DEPRESSION DOMINOES

DEPRESSION DOMINOES

25 Oct 2020

It has been a point frequently well made that the people who appear to be in charge of Covid strategy are not on the whole in fear of losing their jobs. Be they health experts, university professors, politicians or civil servants, they have one eye on tomorrow’s headlines and another on the verdict of history. This results in a strong bias in favour of caution.

There are some signs that the public is starting to question the Orwellian mantra of “Save the NHS” as it becomes increasingly clear that this was no reciprocal arrangement. Excess deaths from cancer and heart disease are estimated by some to be likely to exceed the number of deaths attributed to Covid and the average age of those unfortunates is likely to be well below 82 (the average age of a Covid victim).

THE SHAPE OF THE RECOVERY

The slowly developing realisation that the economy is being damaged has given way to talk of the shape of the recovery. When lockdown was assumed to be a one-off treatment we were going to have a “V-shaped” recovery, like a rubber ball.

Now it would appear, as the country is encouraged to retreat back into a state of fear, that the best we can hope for is a “W-shape”. Or perhaps, as one lockdown gives way to another, a “multiple-W shape” like the World Wide Web (WWW….).

Pessimists who think that we are trapped in a deflationary spiral talk of an “L-shaped” recovery which is patently not a recovery at all but an endless road of flatness. Those who prioritise the environment over all else might welcome this. It should reduce carbon emissions.

Sadly, even the L-shapers might turn out to be optimists.

A recession is usually defined as a cyclical downturn, even, as was the case with the 2008 financial crisis, it is caused by human folly. Human folly goes in cycles too. Collective memory fades and the mistakes of the past are repeated.

DEPRESSION IS NOT CYCLICAL

But the deliberate and relentless deconstruction of the economy in 2020 is not cyclical. As each domino falls, it topples the next and waiting at the end of the line is not recovery but economic depression.

You cannot buy time indefinitely. Paying people not to work while we wait for a vaccine (there are more than 200 in development) is a desperate gamble fraudulently dressed up as a policy of ‘safety first’. The same can be said for awarding academic qualifications to students who have not taken examinations. Every step that is taken is hard to retrace if only because it takes leadership and courage. So they extend and pretend.

The first depression dominoes to fall are the ones that result from banning any activity that is considered non-essential. That takes out most of the hospitality industry including spectator sport and theatrical events. The Covid experts are apparently incapable of understanding the feeder businesses that rely on these reprehensible indulgences.

Most of the food and drink not consumed outside the house is now sold in supermarkets or delivered directly to the homes of those brave enough to open their front doors. Yet the wholesalers who supply the supermarkets also deliver to care homes, schools and restaurants. They are particularly annoyed that the supermarkets have benefitted from business rates relief (£585 million for Tesco alone) while their warehouses and distribution centres do not. With a snap of those expert fingers, their businesses have been whacked again and you can be sure that they will be closer now to bankruptcy than they were six months ago.

ALL DOMINOES FALL IN THE END

The key points here are first, that what is essential and non-essential is a matter of opinion and certainly not a scientific fact and second, that, whatever your view of the first point, essential businesses will suffer as the dominoes fall.

It is important to appreciate the mechanics of insolvency. When a business is losing money in the clearest way – its operating costs are higher than its income – it soon becomes uneconomic for it to keep struggling to survive. Empty planes may fly again, deserted shops, theatres and restaurants may one day reopen but they will not do so if the new operators are saddled with the old liabilities.

A business that rises from the ashes of insolvency is likely to be highly competitive when demand returns. Given that almost every airline in Europe is rapidly running out of money the news last week that Flybe, which went bust in March, is hoping to fly again may seem surprising – but that’s the whole point. The investors, creditors, landlords and employees have been eliminated (so to speak) leaving behind assets that could be put to use again.

The reason why we are potentially about to embrace depression is that a large part of the economy is set to follow the insolvency model. Write everything and everyone off and, when the time comes, start again if you wish. As a result, don’t be surprised if UK unemployment exceeds 5 million and be very aware that the Covid experts themselves are highly unlikely to swell those redundant ranks. Their jobs are deemed essential because depressions don’t just happen by themselves.

And the final act of mass insolvency leads us into familiar territory: the banks will be the last dominoes to fall.

The lockdown enthusiasts, whose numbers are declining but are still bewilderingly high, say, if the trifling matter is raised, that the government will shield the economy by paying all the bills because it can borrow at record low interest rates. How long it can continue to lend to itself remains to be seen, especially given the decline in tax revenues that is the inevitable result of a wrecked economy.

The opposition parties since 2010 have been fond of blaming mostly everything on “Tory austerity”. This must be the first austerity in history where government debt as a percentage of GDP rose sharply and stayed up – from 63% in 2009 to 85% in 2019. In 2020 it will burst through 100%.

History suggests that governments eventually debase their own currency when they simply print money. Perhaps the nation’s public finances will follow its private sector into insolvency. I don’t know what that would look like but I sense that political turbulence tends to follow. Some people might say that contemporary populism appears to be ahead of the curve.

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