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When the bill falls due

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Back at the beginning of the pandemic, anyone who cautioned against a widespread lockdown was accused of putting corporate profits ahead of human lives.  And in the UK at least, public support for lockdowns as a means of safeguarding the vulnerable has remained solid to this day.  Nevertheless, and despite the protestations of lockdown enthusiasts, there was always going to be a price to pay.  Unfortunately, that price was widely believed to be entirely financial and resolvable using the state’s ability to print billions of pounds out of thin air.

Those who understand the economy as an energetic system upon which a financial superstructure has been erected, however, also understood that the price would have to be paid as a decline in complexity.  That is, with less energy to go around, and with the energy cost of energy rising remorselessly, lockdowns will be paid via shrinking consumption, declining real incomes, falling profits and disrupted supply chains.  This is because our globalised industrial economy is like a soufflé – it either grows or it slumps; there is no steady state.  And like all complex systems, it is energy not money (which is merely a claim on energy) which has to grow to prevent the economy from crashing.

We have suffered from another issue in the course of the last 15 months though.  Our collective inability to process time meant that lockdowns had immediacy whereas the eventual cost was discounted because it lay in the future.  Few could conceive of the economy being any different after the pandemic than it had been before.  Indeed, the majority of those who imagined some difference latched onto vacuous slogans about “great resets” and “building back better.”  Only a handful of us were warning from the outset that the post-pandemic economy was going to be poorer and harder for most people.

In an attempt to avoid paying the bill, of course, we have witnessed governments on both sides of the Atlantic printing and spending currency like so many drunken sailors.  And this may, in the short-term, generate an uptick in spending and prices.  Nevertheless, the bigger threat is from supply chains which may take years rather than months to stabilise.  As Brendan Murray, Enda Curran, and Kim Chipman at Bloomberg explain:

“Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up… Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it.

“The difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight… For anyone who thinks it’s all going to end in a few months, consider the somewhat obscure U.S. economic indicator known as the Logistics Managers’ Index. The gauge is built on a monthly survey of corporate supply chiefs that asks where they see inventory, transportation and warehouse expenses — the three key components of managing supply chains — now and in 12 months. The current index is at its second-highest level in records dating back to 2016, and the future gauge shows little respite a year from now. The index has proven unnervingly accurate in the past, matching up with actual costs about 90% of the time.”

The one – somewhat perverse – saving grace is that cheerleading reports of an imminent boom in the establishment media are undoubtedly wrong.  The majority of the newly created currency went to people who already had plenty, while close to half of the population have struggled over the past year.  Even Kevin Peachey at the BBC is forced to concede that:

“Consumers are likely to play safe as the UK emerges from lockdown rather spend like the ‘roaring 1920s’, a survey suggests… the survey of more than 3,000 people found 74% of those asked wanted to save more than they had pre-pandemic. The risk and uncertainty highlighted by Covid meant many were keen to build a financial cushion.”

The uncertainty comes from both the threat of new lockdowns in response to new strains of the virus; but also from realistic concerns about job security when the various state support schemes come to an end later in the year.  In the UK, the largest employment sector – retail and hospitality – has already been eviscerated by inadequate support and a massive drop in income.  In addition to the thousands of shopfronts which lay empty even after restrictions were lifted, the BBC now reports that ten percent of the UK’s cafes and restaurants have also gone bust.

At the same time – as predicted here – the big upturn in spending in April when people were allowed to shop again, turned out to be temporary.  Once folk had had chance to get a haircut, buy some summer clothes and have a drink outside the pub, they quickly returned to their homes to wait and see whether some new strain of the virus would materialise.

What this means is that the cost-push price rises brought about by shortages is unlikely – at least for now – to be exacerbated by as great an increase in demand as some mainstream commentators expect.  Monetary inflation is coming, but not just yet.  By far the bigger threat now is a collapse in profitability as businesses prove unable to pass higher supply chain costs onto a consumer base that refuses or cannot afford to pay.

As you made it to the end…

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