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Signs of things to come

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What do the gig economy, European football, and thefts from cars and churches have in common?  At face value, very little; but each, in their way provides a warning sign of how our economy will attempt to respond to the growing crisis of surplus energy.

For those readers not familiar with the crisis; here is the short version (see the linked post for a deeper explanation).  Because humans have consumed the cheapest and easiest fossil fuel deposits first, the quantity of energy we have to devote to securing energy rises remorselessly.  Throughout the growth phase of industrial civilisation (broadly 1750 to 2000) this was not a problem because the energy cost of energy was never high enough to limit growth in the much larger non-energy sectors of the economy.  Beginning in the 1970s though, growth in the western economies began to slow as the energy cost of energy began to drag on the wider economy.  Restricted – and heavily debt-based – growth was able to continue through the 1990s; but at some point in that decade, the energy cost of energy caused average prosperity to begin to decline.  The ensuing debt overshoot eventually brought down the banking and financial system; obliging governments to bail out the system at the cost of the ongoing decline of the “real economy.”

Between 2000 and 2020, the Asian economies – especially China – were able to generate sufficient growth via massive coal consumption, low-paid labour and a dearth of environmental and safety regulation to prevent the global economy from imploding.  But by 2020 the global energy cost of energy had risen to around eight percent; causing the Asian economies to falter in the same way as the west faltered from the late-1990s.  Without the pandemic, Asia might have limped on for another 5-10 years, just as the western economies had.  But the pandemic has accelerated the rising energy cost of energy to the point that real economic growth – more goods and services being created and traded – is no longer possible (although we may still see growth in some sectors of the economy at the cost of decline in others).  Only financialised growth is now possible – we are in that Wile E. Coyote phase where we can continue borrowing and inflating asset bubbles, so long as nothing comes along – like an oil shock or a shortage in some key mineral resource or component – to cause us to look down.

In effect, we have gone from the neoliberal world in which “a rising tide raises all boats,” to a bleaker world in which one person, corporation or nation’s gain can only come at the expense of another.  We have crossed the energy cost of energy point at which the economy becomes a zero sum game.  This is why we are witnessing the emergence of some decidedly immoral practices at all levels of the economy.

Because of the interplay between the financial economy and the real economy, the energy cost of energy does not translate exactly into energy prices.  It does however; tend to drive up the aggregate cost of essentials such as food, water, utilities and transport, as businesses and households are obliged to switch spending away from discretionary purchases.  Moreover, this shift is experienced differently by various parts of the population.  In the UK, for example, we have lived through a class-based geographical retreat of prosperity.  In the 1970s, this was barely noticeable because general living standards were still rising.  It was just that some disadvantaged groups – ethnic minorities, people with disabilities or mental health problems, people with drug or alcohol issues, etc., tended to be ghettoised in the low-rental cost districts of our cities.  By the 1980s though, we began to talk about a “north-south divide;” as those parts of the UK that had depended on nineteenth century heavy industries like coal mining, steel working, textiles and ship-building fell into terminal decline, while the prosperous southern regions enjoyed the proceeds of more modern economic activities; particularly the banking and finance sector.  Nevertheless, prosperity continued to retreat so that – as was revealed by the Brexit result in 2016 and the 2019 general election – even large swathes of the formerly prosperous south had witnessed declining prosperity.  Prior to the pandemic, while most of the UK had experienced declining living standards, prosperity had retreated to the affluent districts of London and the archipelago of top-tier research university towns.

Even this picture does not fully explain what is going on; because the retreat of prosperity has not been a conscious policy, but rather it is the sum outcome of billions of individual decisions and interactions.  The state, of course, provides the wider regulatory framework in which these billions of decisions are made.  And in the neoliberal system, states eschewed intervention in the operation of the economy.  For example, the European Union adopted “State Aid” regulations which prevented member states from using public money to finance private business (except when it came to bailing out the banks, of course).  In the UK, this gave rise to the Blairite higher education cargo cult in which the state attempted to provide an education-based route back to prosperity, while failing to actually deliver the prosperity itself.  As a result, Britain has some of the most under-utilised university graduates on Earth; youngsters with degrees working in jobs which thirty years ago would not even have required A-levels.

When the massive expansion of people with university degrees failed to cause a boom in genuine graduate jobs, the result was catastrophic for the majority who had not gone to university.  “Grade inflation” caused downward pressure so that even relatively low-skilled and low-paid employers began to use qualification bars to make the recruitment process manageable (something I myself did on more than one occasion).  Rather than sifting through hundreds of applications, by insisting that applicants have a university degree, an employer might need only manage 10 or 20 applications.  They might not get the ideal candidate; but they would get someone who was good enough.

For ex-industrial, rundown seaside and small town rural Britain, where most people live, the result was declining incomes, lower spending and higher prices; particularly of essentials which tend to be most impacted by the rising energy cost of energy.  Looking back to the early 1970s, we see an economy in which a semi-skilled manual worker could earn enough to buy a house, raise a family, run a car and take an annual holiday.  Today that same semi-skilled worker would be lucky to afford a bedsit or a room in a shared house; and buying a house is out of the question.

Note though that this decline was occurring through a period when official inflation rates were stubbornly low.  One reason for this is that official inflation is based upon average spending in an economy which is highly unequal.  The result is that the inflation measure includes goods that relatively affluent people still buy, such as new cars, laptop computers and smartphones, which have been falling in price.  When it comes to the shifts in poorer people’s spending, however, items are substituted out.  For example, if the price of pasta or lamb rises and poor people switch to cheaper rice and beef, then the inflation measure will cease counting pasta and lamb and instead measure rice and beef; so that it appears that the cost of living at the bottom hasn’t actually risen.

Few people at the very bottom of the income ladder believe the official inflation figure these days anyway.  This is because the direct experience of living on the margins is that the cost of essentials has been rising remorselessly for decades.

As the price of essentials has risen, businesses have had no choice than to cut back on their discretionary spending too.  And since for business, the biggest cost is usually the wage bill, the inevitable result is that jobs have been lost.  This is especially true across discretionary areas of the economy such as non-food retail; which is why we have witnessed a growing “retail apocalypse” across the economy since 2008.  It is also why gig economy work has grown dramatically in the ensuing 12 years.  According to the UK Trades Union Congress, just prior to the pandemic there were:

  • 839,000 zero-hours contract workers (excluding the self-employed and those falling in the categories below)
  • 971,000 in other insecure work – including agency, casual, seasonal and other workers, but not those on fixed-term contracts
  • 1,810,000 low-paid self-employed (earning an hourly rate less than the Government Minimum Wage )

Those 3,620,000 workers accounted for 11 percent of the UK workforce prior to the pandemic; and are far more likely to have continued working throughout that are those in more secure employment. 

The establishment media narrative around the gig economy is that it is some kind of technological revolution in which some highly gifted, tech-savvy entrepreneurs are re-imagining the economy of the future.  John Plender at the Financial Times breaks ranks and sets out the exploitative basis of the gig-economy:

“Deliveroo, Greensill, Coinbase, Archegos. Apart from their shared proclivity to dominate the headlines, these high and low flying outfits are an exceptionally disparate bunch.

“Yet one thing they have in common is a dependence on regulatory arbitrage to attempt to extract value – successfully or otherwise – from pedestrian core businesses in which fancy technology plays a purely ancillary role.”

Rather than allowing ourselves to be blinded by the tech, we need to understand that all these companies are really doing is taking advantage of legal definitions of employment and self-employment to circumvent labour market regulation in order to lower their costs.  In the same way, the growing army of under-paid self-employed workers are seeking to get around the fact that a rising Minimum Wage has priced them out of the formal jobs market.  In a previous age, these workers would have formed a long queue outside the dole office.  But today, a punitive social security system creates perverse incentives for people to work for far less than the official minimum wage in the largely unfounded belief that any work is a gateway to prosperity.

In employment, then, the practical response to the rising energy cost of energy is that employers and workers seek to circumvent labour market regulation which was created in a bygone age when real growth was still possible.  And note that this is a very different reality to the wildly optimistic, hi-tech fantasy of the “Great Reset” in which we are meant to generate sufficient growth to automate almost everything.

Nor is the gig economy the place where decline stops.  While a large part of the gig economy exists in a legal twilight zone in which a great deal that goes on is unlawful – subject to civil law – very little crosses the boundary into criminality.  But as the energy cost of energy increases, criminal gangs also have a growing incentive to engage in crime as a means of circumventing the laws and regulations of a by-gone age.

It is no accident that growing demand for the abolition of slavery corresponded to the growth of coal-powered industrialisation.  Such an economy no longer needs raw labour power – whether waged or forced – because of the huge increase in productivity achieved by industrial technologies backed by an explosion of fossilised sunlight.  Wage labourers were still needed to mind the machines; but they were no longer the power source behind them.  This is seen most clearly in the nineteenth century division between the industrial northern states of the USA, where freed slaves were a useful addition to the growing industrial workforce, and the manual labour-based colonial economies of the southern states whose profit margins were built on the back of slave labourers.

Slavery – which is derived from the word “Slav,” reflecting the enslavement of Balkan peoples by the nations of the Middle East and North Africa – has been with us since the dawn of human civilisations.  In more prosperous ages, slavery became formalised into forms of serfdom which nominally afforded serfs some rights in exchange for their duty to provide labour services to state and church.  But it is only after industrialisation that slavery was all but eradicated.  And again, as the energy cost of energy increases, so the benefits to be gained from modern forms of slavery increase with each passing year. 

The Centre for Social Justice estimates that there are more than 100,000 victims of modern slavery in the UK today.  This is not (yet?) the open trading in slaves that underpinned the Atlantic economy of the sixteenth to the nineteenth centuries.  The practice of slavery is still illegal; although enforcement is stretched.  Nevertheless, the trafficking of human beings is increasing.  Nor is it limited to the so-called “sex industry,” where – in the UK – Eastern European girls are lured with the promise of modelling or acting jobs, only to end up in backstreet brothels.  According to the NGO Anti-Slavery:

“Modern slavery is present in every single area of the UK. You probably see people trapped in slavery on a regular basis. It might be someone working in a private home on your street, the man working in the car wash in town, or the cleaner who empties your office bin every night…

“The number of people identified as victims of modern slavery has been rising year on year, with over 10,000 people referred to authorities in 2019. The real number of people trapped in slavery is estimated to be much higher.”

The point is that as the energy cost of energy increases, so unscrupulous and desperate business owners operating at the margins, turn a blind eye to the kind of unregulated “recruitment agency” which takes the wages, but fails to pass them on to the enslaved workers.

Nor are labour market regulations the only ones to provide an opportunity for arbitrage.  The same bygone age in which the labour market regulations were implemented also saw a raft of health and safety and environmental regulation upon which a large part of the Chinese economy was built.  Britain may have abolished most of its coal burning in the last couple of decades; but China is still burning more than half the world’s coal to manufacture all of the cheap consumer goods that are exported to the supposedly greener western economies.  Nor has China particularly bothered by the environmental impacts of its two decades of spectacular economic growth.  Indeed, until recently not only was China prepared to accept the environmental fallout from its own industry, but it also imported a large volume of the supposed recyclable waste from the western economies.  Indeed, one reason why the cost of Chinese manufactures had been low was that the export of recyclable waste funded the return journeys of the ships back to China.

It turned out though, that a large part of the waste we sent to China was too contaminated or of the wrong sort of materials to be recycled.  And so it was either burned or dumped.  And as China’s domestic economy grew, its need for recyclable materials from the west declined; allowing the Chinese government to begin banning imports for recycling. 

One benefit of this in the UK has been the gradual growth of a domestic recycling industry.  But most modern waste is very expensive to recycle.  Many desired minerals are integrated into products – such as solar panels – which contain highly toxic pollutants that can cause considerable harm if they are simply dumped.  As a result, most recycling is still based around relatively cheap materials that are widely used, such as copper, aluminium, steel and HDPE plastic.  Expensive materials which are used in small quantities, such as rare earths and precious metals, are generally more expensive to recycle than they are worth.  The few specialist recycling companies that are permitted to recycle these expensive materials have to conform to strict environmental and health and safety licensing conditions.

Criminal gangs though, have no need to work to regulated industry standards; cutting their costs by illegal processing and dumping of materials irrespective of the damage to people and to the wider environment… which is particularly bad news for English churches.  As an article on the Farsight blog explains:

“Churches throughout history have used lead for their roofs, and lead has served these ancient buildings extremely well. Indeed, we would have lost many of the beautiful ancient buildings, were they not protected by lead. Because of this, lead is still the preferred material today.

“According to Roundhay Roofing, lead can last up to 500 years, and is 100% recyclable, making it one of the most environmentally friendly choices when considering a roof covering.

“Looking at the Scrap Metal Prices UK Guide, lead is worth £1,118 per tonne. Demand for secondary lead is soaring globally and once again has become a valuable target for thieves, but why?

“Lead has one of the highest metal recycling rates worldwide, higher than other metals like aluminium, cast iron and stainless steel.   Using recycled and secondary lead reduces CO2 emissions by 99% compared to traditional processes – that’s why in Europe 74% of lead comes from recycled stock.

“Most notably, 85% of lead is used for acid batteries, a global industry that is estimated to be worth USD 108.4 billion in 2019 and is expected to grow at a compound annual growth rate of 14.1% from 2020 to 2027. The lead-acid battery segment accounted for the largest share of 29.5% in 2019 on account of expanding applications in uninterrupted power supply (UPS), automotive, telecommunication, transport vehicles, and electric bikes.”

As tends to happen when the economy turns down, crime increasingly appears to be worth the risk.  And the crime here is not simply theft.  While lead might be an environmentally friendly choice for roofing, it is highly toxic if processed in the wrong – i.e., cheapest – way.  And you can be certain that these gangs will not be recycling the lead to comply with official recycling standards.

At the other end of the metal recycling market, something similar is going on; to the detriment of British motorists.  As Cahal Milmo at i-news reported last month:

“When police last week pulled over a grey van on the outskirts of a Hertfordshire village, their initial interest lay in the suspicion that the 35-year-old driver had neither a valid driving licence nor insurance. The routine stop only became more exotic when officers slid open the van’s door to find 21 crudely severed catalytic converters piled in the rear…

“It is a pandemic crime wave which has roots that stretch from Britain’s back-street illegal scrap metal dealers to skyrocketing prices for some of the world’s rarest metals, and causes that range from improving environmental standards in China to the lingering effects of the financial crisis on the platinum mines of South Africa.

“But above all it is a nefarious phenomenon, first highlighted by i-weekend in 2019, for which car and van owners are now paying an alarmingly regular and eye-watering price. Data released under FOI from 25 UK forces – out of a total of 45 – shows there were at least 21,000 incidents of catalytic converter theft in 2020, a 64 per cent increase in 12 months. The overall national figure is likely to be much higher…

“One metal in particular – rhodium – has rocketed in price from around $3,000 (£2,200) per ounce in January 2019 to a high last month of $29,200 (£21,000), meaning a tablespoon or so this chrome-like metal is worth more than most cars on the road and some 17 times more than the equivalent weight in gold.”

As the energy cost of energy falls, so the incentive to get around the regulation of a bygone age becomes sufficient for criminal gangs to risk long jail terms to drive the cost of recycling down.  And for the same reason, businesses on the margins are less inclined to ask questions about where, exactly, that lead, platinum, palladium or rhodium happened to come from.

The gig economy, the growth of modern slavery and the increase in acquisitive crimes like metal theft are indicators of how people will attempt to respond to the rising energy cost of energy at the margins.  The short-lived attempt by a handful of owners of 12 top-tier football teams to establish a new European Super League, in contrast, is an indication of what we can expect to see at the top.

In Brief, the owners of the 12 teams wanted to establish a new competition which would include the elite European teams.  The claim was that this would “save football” after the financial hit taken as a result of the pandemic.  The clause which drew the most ire from fans was that – unlike the current Champions League – the 12 founders would be guaranteed a place in the competition in perpetuity.  Since this would undermine the basis of European football in which – at least in theory – the very smallest of clubs can rise through the league tables and eventually earn a place in the Champions League.  It rarely happens in real life; but the cut and thrust of competition, the lure of promotion and the risk of relegation are what combine to make the sport so engrossing for its millions of fans.  The threat of a permanent 12 club cartel at the height of the game was sufficient to provoke a backlash from fans, players, rival teams, politicians and even the British royal family; shocking most of the 12 owners to pull out of the scheme within days.

But few in the establishment media were prepared to dig any deeper than the attempt to rig the competition.  For a deeper analysis, we had to turn to online media such as the Fan Banter website; which explained that what this story was really about was debt:

“In January this year, Deloitte’s annual Football Money League looked at the impact the pandemic has had on Clubs financially.  It warned that teams have missed out on over £1.4billion of revenue across the 2019/20 and 2020/21 seasons.

“This is primarily driven by matchday revenue, due to the absence of fans, but also rebates to broadcasters and some commercial impacts as well as the lost potential to continue their previous growth trajectory over the period…

“The founding clubs have been promised a share of a £3billion grant provided by the investment bank JP Morgan. No wonder these clubs joined within a heartbeat.

“Time to take a look at the current debt of all 12 European Super League clubs, and as mentioned, it makes for shocking reading…

  • Atletico; £804m
  • Barcelona; £1.030bn
  • Real Madrid; £651m
  • Arsenal; £405m
  • Chelsea; £224m
  • Liverpool; £386m
  • Man City; £202m
  • Man Utd; £771m
  • Tottenham; £1.177bn
  • Inter; £757m
  • Juventus; £752m
  • Milan; £247m

“Total debt £7.406 billion…”

In a video for Novara Media, Aaron Bastani goes into more depth about the processes by which these debts were generated; in what he refers to as the “Glazerfication of football.”  When the American Glazer brothers bought Manchester United, they effectively borrowed the money to take over the club against the assets of the club itself; in the same way as a mortgage holder uses the house they are buying to secure the debt.  But beyond this, the brothers then proceeded to use the club’s projected future earnings to borrow money which they transferred into their own pockets.  Nor were they alone in this.  Among some of Europe’s biggest teams – although note that Bayern Munich, Borussia Dortmund and Ajax were not included – this business practice had been widely adopted, leaving clubs heavily in debt and dependent upon rising income to avoid bankruptcy.  As Bastani notes, it may not be an accident that the infusion of JP Morgan lucre is a near match for the debt of the six clubs which operate in this way.

But some of the 12 teams have a different ownership model.  Chelsea and Manchester City are owned by Godzillionaires who treat owning a football team as a loss-making hobby.  And while their clubs have debts they are far from unmanageable.  Moreover, they are most likely to cover any losses anyway.  It is no accident, then, that Chelsea and Manchester City were the first to break ranks.  Meanwhile, those German and Dutch teams that weren’t even part of the 12 were excluded because they operate systems of supporter ownership and control, and simply could never have got the proposal past the supporter representatives on their respective boards.

And so the European Super League is on ice for now.  But the debt is not going anywhere, so don’t be at all surprised if something similar is proposed in the near future.  But in the meantime, you might be wondering where you might have come across this “Glazerfication” approach before.  The answer, for those who have not been paying attention, is that it is the model that drove British high street retailing into the ground in the course of the last decade.  For the Glazer brothers, substitute the now disgraced Sir Phillip Green.   And once you understand the model, you see it everywhere.  A US fracking industry, for example, which has spent billions of dollars to extract millions of dollars’ worth of oil was financed by people who also borrowed huge sums of money against projected income which turned out to be impossible to achieve.

The broader point is that none of this is an aberration; it is how capitalism operates.  So long as we have enjoyed access to growing volumes of low energy cost energy, we have been able to reasonably predict growing future income from economic activity across the board.  But now that the energy cost of energy has passed the point at which the non-energy sector of the economy has to shrink, and as people divert spending away from discretionary items – like football season tickets and television sports subscriptions – so the income streams are thrown into reverse.  Levels of debt which might have seemed reasonable in a bygone age are simply beyond repayment today.

Apparently, not much has changed since Adam Smith wrote 245 years ago that:

“People of the same trade seldom meet together, even for merriment and diversion, but that the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In football as in any other trade, monopoly and cartels are the natural response to a rising energy cost of energy by people whose lavish lifestyles are ultimately funded out of unsustainable debt.  Refinancing, too – like the interest-bearing grant from JP Morgan – is likely to be inevitable; since bad debt will backfire on the banks and create a crisis much bigger than 2008.  And so the likely immediate solution will be to lower interest rates and extend the return period on the debt in a game of “extend and pretend.”   The theoretical cost of the debt will rise – allowing the banks to claim the increase as an asset – but in practice, the monthly repayment will fall – allowing the businesses to pretend they are solvent.

In the immediate aftermath of the pandemic we will be able to turn a blind eye to all of these attempts to get around the net energy bind that we are now trapped in.  An infusion of state and central bank “stimulus funding” will most likely generate a brief boomlet before the inevitable stagflation arrives.  But the energy cost of energy is going to keep on rising unless someone can very rapidly discover some yet-to-be-discovered higher-density energy source and deploy it at scale.  In the meantime, the amount of energy that has to be devoted to the energy sector of the economy will continue to rise – even if it has to be subsidised by states, businesses and households.  And that draws us ever closer to that net energy cliff beyond which industrial civilisation cannot function:

For the moment, we are most likely somewhere near the 15:1 point – where we have to devote one unit of energy for energy against 15 units of surplus energy for the non-energy sectors of the economy.  This means that we have passed the point at which we can “save” our way of life; but it is not too late to enter into a managed period of de-growth in which we try to save at least some of the essentials that make life bearable.  But left unmanaged, the various versions of arbitrage, corruption and criminality can only increase and plunge us into a post-industrial dystopia…

As you made it to the end…

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