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    Bitter fruit Archived Message

    Posted by Keith-264 on June 26, 2023, 6:30 pm

    https://consciousnessofsheep.co.uk/2023/06/21/bitter-fruit/

    Trickle-down economics was meant to be a joke… a parody of the neoliberal reforms introduced by Thatcher and Reagan and cemented into place by Clinton and Blair. The sardonic humour, of course, being that on any of the conventional measures, the opposite had occurred. Far from wealth trickling down, neoliberalism operates as a wealth pump which plunges ordinary people into debt which then allows a new rentier class to grow fat on the interest. Whereas during the post-war years, workers’ wages rose in line with rising productivity, after 1980 wages remained flat while the wealth of those at the top exploded.

    The one – small – consolation once the depression of the early 1980s bottomed out, was that the average household was still better off than the previous generation had been. And by the mid-1990s, with the debt-based boom in full swing, enough of us appeared to be better off, that the social and political conflict of the previous decade had subsided.

    We now understand that – the fairytale literature produced by economists aside – most of the additional prosperity in those days had been borrowed from the future in the form of cheap debt and unproductive assets. And that the debt itself had been floated on some of Planet Earth’s last deposits of cheap and accessible oil – which, both fortunately and unfortunately for the UK, included vast deposits beneath the North Sea.

    There are several things that a country blessed/cursed with a relatively large oil reserve might do. It might, perhaps, limit supply in order to keep prices up and to ensure that the reserve lasts longer. It might – as states in the Middle East have tried to do – levy taxes on the sale of the oil and then use the revenue to develop its internal infrastructure. And it could – as Norway has done – invest the oil wealth in such a way that the country is insured against the financial ebbs and flows which bring recession and ruin to less fortunate places. In the UK though, successive governments simply blew it… emptying the oil fields as fast as possible, even at the cost of its industrial base, as an over-valued pound sucked in cheap imports while bankrupting export industries. The inevitable balance of payments problems which resulted, was brushed over by hawking nation al assets to the highest bidder as the easiest – and most destructive – means of securing foreign currency reserves. And instead of investing in economic development, the revenue from the North Sea – ten percent of government income at its height – was squandered on tax cuts for the wealthy and social security benefits for the victims of economic vandalism. As former Welsh First Minister Rhodri Morgan reflected just before his death:

    “Back then [1983] whoever was running the Government had this amazing ability to spend oil revenues. Governments could afford things. They didn’t have to worry about where the next few quid was coming from. The Falklands War was eminently affordable. Paying the cost of the rocketing unemployment benefit bill, as dole queues doubled, then trebled, wasn’t a problem.”

    The remarkable thing was that the banks – which, after deregulation in 1986, were creating new currency hand over fist – seemed unconcerned about oil being a finite resource. Especially in so narrow a geographical location as the North Sea, where there was an obvious limit on expansion. One reason, perhaps, was the widespread use of the securitised debt instruments which wreaked havoc in the US housing market ahead of the 2008 crash. Whereas, previously, banks were on the hook for the loans they made, because they had to wait years to be repaid, securitisation allowed them to sell the debt – or rather the projected income from it – immediately to third parties. They even set up special insurance companies in the shadow banking sector to add an additional layer of security to the deal. What could possibly go wrong?

    There is a reason why history is peppered with examples of states – under public pressure – lopping the heads off bankers. It is the same reason why Leviticus 25 orders a Jubilee after 49 years. In two words, compound interest. When currency is created as debt, there is never enough currency to repay both the loan and the interest. This can be masked to a great extent by the “velocity” of the currency – the speed at which it circulates around the economy. In the days before electronic banking, for example, the same £1 note could pass from a worker to a shopkeeper, from the shopkeeper to a taxi driver, from the taxi driver to a florist, from the florist to a newsagent… and so on. Nevertheless, and especially in electronic banking systems where the velocity trends to zero, because of compounding, with each passing year, the amount owed but technically unrepayable, grows exponentially so that we – collectively – must borrow more with each passing year to avoid a crash.

    The trouble is that nobody borrows currency just so they can keep it in a bank. Nor do banks – and investors more generally – lend on this basis. People borrow to buy things, while banks calculate that those people’s incomes will grow sufficiently over time that they will be able to repay the debt with interest. And so, this is where the two economies – “financial” and “real” – meet. Because financial growth necessitates material growth. That is, businesses creating ever more goods and services, which households must consume in ever greater volumes. But those goods and services require the raw resources and energy of our finite planet, which, because our need is for exponential growth, have reached their limit.

    What we have been running into since the mid-1970s is the growing inability of the real economy of energy and resources to grow at the pace required by a debt-based financial system. And the bad choices we – particularly in the UK – have made since then, while they have delayed the inevitable crash, have made the problem far worse than it might have been. But to understand this, we must also understand that the economy is geographical too.

    In the depression of the early 1980s, we used to talk about a “North-South divide.” This was the difference in prosperity between the regions north and south of an imaginary line connecting the Wash and the Severn Estuary:

    The divide existed prior to the industrial revolution when London developed as a banking and financial sector… with all of the monopolistic and corrupt practices that that implies. Although not the only reason for the first industrial processes developing in the north and west (the presence of narrow, steep-sided valleys offering an abundance of water power being essential (the south of England is mostly flat) the desire for investment opportunities free from the clutching hands of the City of London kleptocrats was an important driver of the first, eighteenth century phase, of the industrial revolution. It was though, the presence of huge deposits of coal, iron, and limestone – also mostly in the north – which provided the basis for the coal-powered industrial expansion which exploded after the Napoleonic wars.

    The blessing of the industrial revolution was that, for a brief period, steam powered trains brought steel from the Welsh valleys to ports where it was loaded onto steamships built in Glasgow or Newcastle, which sailed the world’s oceans to construct infrastructure as far afield as Australia, Canada, and Argentina in exchange for the raw materials which drove the industrial revolution further again. The curse was that the industrial technologies built in the UK, were rapidly eclipsed by updated versions deployed in Germany and – especially – the USA. And rather than “modernise” – which would have meant demolishing millions of pounds of prior investment – UK industrialists found it easier to cut wages at home while erecting trade barriers around the Empire. In short, what made the north of Britain prosperous in the nineteenth century made it poor in the twentieth.

    Two – largely unsuccessful – responses to this geographical inequality have been tried on and off throughout the past century. The first was to use education and housing policy to encourage migration into the growing regions of the west midlands and the southeast. The second was the attempt to use state funding to regenerate employment in the ex-industrial regions of the north and west. But throughout the neoliberal years, the geographical picture continued to shift with prosperity retreating to the London-Oxford-Cambridge triangle and the archipelago of affluent suburbs around the top-tier universities. So that, by the beginning of the twenty-first century, while London was the richest place in Northern Europe, nine out of the ten poorest were in Britain’s ex-industrial, rundown seaside, and small-town rural economic wastelands:

    Class-based inequality persisted even within the poorest regions. In industrial South Wales, for example, EU and UK state funding, which was supposed to regenerate the economy, gave birth to a new class of social entrepreneurs ostensibly working to raise local living standards, but whose salaries and future funding depended upon local people remaining poor. The Labour Party – which holds almost all of the seats in the area – also took the view that improving living standards risked people switching to the Liberals or the Tories, while ongoing poverty was believed to guarantee votes for Labour. As Blair was to put it, “they have nowhere else to go.”

    Nevertheless, inequality between regions was more pronounced, with even the wealthiest among the salaried classes in the north and west holding just a fraction of the vast wealth flowing into the pockets of those invested in the City of London. And since the oil and gas revenue came to an end in 2005 (when Britain became a net importer of oil and gas) the living standards of the majority have flatlined, with those in the bottom half of the income distribution having fallen slightly in the decade between the crash and the covid.

    If you were looking for a metaphor for the UK economy in 2023, you could do a lot worse than picturing a car that is running on the last vapours in the petrol tank. Its non-financial export industries are a mirage – plants which assemble components imported from elsewhere in the world, together with luxury goods which are vulnerable to the first whiff of a global recession. But – and here is where I want to argue that “trickle down” has been a thing – the rentier activities of the City of London and its vast network of offshore tax havens, have – until now at least – been able to hide the UK’s chronic overexposure to artificially cheap imports.

    This was the “globalisation” counter-trend to the oil wealth and its attendant de-industrialisation in the 1980s and 1990s. Almost unnoticed, the City of London slipped from being the place where British capitalists conducted the world’s business to just one of several “global cities” where world capitalism did some of its business. Meanwhile the real economy of people using energy to convert resources into goods, quietly moved from Mansfield to Madras and from Sunderland to Shanghai.

    Rather than viewing the global economy in terms of class or even countries, think instead of a network of top-tier cities based around international technology, finance and governance. A network which includes London, together with Brussels, Moscow, Rome, Washington, New York, San Francisco, Tokyo, Beijing, Delhi, etc. Hour by hour, day by day, and week by week, trillions of dollars, pounds, euros, yuan, and yen flow through and between these top-tier cities. And these cities, in turn, act as the financial hub for their own hinterlands. This is particularly obvious in the UK because of the wealth disparity. My own home city – Cardiff – for example, continues to draw in wealth as a result of its close connection – financial and governmental – with London, even though within the city there is a huge wealth gap between the impoverished southern crescent and the more affluent northern districts. At the same time, Cardiff acts like a second division wealth hub for its own hinterland, with old ex-industrial towns like Pontypridd and Merthyr Tydfil now largely dependent on the flow of currency from Cardiff.

    To be clear, this is not just the flow of currency via government – which has historically transferred public spending from affluent to impoverished regions (although seldom to the point of changing the relationship). The most recent – and largely failed – being the current UK government’s “levelling-up” funds… which are several orders of magnitude less than that required to alter the balance between relative living standards. Rather, this is an almost invisible flow of currency – almost all of it electronic – via investments, trading, and employment income – through the vast financial network of the global economy.

    This raises some important questions and highly unpalatable answers as to what might happen to an import-dependent country like the UK, if the global currency flows were to be disrupted. Perhaps the first thing to note is that since the currency flow is itself largely invisible, the immediate consequences of disruption might be obscured. Indeed, there would likely be plenty of scope for politicians and economists to view what was happening through their own biased lens. For example, in the UK it has become something of a fetish to blame everything from a shortage of peppers to rising ocean temperatures on Brexit. And while it is undoubtedly true that you would have had to have been a certified lunatic in 2016 to offer people a referendum on EU membership without even considering that you might lose, the chain of events which have unfolded since, tend to eclipse the consequences of that particular foolishness.

    In any case, on a global scale, the tariff barriers that the Trump administration imposed on China had a far greater impact on world trade and thus on world currency flows. But even these pale into insignificance compared to the impact of locking down large swathes of the global economy for two years. And this, in turn, has been dwarfed by the economic fallout from the undeclared economic war on the world’s last supplier of affordable fossil fuels, fertiliser, grain and a host of metals.

    The ensuing – and ongoing – supply shock, which economists and central bankers mistakenly believed to be monetary inflation, initially resulted in shortages and higher prices, but globally has morphed into recession and disinflation… almost everywhere except the UK. Although a degree of disinflation has occurred since the beginning of 2023, the UK consumer prices index remains stubbornly high at 8.7% in May – the same rate as in April. As a result – and confirming the definition of insanity attributed to Einstein – the Bank of England is expected to raise interest rates yet again.

    So here’s the problem, consumer spending – which higher interest rates are meant to curb – is not the cause of rising prices. This is clear to see for anyone prepared to look beyond the establishment media narrative. Office for National Statistics economic data, for example, shows consumer spending falling, with just three percent of businesses reporting increased activity. Meanwhile 27% of businesses report high energy costs as the main driver of higher prices. Indeed, it is the rising cost of imports which is the main reason why UK CPI inflation is stubbornly high. As Swati Dhingra and Jack Page at VoxEU conclude:

    “Imported inflation has therefore been the dominant source of the cost of living crisis in the UK, making up over 70% of headline inflation. Domestically generated inflation, through wages and profit margins, has been relatively subdued despite the scale of the terms of trade loss experienced by the UK.”

    This would seem to answer the question, what would happen if the global currency flows, which had been allowing crumbs of prosperity to trickle down from the top table, were to be disrupted? In the event that the political class were so insane as to disconnect from its main trading block, then lockdown its economy for two years, and then voluntarily disconnect itself from its only source of cheap fossil fuels and resources, the answer for an import-dependent country like the UK turns out to be higher prices across the economy. And it is here that we may have to face up to one of the more unpalatable answers too. Because none of those things are reversible. Britain cannot rejoin the EU, first because the Europeans don’t want us, and second, because a membership in which joining the single currency and the Schengen Zone are compulsory, cannot be sold to the UK electorate. And again, Brexit turns out to be the least of the UKs problems, because the rapid growth of the BRICS trading block demonstrates that the lockdown-disrupted supply chains are not going to return either. This, of course, being especially true of the flows of fuel, food and resources from a Russia which has no incentive or desire to play nice with a western empire which has spent the past three decades trying to Balkanise it.

    Another way of looking at our predicament is that the neoliberal period during which we could use financial weight to buy imports on the cheap from the wider world, has come to an end. Far from price rises – and the attendant cost-of-living crisis – being an anomaly, we are experiencing the first rumblings of a new normal. We are not paying over the odds for our goods and services, but merely experiencing a readjustment as we are forced to pay the full price for imports which we were able to buy on the cheap for the best part of half a century.

    Higher interest rates too – which the Bank of England and the residents of Versailles-on-Thames believe to be temporary – may be returning to where they will need to be if the UK is to have any chance of attracting the capital required to rebuild enough of a domestic industrial base to avoid a complete collapse. After all, it was only the privileged position of the City of London within the global dollar system which – temporarily as it turned out – prevented the UK from going the same way as the majority of the world’s oil states.

    I guess its called “reaping what you sow.”

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