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Economic mood swings

People who have spent time in jail claim that the hardest part of a sentence is the couple of months just prior to release.  So long as the release date had been long in the future, you just hunkered down and did the time.  But the pain of confinement grew enormously with the anticipation of near-term emancipation.  So, in its way, is the current pain of the UK’s confinement – the third, coldest and longest lockdown since SARS-CoV-2 arrived on our shores.  With spring just weeks away, and 12 million of the country’s 15 million at-risk population already vaccinated, the end of the pandemic is apparently in sight.

In an effort to jolly the unwashed masses along, the Governor of the Bank of England, Andrew Bailey, gave a message of cheer to the Observer yesterday:

“The Bank of England is braced for the possibility that a mood of national depression that engulfed Britain as it plunged into a third national lockdown will end with a spending spree when restrictions are lifted.

“In an interview with the Observer, the Bank’s governor, Andrew Bailey, said there was a chance after being cooped up for so long people would ‘go for it’ once the vaccine programme allowed the economy to reopen.”

If this sounds vaguely familiar, it is because you heard the same thing last summer when the first lockdown came to an end.  Certainly, after months cooped up at home, millions of people took to the high street in search of barbers and hairdressers, some summer clothing and a couple of pints down the pub.  But it turned out to be short-lived.  After a fortnight, people returned to their homes and the post lock-down spending blip came to an end.  Meanwhile, rising unemployment – despite the various government support schemes – had left hundreds of thousands of workers facing economic hardship as their weekly average wage of £504 was replaced by just £96 Universal Credit.

By November last year, more than 800,000 jobs had been lost.  That’s some £326,400,000 spending power per week already lost to the economy; £16,786,286,000 per year.  This could more than double in the event that various government support schemes are ended prematurely when the current lockdown is lifted.  So where does Bailey’s optimistic outlook come from?  According to the Observer:

“Threadneedle Street is monitoring what households do with an estimated £125bn in extra savings they have accumulated since the start of the pandemic. The Bank expects only 5% of the total to be spent, but Bailey said it could be more.

The trouble is that the £125bn in extra saving is not distributed evenly across the population.  Indeed, one of the hallmarks of the pandemic is that it has accelerated the process in which the rich have got richer even as the poor became poorer.  There is something that economist John Maynard Keynes could have told Bailey about this.  Keynes talked about people’s “propensity to spend.”  This was a retort to those who preach the gospel of trickle-down economics.  In short, give currency to a rich man and he will seek ways of saving it; give currency to a poor man and he will spend it immediately.  Well, during the pandemic central banks have been handing currency in vast quantities to the rich; which is why they now have £125bn in additional savings.  And yes, some of them may buy a new house or a new car.  But they are not about to buy 800,000 new cars to make up for the ones that the newly unemployed poor will not be buying this year after all.

Bailey might, perhaps, take comfort from the thought that even if they don’t spend that £125bn, the rich will at least invest it.  And that investment will surely generate jobs… won’t it?  Energy-based economist Tim Morgan gives the lie to this:

“In Britain and America, economic and financial policy have long had all the hallmarks of self-destructive intent. Both countries believe that it makes sense to ship value-productive industries (such as manufacturing) out to lower-cost countries overseas, whilst trying to turn themselves into low-wage economies whose main profitable activity involves moving money around. The UK has driven debt upwards relentlessly, for the sole and senseless purpose of buttressing property prices which have already been over-inflated far beyond the point of affordability…

“Both countries seem now to have been driven to the point of policy despair. The American government is bent on injecting yet another $1.9 trillion of borrowed-out-of-nowhere money into the economy, whilst the Bank of England seems to be giving serious consideration to committing a symbolic currency surrender through the introduction of negative nominal interest rates. Both are deluding themselves about the real condition of their economies, with Britain, at least, seemingly persuaded that all will be well if consumers can only be induced to go on a spending-spree with money that they don’t have.”

British investors ceased being anything more than parasitic decades ago.  Most of the extra savings Bailey is worrying about will merely further inflate the already grossly over-valued bond, stock and housing markets where, eventually – maybe next year, maybe five years from now – it will disappear into the ether with the same ease with which it was created in the first place.  Meanwhile back in the real economy, ordinary folk are facing a post-pandemic quadruple-whammy which could well bring down the entire house of cards.

First – and most obviously – thousands of businesses are only in existence in 2021 because of the various government support schemes, and because there is a moratorium on evictions for rent arrears.  The extent to which a government with strong pro-austerity leanings can avoid the temptation to try to balance its own books, will determine the fate of millions of workers in the coming months.  If support schemes are withdrawn too early, the current government could break Margaret Thatcher’s 1979-1983 government’s record for the most jobs destroyed in a single year.  And even if the government decides to extend the support schemes, the damage done by the loss of the critical Christmas sales period will likely result in hundreds of thousands of job losses anyway.

The second – and related – shock comes from a previously announced public sector pay freeze which will see £1.7bn less spending power in the 2021 economy.  While primarily aimed at balancing the government’s own – probably irreconcilable – books, the pay freeze will set the tone for a private sector which is barely treading water at this point.  Indeed, if they stick to the formula (they won’t for political reasons) the committee which sets the minimum national wage would be recommending a cut in 2021.

The third shock facing the economy is that Britain’s de facto bankrupted local councils are seeking a five percent council tax increase in a desperate attempt to balance their own budgets.  Unable to print new currency directly, and in the absence of further central government funding, this may be the only option available to them.  This is because in addition to the extra spending required to respond to the pandemic, they now face a massive drop in Business Rates income as retail and hospitality businesses fail.  At the same time, many more unemployed workers will be seeking Council Tax relief.  But whatever the short-term gain, the long-term consequence is that even more spending power is sucked out of the economy.

The final shock comes from what we might call “real inflation” – not the massaged and corrupted official inflation figures, but the true increased cost of life’s essentials.  Food prices, for example, have been increasing during the pandemic.  In addition, and as a result of increased wholesale costs, the price of electricity and gas is due to increase by nine percent in April 2021.  This at a time when people are already struggling to meet their bills; as the BBC report:

“Citizens Advice said its research in December indicated that 2.1 million households were behind on their energy bills, a rise of 600,000 compared with before the pandemic.

“It was concerned that the planned removing of assistance for recipients of universal credit, as well as other government financial support schemes being wound down, meant there were serious worries over debt.”

The unrepaid – and probably unrepayable – debt outstanding from the 2008 banking crash sets the deeper financial landscape in which this latest lunge down the back-slope of industrial civilisation is taking place.  Despite 12 years of ultra-low interest rates, much of the outstanding private debt has been serviced but not repaid; so that the additional borrowing resulting from the pandemic response threatens to tip an already unstable system into collapse.  As Nick Renaud-Komiya at Money writes:

“Across the country people’s household finances have been suffering under the strain caused by COVID-19 and the restrictions brought in to tackle its spread…

“Just over half (51%) of the people we surveyed admitted to being in debt right now, with the average amount of debt owed in the UK in 2020 coming in at £9,246 per person.

“Our survey also revealed that a quarter (25%) of all new debt incurred this year has been due to COVID-19, with 25-34 year olds taking on the most debt into 2021.

“Over a third (36%) of the debt accrued this year in London has been blamed on the COVID-19 pandemic…

“According to our research, 11.36% of new debt incurred this year has come as a consequence of furlough payments not covering a recipient’s household costs.

“Figures from the data company Statista suggest that 9.4 million UK jobs were furloughed during 2020. If this is correct, then the cost of debt due to the CJRS is roughly £1,050 per furloughed employee.

“Taken together, that’s almost £10 billion of personal debt directly caused by workers struggling with reduced income due to furlough.

“Separately, one in five people (20%) we spoke to said that they have taken out additional credit cards or loans to help them pay off COVID-related debt.”

It is for this reason no doubt, that a more solemn Andrew Bailey has been writing to commercial banks, urging them to prepare for negative interest rates.  The expectation is that banks will need several months to respond to a negative interest rate; clearly anticipating that the spending spree promoted in the Observer this weekend may not put in an appearance after all.

One reason why any uptick in consumer spending may be short-lived is trailed by Bailey in the Observer article:

“’The risk is on the upside – that after you lock people up for this long they go for it.’ He added: ‘One interesting question is how much that desire to spend comes up against a supply side that doesn’t recover immediately’.”

Transport fleets (planes, ships and trucks) around the world have been cut dramatically in response to the collapse in global supply chains in 2020.  Even with pandemic restrictions in place, this has led to long delays in shipping consumer goods such as laptop computers and televisions.  One result is that the cost of shipping to the UK has risen fourfold, leaving many retailers selling already ordered stock at a loss.  Additional spending in the aftermath of the latest lockdown can only worsen these problems in the short-term since it takes time for investment in new transport capacity to filter through.

There is though, a more profound reality that promises to send prices spiralling out of control in the event that western consumers attempt a spending spree in the summer of 2021.  Oil prices have already risen back to $60 per barrel as futures traders anticipate a new oil shock resulting from lost capacity in the oil industry.  Unfortunately, $60 per barrel is not high enough to reopen many former oil wells or to open up drilling new resources.  It is however, sufficiently high to trigger another economic downturn similar to the one in 2014.  This is because the increased price of oil initially results in an increase in the cost of everything made from, or transported with oil; at least until consumers adjust their spending patterns accordingly.

Of note in the Observer interview with Bailey is a passage, which may explain his false optimism:

“Bailey said the Bank’s monitoring of its own staff, almost all of whom are now, like him, working from home, had given him a feeling that the country had become markedly more downbeat at the turn of the year. ‘I could sense it from our institution. Hopes were raised by news on the vaccine, but then of course we had another lockdown and a big resurgence in Covid. The whole mood was pretty down, although it is alleviating now,’ he said.”

This is a form of bias that we are all prone to fall into – assuming that what we observe around us can be extrapolated to the population or the economy as a whole.  But anyone fortunate enough to be working for the central bank in London had – until Covid struck – been enjoying a privileged metropolitan salary class lifestyle; very different to that experienced by the majority in ex-industrial, rundown seaside and small town rural Britain.  Bank of England officials may long for a return to normal; but most likely, the kind of normal they will be facing will be the prolonged depression experienced by the majority in the years since 2008.

As you made it to the end…

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