonstrated any greater degree of foresight.  Typical of the political class who have pressed for lockdowns and restricted movement to – often fail to – contain the spread of the virus is Melinda Gates who, along with husband Bill has been using the weight of the Gates Foundation to propagandise in favour of the particular package of restrictions which became the orthodoxy:

“You can project out and think about what a pandemic might be like or look like, but until you live through it, it’s pretty hard to know what the reality will be like. So I think we predicted quite well that, depending on what the disease was, it could spread very, very, very quickly. The spread did not surprise us.

“What did surprise us is we hadn’t really thought through the economic impacts. What happens when you have a pandemic that’s running rampant in populations all over the world? The fact that we would all be home, and working from home if we were lucky enough to do that. That was a piece that I think we hadn’t really prepared for.”

The supply destruction that is going on behind the scenes as corporations shut down operations and scrap equipment, machinery and vehicles will only come to public prominence when governments declare the pandemic to be over.  Only then, when key fuels and resources are no longer available to us in the quantities required will we fully understand the folly of shutting down economies in a failed attempt to halt the spread of a not particularly dangerous virus.  But the consequences of that third wave, which will give rise to evils from third world debt defaults and increased poverty and hunger to trade and resource wars, will be beyond our capacity to resolve.  Lacking the energy and resources even to develop a steady-state economy, the global economy which emerges out of the pandemic response can only collapse; most likely rapidly.

Remember that the post-pandemic response is not simply a crisis of our governments’ making; it is also a continuation and an acceleration of an overshoot crisis which has been unfolding since the early 1970s.  As I wrote at the beginning of the lockdown:

“Neoliberal globalisation was an adaptive (nobody planned it) attempt to maintain growth in the face of declining surplus energy.  Transferring and concentrating manufacturing in regions of the world that have cheaper labour in abundance, and which have fewer concerns about burning coal and living with pollution helped drive the price of goods down to the point that western consumers could (at least with the aid of credit cards) afford them.  But as the energy cost of energy has continued to increase, even the growth seen in Asia since 2008 was already grinding to a halt long before some hapless Chinese diner decided that bat stew was a good idea.”

Prior to Covid-19 we might have looked forward to another decade of gradual economic shrinkage; allowing us to save at least some of the trappings of an advanced industrial civilisation.  That hope has now largely evaporated.  When the third, post-Covid supply-side wave washes over us, the dislocation will be so great and so rapid that even the most basic activities like putting enough food on the table may well be beyond us.

As you made it to the end…

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