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More death spirals begin to spin

An economic death spiral occurs when a system loses critical mass.  For example, the UK’s energy death spiral – which is reaching its crisis phase – is the result of rising energy costs creating an involuntary loss of demand across the system.  In part, businesses and households engage in energy-saving and conservation methods to lower their demand.  And in part, they self-disconnect – in the case of businesses, they go bust, while household simply shiver in the dark.  The reason this becomes a death spiral is because the system was designed around cheap energy and mass consumption.  But as the cost of energy rises the mass consumption is lost.  And so, the rising cost must fall on a shrinking consumer base… which, in turn, causes more businesses and households to disconnect.  In the UK, this reached the point last year, that the state had to step in to bail out the energy companies by paying a portion of household energy bills – although with the cost running to billions of pounds, and with the UK economy outside London already in a recession, this is unsustainable.  And so, the crisis point is reached.  Without state aid, the energy industry is no longer profitable, companies will go bust, most likely followed by a period of mergers and acquisitions until it becomes clear that the entire economy will have to readjust to using far less energy and at a far higher cost.

Energy is far from alone in facing a death spiral.  Pretty much all of our critical infrastructure – which is another term for our life support systems – has the same dependence upon mass consumption.  Take the road network.  Arguably – and a lot of Just Stop Oil types are very vociferous in making this argument – almost all road use is frivolous.  Yes, lots of people claim that they “need” to drive to get to their work.  But as we learned over two years of lockdowns, a large number could just as easily work from home.  And most of those who can’t, could walk, cycle or use public transport.

The bit that the net zero zealots ignore though, is that whether we like it or not, our life support depends upon a fleet of heavy trucks – for which there is no viable alternative to diesel-power – moving essentials like food, machine parts, medical supplies, etc., without which not only would our economy come to a halt, but millions would die in fairly short order.  When all is said and done then, we will continue to need roads well beyond the various state target dates for phasing them out.

Unlike the energy death spiral, where it is the breakdown of a market mechanism – falling consumer demand – which accelerates the decline, the road death spiral will play out differently because, for the most part, Britain funds its roads via general taxation.  Indeed, politicians tend to promote new roads as a Keynesian means of stimulating growth during recessions – a means of putting millions of new pounds into the hands of previously unemployed workers.  But again, the British state is now in so precarious a situation that such largesse is no longer affordable.  Politicians may claim that they are cutting road building for environmental reasons, but decisions are really being made on cost grounds.

Nevertheless, even if no new roads are built, the existing network has to be maintained if those essential supplies are to continue getting through… and that means that someone has to pay for it.  One of the big problems facing the Department for Transport is that the decision to phase out internal combustion engine vehicles by 2030 also means foregoing the £27bn-a-year taken from duty on fuel.  This has led to broad acceptance that some form of road pricing will be inevitable to maintain the road network.  The reason that road pricing is currently the favoured solution is precisely because as ever fewer of us are able to drive – whether through state regulation or the increasing cost of vehicles, fuel and maintenance – so political resistance to using taxes to fund roads will inevitably increase.  The obvious problem though, is that road pricing must result in a similar loss of critical mass to that seen with energy.  And there is simply no way that we could load the entire cost of road maintenance onto the operators of the essential trucks without making the cost of essentials so expensive that, again, millions of people would be dead in relatively short order.

When it comes to feeding us, we find yet another form of death spiral.  The supermarket model which developed in the UK in the early 1980s was itself based on a big rise in car ownership, which allowed the development of large stores adjacent to the major roads on the outskirts of towns and cities, where the cost of commercial property was far lower than in the city centres.  Operating on a large-scale, supermarkets offered convenience.  Where previously, household shopping – which was mostly done by women – was an odious chore requiring walking from shop to shop, while carrying heavy bags, and then lugging these home on public transport, the supermarkets allowed the entire process to be done in one go, with no need to carry heavy bags.

Crucially, the supermarkets were able to develop a critical mass, as shoppers abandoned the High Streets and markets in favour of the new one-stop-shop.  And with mass use, supermarket purchasing managers could, in effect, pool our collective demand in order to bid down prices – either forcing farmers to cut their prices, or simply purchasing items from parts of the world with lower wages and fewer regulations.  At the same time, competition between the supermarkets themselves, served to keep them honest – they couldn’t risk raising prices too high in case they lost critical mass to their competitors.

In many ways then, the supermarkets were something of a metaphor for the debt-based boom of the 1990s and early 2000s.  Although few of us realised it, the supermarkets provided us with an abundance of food at prices far lower than would otherwise have been possible.  And so long as the supermarkets continued to have access to cheap energy, relatively low wages, and functioning global supply chains – i.e., if only the world was infinite – then this might have continued indefinitely.  But in 2023, Britons are waking up to steeply rising food prices because all of the fundamentals which made supermarkets work are no longer in place.  Energy isn’t cheap anymore, meaning that supermarket operating costs are rising.  And for the moment, wages are still rising – albeit lagging behind inflation.  That inflation, of course, is largely the result of increasing food prices which are due both to fertiliser shortages and/or fertiliser prices leading to lower yields, and to increasingly disrupted supply chains.

All of these issues have fed into the current UK vegetable shortage.  And while the BBC has pointed to bad weather in Spain and flooding in Morocco as the main driver of shortages, Matt Mathers at the Independent points to the uncomfortable truth that:

“Lea Valley, which stretches from Hertfordshire and Essex to north London, produced around 75 per cent of Britain’s cucumbers and peppers in 2020.  The area – dubbed the ‘cucumber capital of Britain’ – could see production halved this year compared with 2020 figures…

“Lee Stiles, Lea Valley Growers Association secretary,  said in November that there would be British produce shortages next year ‘across the board’ due to increasing costs.  [While a] report from Promar International found that growers’ production costs increased by as much as 27 per cent in last year – with tomatoes, broccoli, apples and root vegetables most affected.

“Energy was one of the main drivers of increased costs, up 165 per cent, followed by fertiliser, up 40 per cent, and workforce costs, up 13 per cent.”

The problem facing supermarkets – which have already done most of the things which keep prices low – is that they cannot raise prices without losing critical mass.  This can happen internally, as customers who previously bought premium range items switch to the value range, or it can result in consumers abandoning supermarkets in favour of discount retailers.  And many more of us are no longer shopping for the things we like, but limiting ourselves only to the things we really need.  Either way, the hidden threat is that one or more of the big four – Asda, Morrisons, Sainsbury’s and Tesco – will go bust.  If that happens, the downward pressure on prices – which, even today, is holding prices lower than they would otherwise be – would be released, throwing the food industry as a whole into a death spiral, as rising prices fuel falling demand until a large part of the population is surviving on bare essentials.

The broader economic death spiral is that as a critical mass of the population is forced back to spending on essentials only, then the – currently much bigger – discretionary sectors of the economy will implode – most likely very rapidly, setting off a chain reaction as the ensuing job losses result in a massive decline in aggregate incomes, and even more critical mass is lost.

The sad reality for those of us living in western economies, is that our entire lifestyle has been underwritten by artificially low prices generated through mass consumption.  Had we been living on an infinite planet, this could have continued indefinitely.  But as we run up against resource limits, and especially as we face declining surplus energy, there is no way of preventing death spirals spinning up across the economy.  And while some degree of income redistribution and public or non-profit ownership of some critical infrastructure might delay the inevitable, in the absence of yet-to-be-discovered, cheap and high-density energy and the resources this would unlock, standards of living that we might have associated with extreme poverty a decade ago are likely to be the source of envy for most of us in years to come.

As you made it to the end…

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