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Home / In Brief / In Brief: Growth of a sort, A question of cascades, Energy and government, That’s the point, Full circle

In Brief: Growth of a sort, A question of cascades, Energy and government, That’s the point, Full circle

Growth of a sort

Unsurprisingly, incoming “worst prime minister ever,” Liz Truss has announced that she will prioritise “growth” for the remainder of the parliament.  Unsurprisingly, that is, because it is what every incoming prime minister says they are going to prioritise and, increasingly, what they fail to achieve.  Rather like the old Soviet tractor factory reports, governments have learned to fiddle the figures to at least present some anaemic GDP growth, even as the majority of us have seen our living standards fall for the best part of two decades.

The alternative is unpalatable to politicians.  If growth cannot be achieved, stagnation is the next best thing.  But stagnation means that none of the outstanding public and private debt which, when we include all unfunded liabilities – such as public sector (not the state) pensions – could be as high as £20 trillion (of which, government debt is but a tenth) can never be repaid.  And once we admit that, then we are in the mother of all financial predicaments because we must either inflate the debt away or default.

This adds to our woes because what little growth we have experienced over the last couple of decades is entirely due to inflating an unsustainable debt bubble.  As Tim Morgan explains:

“Even before the onset of the pandemic in 2020, Britain had spent twenty years adding £4 of new debt for each £1 of reported ‘growth’ in GDP. The mathematics get even worse if we add broader financial liabilities, and unfunded pension commitments, to the equation. Where Britain is concerned, these broader liabilities are enormous.

“Even this 4:1 ratio understates the grim reality, because the injection of liquidity creates transactional activity – measured as GDP – rather than adding value. SEEDS calculations indicate that, within recorded ‘growth’ of £715bn (at constant 2021 values) between 1999 and 2019, only 30% (£215bn) was organic expansion, with the remaining 70% (£500bn) the cosmetic effect of borrowing at an annual average of 7.2% of GDP through this period.”

Insofar as there is still some scope for the UK government to continue borrowing – although current account and growing international dollar shortages are rapidly closing this window – the new prime minister may be able to add another £500bn or so to deal with “Putin’s energy crisis.”  But while this may generate more activity, it will not generate the real economy value growth required. And as a result, borrowing now just means even worse problems a few years from now.

The government/establishment media capturing of the word “crisis” is instructive here too.  Versailles-on-Thames seems to believe that our various issues – broken supply chains, commodity shortages, fossil fuel depletion and spiralling energy costs, and the ensuing rise in prices across the board – are temporary in nature and will somehow go away next year or the year after.  This though, is wishful thinking on a gargantuan scale.  Even if, for example, the Russian invasion of Ukraine comes to an end, there is no reason to believe that the Russians will turn the gas taps back on.  And why should they?  Collectively, the west – including your racist social media friend – has made clear that it despises the Russian people as much as it does the Putin regime.  Moreover, older Russians remember how the west treated Russia following the collapse of the Soviet Union, when they went through a crisis far worse than anything we have experienced so far.  Having developed the framework of a new BRICS trading system, Russia, along with the BRICS states, has little incentive to export to the west on anything like the scale that existed prior to February 2022.

That leaves us with the prospect of somehow creating domestic energy security.  Laughably, many greens and leftists are still pushing non-renewable renewable energy-harvesting technologies (NRREHTs) as the solution to a problem that they are in large part the cause of because gas is currently the only option to iron out the intermittency.  Nuclear seems to be a preferred low-carbon baseload option for the political class – and an increasing number of environmental activists – but we would have to put up with more than a decade of energy shortages while we wait for new nuclear to be built were we to go down that route exclusively. 

In the hands of the Tories, a big push for fracking is likely to emerge as the easiest and quickest means of replacing Russian gas.  But even this is far from the free lunch that many of its proponents claim.  The reason why fracking failed to take off five years ago was that it cost too much to bring in a profit.  This may have changed now that the price has risen eightfold.  But that’s the point… if fracking is supposed to solve our energy woes, it has to deliver cheap energy, not energy which a third of UK households and businesses cannot afford to use.

The reason why this leaves us in a predicament rather than a crisis – something that few politicians or activists understand – is that the economy begins with energy.  That is, just as you and I cannot do anything if we go without food for more than a few days, all of the machinery and technology that we depend upon to get everything done is no more than an art installation without the electricity and fossil fuels that power it.  And even if some energy is available, if it is too expensive then it becomes too unprofitable to use anyway.

The incoming UK prime minister faces both energy problems at once.  As a result of the sanctions we put on Russia, we have an absolute shortage of gas.  That translates immediately into shortages for heavy industries like aluminium smelting, which rely on gas to create thermal power.  It also translates into electricity shortages across the economy on days when the wind isn’t blowing sufficiently – roughly 219 out of every 365 days.  Less obviously though, we also face the problem of rising energy costs, which mean that more of the energy available to us has to be directed at producing energy, so that less is available to power the wider economy.

In addition to the very real hardship that this spells for Britain’s businesses and households, it rules out the economic growth that the new prime minister hopes to achieve ahead of the next election.  Historically, growth has been achieved in three ways.  First– in two phases in the industrial age – adding more energy-dense fuel sources to the mix.  Second, and easiest, by adding more cheap energy to the mix.  And third, by using technologies to become more energy-efficient, aka “productivity gains.”  Herein is the core of our predicament.  We have no new, higher-density energy source to add to the mix.  We have also spent decades burning through all of the cheap fuel deposits, leaving us with expensive deposits – such as the shale deposits of northern England.  And in the neoliberal period, we squeezed the last of the productivity gains out of the system.

What this means is that not only can we not have growth, but even the debt-based stagnation of the decade between the Crash and the Covid may begin to look like a period of glorious prosperity in contrast to the economic shrinkage that is inevitable in the absence of cheap and abundant energy.  Impoverishment – at least the material kind – is the only thing we can expect to grow from here…

A question of cascades

Among the mostly unforeseen problems facing us today is that our critical infrastructure – including energy – is designed to operate on a “firm” basis.  Sure, in an emergency, the power can be cut.  And one of the obvious consequences to anyone who prefers a desktop PC to a laptop is that computers break when the power goes off without warning.  Less obviously, the working life of grid infrastructure itself is shortened if there are too many power cuts.  And then there is that vast network of communications infrastructure which also depends upon a steady supply of power.

On any day at an average datacentre, a truckload of hardware is required to replace all of the old hardware which has burned out.  That’s without the kind of power outages that are expected across Europe – including the UK – not just this winter, but for years ahead.

And then there are the lockdown-induced supply chain disruptions that mean that even now, key computer components are in short supply.  So, the very last thing we want to be doing is putting additional strain on the components we are currently using just in case we cannot get replacements.

Replacements may turn out to be a lot harder to find once the other three-quarters of the world’s countries switch to the emerging BRICS trading system.  The financial services – aka tax evasion – that the UK has traditionally used to balance its export-import current account will be about as useful as a chocolate teapot in a world in which just 25 percent of countries still trade in western currencies.  Moreover, without the energy needed to power business and industry, it is far from clear what we are going to export in order to pay our way in the world.

What this suggests to me is that things are going to begin breaking down.  And it is unlikely that we will be able to quickly fix anything which depends upon imported components or commodities.  Worse still, as we are already seeing with our water and energy sectors, there is zero strategic thinking in the UK.  Instead, the likely diminished supply of parts and components will simply go to whichever corporation can pay the most for them rather than which of our critical infrastructure needs them most.  We already witnessed this process at the beginning of the pandemic, when godzillionaires were buying up ventilators and PPE even as hospital patients gasped for breath and frontline doctors and nurses were exposed to lethal viral loads… don’t expect energy parts and components to be any different.

Problems arise when breakdowns become more prolonged and adjacent infrastructure is impacted.  For example, when the electricity goes off it is not just the lights which go out.  A large part of the water system, which depends upon electric pumps, is also taken out.  The fuel pumps at filling stations are also electric, so drivers – including of commercial vehicles – have to make do with the fuel in the tank until the power is restored.  Without power, the banking system cannot operate.  Even the smallest shops rely on electric tills these days, and there is no back-up cash system.  Indeed, since less than two percent of UK transactions are in cash, power outages effectively put an end to economic activity for the duration.  Remember too, that each time the power is cut unexpectedly, there is a greater chance that the hardware and/or software of neighbouring critical infrastructure will also break.  And with our just-in-time supply chains still on life support after two years of lockdown, repair and replacement may turn out to be more difficult than is currently planned for.

The nightmare scenario is the kind of cascading collapse that David Korowicz warned of in the aftermath of the 2008 banking crash.  This happens when key nodes within the system don’t simply fail, but cannot be restored, causing a cascading failure across the network.  It is a version – applied to economic complexity – of the old idea that we are just nine meals – or power cuts – away from anarchy.  But what happens when the effects become widespread, irreversible, devastating?…

Energy and government

One of the many drawbacks on engineering an energy crisis is that government may itself be unable to function.  This, I believe is a major blind spot for those who imagine themselves to be in control.  Nevertheless, modern government depends upon not only the surplus energy derived from fossil fuels, but also from fossil fuel technologies.

Consider, for example, that the switch in power from local to central government and from the old nobility to the elected commons – the peak roughly corresponding to the period of Liberal government prior to the First World War – was the result of economic, social and political forces unleashed by steam technologies such as deep mines, large factories, railways and steamships which, among other things, cut travel times – and thus communications – from days down to hours.

Prior to the industrial age, county-level government was about as large as could be managed… national government being concerned primarily with military and imperial issues.  Indeed, the entire national government during the reign of Charles II was roughly the size of a small district council today.

In the USA, it was arguably only with the advent of oil technologies that a federal government could vie for power over the individual states.  While the famous Pony Express had connected the east and west coasts, and while railways had made for easier travel between them, it was only with the development of air travel that congressmen and senators along with their bureaucratic entourage could travel quickly back and forth to Washington.

Today, the Internet and its network of fibre optic cables and datacentres – likely the final technologies of the fossil fuel age – allow national states to operate in a profligate manner, with governments assuming to themselves activities which would once have been the preserve of private households and private businesses.  And alongside this are the many functions which could likely not be done at all without anyone missing them.

The question, as we face a future of insufficient surplus energy to power the economy, and with intermittent periods of energy outages, is how far modern government can function without having to devolve responsibilities back to the local level or to forego them entirely.

That’s the point

No doubt our new “worst prime minister ever” and her advisors will be spending the weekend honing the various emergency policies that she is going to have to announce next week.  And among the people they will be listening to will most likely be Baroness Ruby McGregor-Smith – a Tory peer and head of the British Chambers of Commerce, which represents Britain’s small and medium businesses.  The Baroness took to the airwaves last week to call for a massive support package for Britain’s increasingly hard-pressed business sector in the face of untenable increases in energy prices.  But the kind of support required cuts across Truss’s well-trailed desire for tax cutting and for balancing the government’s books.  More importantly though, it is at odds with the stated efforts of the Bank of England to engineer a deep enough recession to bring demand for energy down sufficiently to lower the price on international markets.  That’s the point, by adding the fuel of higher interest rates to the fire of international price increases, the Bank of England technocrats are deliberately causing the very business failures that Baroness Ruby McGregor-Smith is calling on government to prevent.

It is not clear whether Bank of England officials actually believe what they are saying, given that they also acknowledge that they can do nothing about international commodity price rises.  But it is more likely that interest rate rises are intended to bolster the value of the Pound against the rising US dollar.  Not doing so would mean UK dollar-denominated debt repayments – state and private – rising, balance of payments deficits reaching crisis levels, and at worst could involve a run on the pound itself.

The increasingly insolvent small and medium enterprises that Baroness McGregor-Smith represents are collateral damage either way.  Not only their costs – including debt servicing – rising at an alarming rate, but their former customers are themselves having to focus spending on essentials like food, fuel and energy.

There is a wave of bankruptcies just around the corner.  And there is little the new cabinet will be able to do to provide relief given the high stakes involve in risking a big fall in the value of the pound on international markets.  Moreover, if only for electoral popularity reasons, government will be under pressure to bail out households ahead of businesses.  Although, of course, the more businesses fail, the higher unemployment and under employment rises, the more people government is pressured to support, and the greater the squeeze on the pound.

Full circle

Public houses in one form or another have been around since Roman times.  Originally roadside rest-stops, they gradually became a focal point of village life, providing a warm space during winter evenings, where people could refresh themselves before taking to their beds.  Perhaps inevitably, they have a long history of being a source of revenue for the state too – tax collectors from the Middle Ages have reaped the duties on alcohol.

In the energy-rich decades after the Second World War, pubs lost their role as a warm space.  And gradually their position at the centre of village – and suburb – life, began to diminish.  In the neoliberal era, as with fuel, the rates of duty and tax on the sale of alcohol left publicans in the role of tax collectors, with many opting to compete with restaurants and nightclubs by selling food and offering entertainment in order to remain profitable.

In the neoliberal era, many failed.  Around 9,000 closed between 1980 and 2000, as consumer behaviour responded to supermarkets selling cheap alcohol, and as subscription television took the place of cinema.  The trend accelerated after the 2008 crash as most people’s real incomes fell.  More than a quarter of the UK’s pubs closed between 2000 and 2019, with the biggest falls in the years after the crash.  Data for the last two years has yet to appear, but few expect anything more than bad news.  The economic vandalism of lockdowns didn’t just push Britain’s remaining pubs to the edge of bankruptcy but has left the entire hospitality sector just one bad Saturday away from insolvency.  According to Statistica, in 2020 alone, 5,930 bars, pubs and restaurants closed with just 3,955 new openings.  Nobody expects 2021 data to be any better, and in 2022, the new economic landscape of high energy prices and collapsing discretionary spending looks set to crush the entire hospitality sector.

With energy contracts up for renewal this month, and with no price cap for business customers, publicans are struggling to access energy at all.  And those who are offered deals are being asked to put down £10,000 deposits because energy companies doubt that they will be able to survive the winter.  In this, the energy companies are likely correct.  There are limits to the energy saving measures a publican can make without driving customers away.  And with a quarter of the population deciding to go without heating at all this winter, few are going to be doing anything so frivolous as going to pubs and restaurants… or even getting a bag of fish and chips to take home.

It is hard to miss the irony that, at a time when campaigners and politicians are talking about a need for public “warm spaces” this winter, the public houses which used to be Britain’s warm spaces may finally disappear for good.

As you made it to the end…

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