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Running out of time

Among the biggest human failings is our inability to process time.  Psychologists, for example, have demonstrated time and again that most of us are incapable of deferring gratification.  But our hear-now orientation also leaves us vulnerable to negative events, even when we are forewarned.  One reason, for example, why panic buying is widespread at the start of a crisis is that most people do not build personal buffer stores of food and other essentials because they base their future on the experience of the recent past, when supermarket shelves were mostly full.  Add to this a kind of perceptual blind spot for anything which might contradict our comfortable view of the future.  As individuals, we are all too often like the fat man who says he will go on a diet… tomorrow, or the smoker who promises to give up… soon.  Governments too, prefer to take the line of least resistance rather than take early action to head off future crises… kicking so many cans down the road in the hope that a future government will figure out what to do.

No state has practiced the art of can kicking to quite the extent that the UK has managed over the last half-century.  Although not quite on the scale of the USA – which can print dollars at will – successive British governments have enjoyed the privilege of being able to borrow against an internationally tradable currency.  This has allowed governments to spend without having to worry too much about how they are going to pay… which is one reason why, despite decades of promises to “roll back the state,” the UK state and the currency it spends is bigger today than ever before.  In the past, British governments were able to pay for this extravagance from the returns on North Sea oil and gas.  But that option came to an end in 2005, when the UK became a net importer of oil and gas.  They have also regularly turned to the money launderers and Ponzi fraudsters in the City of London to provide them with cheap loans – although the quid pro quo has been that successive governments maintain an over-valued pound… most often by selling off public assets like railways and power stations.

For the moment, investors are prepared to loan currency to the UK government.  This is done by purchasing British Gilts – the equivalent of US treasury bonds – which pay interest for the duration of the loan.  That interest is paid from the taxes which the government is able to levy on British households and companies.  Although in an emergency, as we saw with the partially manufactured pension crisis last October, it is possible for the Bank of England to buy back or “monetise” the government’s debt.

In a truly wealthy economy – one which creates real wealth rather than mere monetary claims on someone else’s wealth – the twin processes of borrowing and creating currency can go on more or less indefinitely.  But the UK is not really a wealthy economy… even if a handful of British individuals are richer than most of us could dream of.  We have, for example, very few public assets left to be sold off to raise the foreign currency – mostly US dollar – reserves that we need.  Much of our physical export goods are luxury/discretionary items like Scotch whisky, whose sales are highly vulnerable to global economic downturns… such as the global downturn that even the paid optimists now agree is going to happen in 2023.  And the UK is expected to be particularly badly hit.  As Elliot Smith at CNBC reported earlier this week:

“In its 2023 macro-outlook, Goldman Sachs forecast a 1.2% contraction in U.K. real GDP over the course of this year, well below all other G-10 (Group of Ten) major economies…

“The figure places Britain only fractionally ahead of Russia, which the bank projects will see a 1.3% contraction in 2023 as it continues to wage war in Ukraine and weather punitive economic sanctions from Western powers.”

Even this may be optimistic, as the early squalls of a gathering economic storm appeared either side of Christmas.  Just prior to the holidays, with Britain in the grip of industrial unrest, the Office for National Statistics revised down its GDP figure for the third quarter of 2022 from -0.2% to -0.3%, suggesting that we were already in recession – two quarters of negative growth – even before 2023 arrived.  Nor do the early economic reports for 2023 provide much comfort.  New car sales were down to a low last seen in 1992 – something the industry blames on a shortage of semiconductors rather than falling demand.  However, the more worrying figure is a 20.6 percent decline in sales of new light commercial vehicles – the classic white vans which are a bellwether for the strength or weakness of an economy.

The latest High Street data also points to a big downturn already unfolding in the last half of 2022.  As Lucy Hooker at the BBC reported earlier this week:

“There was a sharp rise in the number of shops closing on the UK’s High Streets, shopping parades, and out-of-town shopping parks in 2022… More than 17,000 sites shut up shop – the highest number for five years.  Total closures were nearly 50% higher than in 2021.

“The number of retail jobs lost, in stores and online, also jumped as businesses closed or cut costs.  More than 150,000 posts were closed, up 43% compared to the previous year.”

Among the online stores announcing lay-offs is global behemoth Amazon, which has announced 18,000 redundancies.  However, this may be more to do with over-optimistic hiring during and immediately after the pandemic, when the switch to online sales may have looked like the beginning of a boom.

A key driver of these early economic shocks has been the big spike in CPI inflation – mostly a consequence of disrupted supply chains and, more recently, counter-productive sanctions on Russia – which forced businesses and households to dramatically curb their discretionary spending.  And this is the main reason why the Bank of England has followed the US Federal Reserve in implementing the fastest rise in interest rates in modern history… a secondary reason being the need to maintain the value of the pound on international markets.

Here’s the problem though.  It isn’t just businesses and households that are hit by interest rate rises.  Government must also pay more interest on its borrowing, which includes the large amount of debt run up to pay for lockdowns – £2,436.7 billion at the end of Quarter 2 (Apr to June) 2022, equivalent to 101.9% of gross domestic product (GDP):

And as each portion of the debt – issued when interest rates were close to zero – comes up for renewal, it will have to be priced at the new, higher, rate of interest.  Another way of looking at this is that a growing portion of government spending is rendered entirely unproductive – simply servicing the cost of earlier borrowing.  Moreover, any new borrowing, even productive borrowing for building new infrastructure or for helping to boost domestic business must also be bought at this higher cost.

The knee-jerk response to this is the orthodox – i.e., wrong – policy of balancing the government’s books.  Which is precisely what the rhyming slang chancellor has promised to do… although deferring unpopular spending cuts until after the next election.  The problem is that by raising taxes and/or cutting public spending during a recession, government simply removes even more currency from the system, creating more business failures, more unemployment, and deepening the recession.  The irony being that the more the government pays down its debt, the higher the debt to GDP ratio rises.

There is also a big impact on taxes.  As I have written on several occasions, without the receipts from North Sea oil and gas, and with few public assets left to sell, an ever greater part of the cost of servicing government debt must fall on the shoulders of Britain’s domestic businesses – the multinationals seldom paying much tax to the UK – and households, leaving the UK government with a shortfall between tax income and public spending.

Much of the reason why Dagenham Liz and KamiKwasi were quickly removed from office last October was that their attempt to implement an ungrounded tax-slashing economic policy raised the very real danger that the international financial institutions which usually buy British Gilts would consider the UK too great a risk – that is, that the UK would be unable to raise the tax income needed to repay the debt.  At the very least, this raised the possibility that markets would demand a much higher interest rate.  And at worse, it might have resulted in there being no buyers at all – leaving the Bank of England with no choice but to buy back the debt… devaluing the pound in the process.

This might not be too big a problem for a balanced economy.  But the UK economy is anything but.  Because it is far too reliant upon imports – and far too dependent upon the financial alchemy of the City of London to pay for it – losing control of interest rates and/or being forced to devalue the currency, despite the economy already being in recession, risks adding another massive dose of supply-side price increases to our already heavy economic woes.

In recent days, both Sunak and Stammerer have floated those two favourite pseudo-solutions to Britain’s woes – growth and productivity.  This is no more than ventriloquist’s dummies opening their mouths and having words come out, since neither man, nor the parties they lead, have the first idea what growth and productivity actually are.  Obviously, if it was possible to double GDP – growth – then debt as a percentage of GDP would fall without the need to raise taxes or cut public spending.  And if this could be achieved without increasing the working population or the various inputs to production – productivity – so much the better.

Growth and productivity are not, however, the result of the sprinkling of political pixie dust.  Both can only be generated by increasing exergy – the productive energy available to the economy.  Growth being driven by simply increasing the volume of energy, of which exergy is a proportion, while productivity requires an increase in the proportion of exergy to waste heat derived from that energy.  So, here’s the show-stopper: Britain is out of power.  The North Sea – or at least the British sectors – is largely depleted.  Yes, there are a few small, hard to reach and expensive gas and oil deposits which may still be tapped.  But with each passing year, the UK becomes more dependent upon oil, gas, and coal imports.  Nuclear was probably a good idea, but the 2010 Tory government chose not to invest, despite knowing that the existing nuclear fleet would be retired during the 2020s.  Coal was phased out to the point that there are only three coal power stations left.  Solar is a non-starter this far north in a part of the world which is more often covered in clouds.  Wind turned out to be far less productive than was assumed, and in any case is too intermittent to provide the economy with the firm energy it requires.  Gas generation was relatively cheap and flexible.  And so long as the UK government didn’t do anything insane like, say, having a hissy fit and disconnecting itself from the last supplier of cheap gas on the planet, then it could have provided the backbone of Britain’s energy for the next decade.  Imported electricity – which is at its maximum – depends upon our European neighbours having a surplus of electricity… which is ever less likely since their governments threw the same hissy fit as ours.  The bottom line being that not only does the British economy not have the energy needed to make productivity gains or to grow more broadly, but it is also becoming so energy-deprived that a prolonged period of economic shrinkage is already occurring.

Britain, it appears, is like the character in the old story about a traveller in Ireland stopping to ask one of the locals how to get to Dublin, only to be told, “ah well, you don’t want to start from here…”  The last, tenuous thread keeping Britain in the economic game is a City of London which is rapidly running out of confidence tricks to keep the pound at a value far greater than it has been really worth for decades.  And while the Modern Monetary Theorists may object that if all else fails, the Bank of England can simply print new pounds directly, the UK’s dependence upon imports means that this course of action would drive the price of everything from wheat to electricity into the stratosphere.  We might – and for the longer-term, I do – argue that a devaluation of the pound is exactly what we need.  This would force us to rebuild some of the domestic industry which we so casually allowed to move offshore.  It would also allow us to rebuild our domestic agriculture – although it is unlikely that we could become entirely self-sufficient.  But to be forced – by a run on the pound in international financial markets – to do this in a matter of months would amount to a crisis on a scale not experienced in living memory… and would leave the UK reliant on the kindness of strangers to have even a chance of recovering.  Our best option would have been to begin the process 25 years ago… but as I say, one of our biggest failings is that we don’t process time.

As you made it to the end…

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