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Build Back Later

Image: Stéphane M Grueso, CC BY-SA 2.0

Unless you’ve been living on another planet for the last year, you cannot but help to have heard politicians using the phrase: Build Back Better.  This political bandwagon is borne out of desperation to find a way out of the mess they have created in responding, out of greed and self-interest, to a pandemic that need not have been anything like as deadly as Covid-19.  It also comes from a techno-utopian ignorance of how economies actually work.  For the most part this is because economics departments around the world view “the economy” solely in terms of the financial system.  And since fiat currency is infinite, the assumption is that so long as enough new currency is thrown at a problem, it will eventually be resolved.  We already see this in the various infrastructure and job creation plans being drawn up by governments to mop up the anticipated mass unemployment following the ending of the various financial support packages put in place during the pandemic.

The World Economic Forum’s mish-mash of imagined green technologies based around the 5G network is intended to steer governments away from knee-jerk investments in fossil fuel-based infrastructure projects such as new roads, runways and high-speed rail lines.  Instead, we are encouraged to imagine a world powered by clean hydrogen and nuclear fusion, in which we work digitally, are transported in self-driving electric cars, and have all of our stuff delivered by self-guided drones.  Instead of the twentieth century economy based around the manufacture and consumption of goods, we will instead live in a green service economy.

Unfortunately, this vision too, demonstrates just how ungrounded the global technocracy has become.  While in theory the chosen power sources for this techno-dystopia are far more powerful than fossil fuels, in practice, both require more energy input than they can provide in return.  Because the gulf is not too great, in limited applications hydrogen – when derived from gas – can act as a battery.  If though, it is used to iron out the intermittency – including between summer and winter – of renewable electricity generation, then it cannot simultaneously be available to replace the fossil fuels required to run transport, agriculture and industry.  Nuclear fusion, though possible for a few seconds at enormous energy cost in laboratory conditions, requires the invention of so many new materials that it is simply not going to put in an appearance in anything like the time needed… and certainly not in time to reopen the post-pandemic economy.

This is another major issue with the idea that we might build back better.  The economy doesn’t operate like a car that can be put in a garage and switched off until it is next needed.  Rather, the real economy – of which the financial elements are merely a derivative – is a complex self-adapting and dissipative organism.  In its modern, globe-spanning manifestation, it is far too complex for politicians and economists to manage or even understand.  The best they can hope to do is to surf the waves in the hope of convincing the rest of us that someone knows what they are doing.  The reality, though, is that even something as banal as a cup of tea might involve millions of separate economic transactions in the process of converting raw materials into finished products that arrive in your kitchen cupboard.  Suffice to say that we disrupt these webs of transactions at our peril.

Not that this is immediately obvious.  Indeed, one would – wrongly as it turns out – have assumed that the political left might have most objected to the lockdown of economies because of the inevitable mass unemployment that is going to follow.  But no; the political left has sought even more draconian restrictions than those implemented by right wing governments.  One reason for this might be because it has forced those governments – at least for now – to concede that the state must play an active role in the economy and that currency creation is far easier than previous governments cared to admit.

Nevertheless, we are currently sitting in the middle of a slow motion train wreck, whose full effects will only be realised in the months and years to come.  In the UK, for example, 800,000 jobs were lost between March and November despite the various support schemes.  A further 1.5 million redundancies were expected prior to the Christmas lockdown; and many more retailers are now expected to collapse as a result of the loss of Christmas spending.  This though, is only the surface of a much deeper crisis which is gathering pace with each passing day.

While the headlines have focused on the travails of retail and hospitality – and, in Britain, an attempt to blame everything on Brexit – the more profound impact of the response to the pandemic is being felt in the very life-blood of the global economy; oil and transport.  As the Office for National Statistics reports in its December update:

“Clothing stores reported the largest annual fall in 2020 at negative 25.1%, which was also the largest year-on-year fall on record for the sector. The sector was heavily affected by the retail restrictions, with feedback from retailers suggesting that the inability to try clothes on in physical stores and the restrictions to hospitality meaning consumers socialised less, also impacted sales.

“Fuel retailers also suffered a record year-on-year fall in sales, down 22.2%, with travel restrictions and work from home guidelines significantly reducing the demand for fuel throughout the pandemic period.”

The trouble is that these declines have consequences.  Just-in-time supply chains which are suddenly met with declines of this magnitude cannot simply hibernate until business picks up again.  Shipping companies must still pay mooring fees, crew wages, maintenance costs, etc..  Tanker operators cannot simply have their ships sitting idle on the off chance that someone might order some additional fuel.  And so we are already witnessing the scrapping of older vessels while others – for the time being – are being operated at a loss in the hope of a better economic environment in the coming months.

One consequence is that import costs have risen dramatically.  As Vivienne Nunis at the BBC reports:

“Shipping lines have been trying to drive down demand from British importers by charging a premium for deliveries to the UK, or bypassing the country’s ports altogether.

“One shipping line recently offered freight rates of $12,050 for a 40ft container from China to Southampton, but charged just $8,450 for the same container to travel from China to Rotterdam, Hamburg, or Antwerp.

“The UK’s largest container port at Felixstowe has been experiencing long delays since October. Congestion has also been a problem at the Port of Southampton, albeit to a lesser extent.

“The bottlenecks were initially caused by a surge in imports as business activity picked up after the first wave of the pandemic. Huge shipments of PPE and the usual Christmas rush added to container volumes and ports struggled to cope.”

Note that while the cost of a container going to Rotterdam is cheaper than for the UK, it is still four times more expensive than the pre-pandemic $2,100 container.  More importantly, note that the problems being experienced in January 2021 are an unintended consequence of actions taken in March 2020.  That’s the trouble with a complex global economy – it takes time for the consequences of our collective actions to come back and bite us.

Retailers faced with higher costs are currently selling stock at a loss.  They may be temporarily supported by various government-backed loans and furlough payments to maintain their employees.  But unless the situation turns around, sooner or later they are going bust.  And even the few which are able to keep going will only be able to do so at a much higher cost.  This is not just because of the transportation costs, but also because oil shortages figure large in our near future.  As oil geologist Art Berman reports:

“U.S. oil production has fallen more than 2 million barrels per day since March 2020. It will fall much lower.

“Output has fallen from almost 13 mmb/d in late 2019 to below 10.5 mmb/d in October 2020. EIA forecasts an increase in November to 11.0 mmb/d and then an average level of about 11.1 mmb/d for the rest of 2021.

“EIA’s forecast is impossible. It does not account for the low level of drilling and for the high decline rates of U.S. wells. It seems more likely that production will drop by at least another million barrels per day below October’s level later in 2021.

“A major problem with EIA’s model is that it assumes a 2 month lag between well start and first production. Data shows that for 2019, the production-weighted average from well start to first oil production was about 4 1/2 months. It further shows that the average lag from first oil to offset of legacy production decline is about 7 months. That means that future production for the next six to twelve months is locked into low rig counts. No matter how radical, an increase in drilling will not result in higher production until much later in 2021.”

Since US tight oil accounted for all of the increased oil extraction in the last decade, and given that the global oil industry hit peak output in 2018, we may well be looking at our first serious global supply-side shock since the 1970s… except this time around there will be no new North Sea or Alaskan oil fields to bail us out.

What this points to is an irresolvable post-pandemic dilemma.  Despite the claims of Herr Schwab and his followers, there is no “virtual economy” de-coupled from the real economy of energy and resources.  As Jason Hickel explains:

“But services have grown dramatically in recent decades, as a proportion of world GDP — and yet global material use has not only continued to rise, but has accelerated, outstripping the rate of GDP growth. In other words, there has been no dematerialization of economic activity, despite a shift to services.

“The same is true of high-income nations as a group — and this despite the increasing contribution that services make to GDP growth in these economies. Indeed, while high-income nations have the highest share of services in terms of contribution to GDP, they also have the highest rates of resource consumption per capita. By far.

“Why is this? Partly because services require resource-intensive inputs (cinemas and gyms are hardly made out of air). And partly also because the income acquired from the service sector is used to purchase resource-intensive consumer goods (you might get your income from working in a cinema, but you use it to buy TVs and cars and beef).”

Someone still has to make the self-driving electric cars, the drones and the laptop computers and smartphones we all work on.  Someone still has to grow the food we eat and treat the water we drink.  And someone has to maintain it all.  And the bottom line is that all of that requires mass consumption to keep it affordable together with a steady supply of raw materials and a growing supply of energy.  And the kicker is that none of those preconditions exists any longer.

The energy cost of energy has been rising remorselessly for the last two decades; so that the energy available to the wider economy has been falling.  This is one reason why productivity has slumped and cheap labour is replacing automation.  Resources are following a similar trajectory.  Having mined and depleted all of the easy deposits, we find ourselves resorting to ever lower-grade ores – which require ever more energy to process – to keep the system going.  Abundant materials like steel, copper and aluminium can be recycled.  But most other resources are too expensive to reuse.  And so, in the course of the next decade, we face a series of supply-shocks against which the only solution – in the absence of a yet-to-be-discovered high-density energy source – is to downsize the global economy to levels far less material than those imposed on us in response to the pandemic.

This is not, of course, what governments are going to do – it wouldn’t be popular with voters.  Instead – and we already see this with Joe Biden’s plan to print and spend another $1.9 trillion – states and central banks around the world will – once a grown up tells them the pandemic is over – embark on the biggest currency creation and spending spree ever witnessed.  Its aim – as always – will be to protect the fictional wealth of the global godzillionaires locked up in shares, government bonds and collectables.  It will fail for this simple reason – each new round of stimulus costs exponentially more to get the same increase in GDP in large part because there is not enough left of Planet Earth to result in more real growth.

Any attempt to reopen the economy must result in inflation and shortages because the material basis of the December 2019 economy no longer exists.  But keeping the economy on lockdown can only result in further irreparable damage to the economy’s life support systems.  In the same way, create eye watering volumes of new currency and you devalue the currency to the point of worthlessness; but seek to rein in the excess currency and you vaporise the nominal wealth of the global elites (and everyone’s pension pot to boot)… in short, we’re damned if we do and damned if we don’t.

As you made it to the end…

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