This is Part 2B of what will now be a four-part series of posts; things are changing rapidly. We’re interested in the extraordinary impact of governments’ reactions to the Covid-19 pandemic. Some of us consider that, as grim as Covid-19 could be (and for now that remains arguable without meaningful data and in the context of other pre-existing pandemic diseases), the mind-boggling situation in which we now find ourselves provides an opportunity to address the risks and failures of globalisation. Meantime, in real-time, the UK National Health Service (NHS) structure – which is a massive, centralised bureaucracy – is proving to be, shall we say, sub-optimal in the face of this pandemic. Sure, NHS front-line staff are working heroically, but the NHS management system is now being exposed for what it is: unfit for purpose. I can say this with a certain amount of inside knowledge having worked in the past for two years as an NHS Health Board director and being married as I am to an NHS doctor. However, the pros and cons of the NHS is a story for another day. For now, we’re investigating the imminent collapse of the global economy and what should emerge from that.
All Warfare is Based on Deception
We’re told that the fight against the Covid-19 virus is a war. Sun Tzu was a Chinese general, military strategist, writer and philosopher who lived at the time of the ancient Chinese Eastern Zhou dynasty, in the first century BC. Sun Tzu said, ‘All warfare is based on deception’. It’s perhaps fitting then that the most serious threat to our lives – emanating from China – is not Covid-19; it’s the forthcoming outright tanking of the global economy. Covid-19 has deceived us into thinking that, metaphorically, we’re all going to die from coronavirus. Indeed, some of us could be hit by Covid-19, but the chances of that happening are relatively low, accurate data notwithstanding. On the other hand, a damn sight more of us are now almost guaranteed to be hammered by the trashing of the global economy taking place before our very eyes. That’s not my assessment. Please take a little time to read and digest the following observations because they’re fundamental to the arguments I’m going to make in this post about our future prosperity:
McKinsey & Company
‘The shock to our livelihoods from the economic impact of virus suppression could be the biggest in a century’
‘Global supply chains face disruption in multiple geographies … [we’re looking at] the end of supply chain globalisation’
‘The coronavirus is not only a health crisis of immense proportion – it also signals an imminent restructuring of the global economic order’
Emmanuel Macron, President of France
‘Globalisation faces a major crisis’
Kate Andrews, Economics Correspondent, The Spectator
‘All economic indications suggest that we’re midway through the sharpest economic contraction in history’
‘It seems likely the Covid-19 virus will have a long-lasting impact, marking a turning point in globalisation. The status quo has run out of political capital’
Fraser of Allander Institute, University of Strathclyde
‘Covid-19 represents the greatest public health crisis in a generation [and] a massive shock to the global economy’
Jeremy Warner, Economics Assistant Editor, The Daily Telegraph
‘The immediate and no doubt lasting economic costs of Covid-19 are out of all proportion to the distress of the disease itself. We are doing ourselves untold economic damage’
‘A recession is not the correct word for what we are currently witnessing. It is an abrupt stop of economic activity, from 100 to zero in just a few days or weeks. A virus-driven ice age’
Gail Tverberg, Our Finite World
‘My analysis indicates that now, in 2020, the world economy cannot withstand long shutdowns. One very serious problem is the fact that the prices of many commodities (including oil, copper and lithium) will fall far too low for producers, leading to disruption in supplies. Broken supply chains can be expected to lead to the loss of many products previously available. Ultimately, the world economy may be headed for collapse’
My purpose here is not to scaremonger; rather, I want to raise awareness and illuminate readers from the perspective of people whom I refer to as ‘alt-economists’ and to whose ideas and predictions I’ll refer presently.
Meantime, here’s one from the ‘Department of Sweeping Statements’: orthodox economists will tell you that the gloomy observations above are largely hyperbole. They’ll tell you that the laws of supply and demand will prevail, national economies will adjust and Adam Smith’s ‘invisible hand’ will work its magic worldwide. In other words, many will predict what they assert will be the economic outcome of the Covid-19 pandemic, namely we’ll eventually pick up from where we left off vis-à-vis the globalised economy and everything will be alright on the night. Politicians will ride this bandwagon. The underlying mantra will be that, whatever happens, we must strive to return to global, industrialised economic growth. We need to challenge that view.
For the purpose of this post, there are two particular shortcomings with economics:
Forecasting. First, as the erstwhile Governor of the Bank of England, Mervyn King (himself an economist), has noted, economics is great at explaining what’s happened in the past, but struggles to explain what might happen in the future.
Truth. The second problem relates to the first: whilst economics uses mathematics to convey ideas and explain empirical data, economics is not science. The best we can do in this respect is to refer back to the Victorian historian Thomas Carlyle’s description of economics as ‘the dismal science’. There are no irrefutable truths in economics in the same way that, say, Newton’s Laws of Motion are truths and can predict unfailingly the motion of objects etc. In fact, as UCL’s Peter Antonioni explains, ‘economics is all about humanity’s struggle to achieve happiness in a world full of constraints’. In similar vein, in his book ‘50 Economics Ideas’, Edmund Conway, Sky News’ Economics Editor, tells us that ‘economics is, at its very heart, the study of people’.
Not only are there shortcomings with economics – being as it is, at best, pseudo-science – there’s also a specific shortcoming with economists themselves: they can get shirty when scientists (eg a physicist like me) or other non-economists stray into the world of economics. Three alt-economists’ names come immediately to mind in this respect: Chris Martenson, Gail Tverberg and Dr Tim Morgan.
Before I distil the thinking of these three alt-economists into where they argue we’re heading in terms of the global economy, we need to consider the words of the theoretical physicist, Dr Michio Kaku (City University New York); here’s what he has to say about energy:
‘Energy is vital to civilisation. In fact, all of human history can be viewed through the lens of energy. For 99.9% of human existence, primitive societies were nomadic, scratching a meagre living hunting and scavenging for food. Life was brutal and short. The energy available to us then was one-fifth of a horsepower – the power of our own muscles … [today, thanks to the Industrial Revolution] the energy available to a single individual is now measured in thousands of horsepower’
Another physicist, Professor David MacKay (University of Cambridge) in his book, ‘Sustainable Energy – Without the Hot Air’ (2009) makes the point that in the near future – if indeed the time has not already arrived – mankind will need to figure out how to power civilisation without ‘the benefit of two billion years’ worth of accumulated energy reserves’. The point which both Dr Kaku and Professor MacKay make is that the reason so much of the world enjoys extraordinary prosperity (financial and non-financial) – certainly compared to 200 years ago and more – is because man discovered cheap energy in the form of fossil fuels and in the form of cheap oil in particular.
Economics as we know it today emerged with the Industrial Revolution and has its roots in Adam Smith’s seminal work, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776). Since then everything else is history. Look at the extraordinarily beneficial effect on the world-as-a-hundred-people over two centuries which has arisen from mankind having discovered how to release two billion years’ worth of accumulated energy reserves, ie releasing sunlight energy from fossil fuels:
Oil and Commodities
What’s all this got to do with Covid-19? Well, economists and politicians will be desperate to see a rapid recovery from the state we’re in; indeed, won’t we all. Quite what recovery will look like in terms of the alphabet (V-shaped, U-shaped, W-shaped …) doesn’t really matter much. What does matter is that there will be an unholy scramble for economic activity. Bear in mind that ‘economics is all about humanity’s struggle to achieve happiness in a world full of constraints’. And therein lies the rub. Gail Tverberg points out that ‘one very serious problem is the fact that the prices of many commodities (including oil, copper and lithium) will fall far too low for producers, leading to disruption in supplies’.
In other words, our ‘world full of constraints’ is going to take on huge significance post-Covid-19. Nations around the world will be looking to hoover up resources to get us back to industrialised rates of economic growth from what could turn out to be the most precipitous, synchronised decline in global economic activity in all history.
Resource constraints were increasingly evident anyway pre-Covid-19. Post-Covid-19, commodities’ producers will find it extraordinarily difficult to supply our basic industrialised requirements of oil, copper, lithium etc. For example, today oil is languishing at $25/barrel. Oil producers are unable to sustain their operations with oil at that price. Normally, shale oil costs at least $40/barrel to extract and can cost more than $90/barrel. The cost of conventional oil varies significantly: Saudi Arabia can produce oil at less than $10/barrel; however, worldwide oil extraction costs range from $30 – $40 per barrel. The Guardian newspaper reported a few days ago that ‘North Sea oil and gas is in a paper-thin position as prices plunge’.
If they’re not doing so already, around the world oil producers will be downsizing (again) rapidly; some of the smaller players will perish. Once producers’ capabilities to discover, extract and refine oil to bring it to market are lost, it will be near-impossible to recover those capabilities rapidly, if at all. The point is that the post-Covid-19 oil price will be a critical constraint to recovery, not to mention other industrial raw materials’ price constraints. Analysts are already predicting that the oil price will soar back towards $100/barrel on the back of any recovery, and could continue to rise beyond that in the medium-term. Our complex, globalised society is unsustainable in the long-term with oil at $100/barrel plus.
Other Relevant Issues
There are four other critical issues arising from the Covid-19 epidemic which are relevant to life after Covid-19 and whether or not we choose to return to the globalised status quo ante, as follows:
Fear. Henceforth, and for perhaps a generation or more, people around the world will fear another globalisation-fuelled pandemic. Some epidemiologists say that the risk of an unstoppable virus is growing all the time and that Covid-19 represents a warning as much as anything.
China. The role and behaviours of China are in the spotlight for these reasons: China was unquestionably the source of this new coronavirus which almost certainly emanated from one of its appalling wet markets; China’s systematic abuse of human rights; China’s unscrupulous trading behaviours; China’s flagrant disregard for the environment. One could go on, but China is on notice in terms of its global role in the post-Covid era.
Global Debt. The global debt situation merits a post in its own right. The last time I looked at The Economist’s Global Debt Clock, total government debt stood at $58 trillion, and climbing. If you then add in corporate debt and household debt you find that between us, the world and his wife owe somebody/somewhere something like $188 trillion. Here’s the thing, though: in 2018 the global average debt-to-GDP ratio (debt as a proportion of the value of all of a nation’s goods and services produced in a given period) stood at 226%. An economist would lambast me for saying this; however, that’s like you earning £25,000 per year and owing £56,500 on your credit card, with the debt growing by the month. It’s a simplistic analogy, but it makes the point that we’re living way beyond our means. If you now factor in the extraordinary amounts of fiat money governments are throwing at the Covid-19 pandemic (US $2.2 trillion; Germany $815 billion; UK $405 billion; France $375 billion and so on), it doesn’t take an archbishop to figure out that global debt is heading off the Richter Scale. Does it matter, you ask? After all, world governments owe the money to their own citizens, not to the Martians. However, the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as for example various eurozone governments have done, and the country (and its neighbours) can be plunged into crisis. We need to be very, very concerned about the impact of global debt on our lives in future.
Environment. Last but not least, globalisation has been a disaster for the Earth’s environment. Let me quote here ‘Peak Prosperity’s’ Chris Martenson: ‘the environment – meaning the world’s resources and natural systems on which we depend – is exhibiting clear signs that we’re approaching its limits. We’re finding ourselves in the position of needing to exploit the poorest-quality mineral ores. Peaks in critical resources are being noted at a faster and faster pace. We’re scouring the globe for the last few concentrated sources of primary wealth. We’re depleting water in fossil aquifers at unsustainable rates. Farmers are mining soils of essential nutrients, and our oceans’ rich ecosystems are suffering’.
Taken together, all these factors count against us pursuing a wholesale return to a globalised economy; they signal to us that we can’t go on like this, ie we really should not be busting a gut to recover globalisation. Globalisation is killing us; literally.
What’s the Answer?
The answer is not mercantilism. The answer lies in shifting the world economy away from globalisation towards localisation with international trade; shifting politics from centralisation to decentralisation; shifting society to valuing ‘somewhere’ (one’s mother country) from valuing ‘anywhere’ (a largely abstract idea of worldliness). Here, David Goodhart explains what I mean about the Anywhere/Somewhere issue:
Here’s a summary of where the alt-economists and others think we should be heading post-Covid-19:
In my next and final post (honest) on this topic of life after the Covid-19 pandemic, I’ll put flesh on the bones of the image above and explain how we could make life much better for ourselves in a post-globalised economy. After all, ‘economics is all about humanity’s struggle to achieve happiness in a world full of constraints’.
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See you down the pub – post-lockdown …