When the coronavirus crisis started I wrote that if the U.K. lockdown ends at the end of May there will be a bad recession, if it ends in June there will be a depression and if it stretches on into July, August and onwards then the result will be biblical.
While the lockup has ended to some extent, it carries on in many aspects and there is no full end in sight. To add to the difficulties a second wave will already be underway as it is in other countries.
Partial lockdowns will continue to have a cumulative effect so the outcome is fast heading for “biblically” awful. The announced figures are numbingly shocking.
When the Bank of England predicts the worse recession in 300 years, you know it’s going to be bad—but it’s worse. Three hundred years ago the industrial revolution had not even begun. So transcribed for context, the Bank of England is predicting the worse recession in industrial history. That history includes the Napoleonic Wars (a nine year Depression); various financial crises, including 1857-1858 and 1867-1869; the long depression of 1873-1896; the 1919-1926 depression; the great depression of the 1930s; the 1956, 1961 and 1973 recessions; the early Thatcher years of austerity, the 1990s recession; the “black Wednesday” pound debacle and housing crash; and the global financial crisis of 2007-2011.
The numbers that are in are equally incredible. Overall tax income is down 28% although some reports state way higher. Sales tax (VAT) down 46% and employment taxes down 29%. Government debt levels have exploded to above 101% and headed up vertically towards perhaps 120% by next year.
And still the economy is deteriorating as large parts of it remain closed down or at best truncated.
A sharp end to the lockdown may have enabled a snapback in economic activity but it seems unlikely that this will occur as the lockdown is ended in step changes that appear to be likely to roll out over perhaps months.
Then there is a second wave to contend with. It appears this is inevitable. What then? Will an economically terminal lockdown be rolled in to finish off the economy?
It’s further sobering to note that Australia does not plan to open up for international travel until next year. Is that a pattern for the rest of the world? No business travel or tourism until further notice? It almost seems pointless to pour that little crisis into the current brim full bucket of disaster.
Every day that passes is digging a bigger pit for the U.K. economy and to hear the British prime minister say that spending will continue on government services as if nothing has happened and in the same breath talk about managing finances prudently it is hard not to be struck with cognitive dissonance.
…. and the band played on.
So what is going to happen? It’s going to get worse. A lot of businesses are going to reorganize as the government support wanes, ahead of the end of it in early winter. Any business not on a lucky island boosted by the crisis is going to cut back to the bone. For the service-heavy U.K. industry a lot of people with four hours of work in their eight-hour day will find they weren’t as vital as they thought they were now that “working from home” has stripped their organizations of the social noise that howls through many an organization.
With an extended collapse of tax revenue and apparently a commitment to keep spending on its social budget there is only one way ahead: Inflation.
Here is that Wikipedia quote again, from their hyperinflation entry: Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
This is apparently a quote from a scholarly book called Monetary Regimes and Inflation by Peter Bernholz. Thanks for that Peter. It succinctly states the most likely outcome of this current situation.
It is global. The VAT take in is down by almost exactly the same amount as in lockeddown Philippines. The world is going to have to march down the same road together as this crisis grinds on and on against a background of highly-leveraged states unable to rely on the previous levels of revenue to support their huge social overheads.
There is a fork in the road ahead. We will get one of two outcomes:
1) An economic miracle.
2) The recession predicted by the Bank of England
If it’s number 2 then without inflation we get a total meltdown of the stock market and for that matter the economy. With inflation, we see a cushioning effect as illiquid assets are transferred from the economically inactive to the economically active via the magic of negative real interest rates, where the levered get free money from the savers as that nation resets its economy via currency devaluation.
It’s an old story and here is a picture of it, care of French history.
And they say it’s going to be deflation.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.