Yves here. I wish I had written this must-read post. Richard Murphy lays out the case for whose interests need to be sacrificed for the economy to have any hope of surviving under the conditions being imposed on businesses to keep workers and customers safe. Unfortunately, his well-reasoned recommendation, that landlords, banks, and pensioners need to take hits to save jobs and businesses, is not likely to find support in official circles. But Murphy’s argument, in essence, is that these groups are toast under any scenario, and they can’t be allowed to weigh down the productive sectors of the economy.
By Richard Murphy... Originally published at Tax Research UK
Summary
This blog post is, in effect, an essay of almost four thousand words. I did not intend that when I started to write it. If I had known it would be that long I might have used a different style. But as I wrote it just kept growing. That is because what I think it is about is vital, in the sense that the issues I address cannot be avoided.
What I am suggesting is that whatever we think or do we are heading for the most almighty economic crash. The things that we have treated as stores of value – which are mainly shares and both commercial and residential property – are massively overvalued now. And there is nothing we can do to prevent the value of them crashing because the Ponzi style financialisation that has gripped western economies – and those of the US and UK in particular – for the last forty years was always heading for a massive crash, and now it has arrived. The genie is out of the bottle and it will not go back in again.
But that is not to say that our government (and other governments) are left powerless in the face of this. They are not. They can still make a decision about which factor of production – labour, business (enterprise), banks (capital) or landlords they wish to favour in the crisis to come.
If they favour people and business and sacrifice landlords (whos assets will survive, come what may, albeit at considerably less worth) and banks (which will inevitably need to be nationalised) then more people and many more businesses might make it through the coming crisis. If they favour landlords and banks – as the UK government is at present – then the chance that much business at all will survive this is pretty remote. And in the end, nor will the banks or the landlords either. That’s my bleak prognosis. And either way, pension funds and pensioners are in deep trouble: most will now be dependent on the state, which means much more generous provision has to be thought about now than we have ever previously imagined.
I didn’t enjoy writing this post. I’m not suggesting it’s a fun read. It is not. And yet, I do see hope. Our economies have been blighted by the curse of financialisation. I would not have chosen to end it the way that it’s going to happen. But wise governments will realise that the end of financialisation is now nigh, and act accordingly.
And some won’t.
On that decision rests the fate of millions of people.
I wish I thought I could rely on our government to make the right choice. Time alone will tell if they will.
The lockdown threat to business viability
At the beginning of May 2020 it is very apparent that life is not returning to normal. Plans to end lockdown do, according to the Financial Times, include staggered working hours; rules to require social distancing in the workplace and shops; a ban on workplace canteens; a requirement that employers provide extra car parks (seemingly overnight) so that employees need not share lifts to work; a reduction in the number of people allowed to share lifts and a great deal more that makes it apparent that whatever work might be like after lockdown it will be nothing like what it was before it.
It is easy for the government to say this. And the rules could, possibly, be enforced. But the consequences need to be thought through, because they are staggering.
Of course it is theoretically possible that some companies could actually survive the substantial new costs that this way of working will impose. But I stress that the word ‘theoretically’ is doing a lot of work in that sentence. That is because the reality is that in all likelihood almost none can, or will. Our economy is not geared to work in this way. And by geared I do not mean physically, where it is apparent that our capacity for adaptation is already quite phenomenal. Instead I refer to financial gearing, interpreted broadly.
The financial burden on business
Like many households, a great many businesses are massively debt-burdened. They have both significant financial borrowings and / or substantial rent payment commitments. That is because they are both under-capitalised in many cases and do not own their own properties, with rent in that case pretty much representing interest on an expensive loan that they might have had to take if they were to have bought their property instead.
Importantly, these obligations are fixed at present. The government might have shrunk official interest rates to near enough zero, but the reality is that in the actual economy that is not the case. The burden on businesses to repay loans, interest on those loans, and rents, might have been subject to some minor concessions for strictly limited periods at present, and then only for some lucky businesses, but for many the obligations will be ongoing. And there has been not a hint, so far, of long term support on these issues. Instead new government-backed loans under coronavirus schemes will just add to these debt mountains.
What this will mean is that companies working with reduced efficiency and increased costs in markets where demand will be reduced will be under enormous stress. They will, absolutely inevitably, suffer reduced profitability from their trading activities, but will nonetheless be facing fixed financial obligations created in an entirely different era and market and, quite crucially, legally these obligations are not re-negotiable in most cases.
It does not take a financial genius to realise that this is a situation that literally cannot work. The vast majority of businesses cannot now survive if they are to meet those financial obligations. We are seeing this on High Streets already, where refusal to pay rents is becoming commonplace, but the problem will now extend to every industrial estate, office block and workshop in the country.
The tiny minority of businesses with no borrowings and their own, paid for, freehold premises might make it through this crisis. In addition, micro-enterprises working at home and with almost no employees might also do so. But with the lockdown conditions that are going to be imposed, the rest cannot. It will be as simple as that. I cannot be more blunt: on this occasion comments based on the extrapolation of obvious heuristically derived conclusions that reduce analysis of a situation to its barest essentials are both necessary and true.
The choice the government has to make
In that case it is also true that in the economy to come some fairly stark decisions have to be made if it is the plan of the government that we survive this crisis. Of these the most important (as ever when the reality of these situations is faced) is whose interests are to be prioritised?
Is it labour, and the need to preserve jobs, that has the highest priority?
Or is it enterprise, meaning that the preservation of trading entities becomes the core goal?
Alternatively, assuming that this can be done, is banking to be pre-eminent to prevent a crash? In other words, is capital preserved?
Finally, might instead the interests of landlords feature most highly?
To go right back to this most basic of economic questions, which factor of production is to have priority? Unavoidably, that question does, of course, have implicit class connotations attached to it.
Right now it seems quite clear that the government is setting its priorities in the reverse ordering of the above list.
To be precise, landlords have not really been asked to make any sacrifices to date: their interests and income streams appear to have survived almost unscathed to date.
Banks on the other hand are already subject to massive support for which they did not pay and are also now enjoying significant effective additional funding for loans from which they will make money. Quantitative easing has also helped them, and it’s back on the agenda.
Business loans, most especially to larger companies are getting through, but as loan capital those funds simply defer the day of reckoning that is to come because, as yet, the government is quite unable to differentiate cash flow, liquidity and solvency, let alone loans from capital. As such the wrong support is being provided, and the stress is growing as a result.
And furlough just disguises the fact that more than 6 million people are now likely to be unemployed in the UK. When the self-employed whose businesses have failed are added in it could be much higher.
My point is that this ranking of priorities – so natural to a political party established to support the interests of unearned wealth – is fundamentally misjudged now.
by Richard Murphy, Tax Research UK via Naked Capitalism | Read more:
By Richard Murphy... Originally published at Tax Research UK
Summary
This blog post is, in effect, an essay of almost four thousand words. I did not intend that when I started to write it. If I had known it would be that long I might have used a different style. But as I wrote it just kept growing. That is because what I think it is about is vital, in the sense that the issues I address cannot be avoided.
What I am suggesting is that whatever we think or do we are heading for the most almighty economic crash. The things that we have treated as stores of value – which are mainly shares and both commercial and residential property – are massively overvalued now. And there is nothing we can do to prevent the value of them crashing because the Ponzi style financialisation that has gripped western economies – and those of the US and UK in particular – for the last forty years was always heading for a massive crash, and now it has arrived. The genie is out of the bottle and it will not go back in again.
But that is not to say that our government (and other governments) are left powerless in the face of this. They are not. They can still make a decision about which factor of production – labour, business (enterprise), banks (capital) or landlords they wish to favour in the crisis to come.
If they favour people and business and sacrifice landlords (whos assets will survive, come what may, albeit at considerably less worth) and banks (which will inevitably need to be nationalised) then more people and many more businesses might make it through the coming crisis. If they favour landlords and banks – as the UK government is at present – then the chance that much business at all will survive this is pretty remote. And in the end, nor will the banks or the landlords either. That’s my bleak prognosis. And either way, pension funds and pensioners are in deep trouble: most will now be dependent on the state, which means much more generous provision has to be thought about now than we have ever previously imagined.
I didn’t enjoy writing this post. I’m not suggesting it’s a fun read. It is not. And yet, I do see hope. Our economies have been blighted by the curse of financialisation. I would not have chosen to end it the way that it’s going to happen. But wise governments will realise that the end of financialisation is now nigh, and act accordingly.
And some won’t.
On that decision rests the fate of millions of people.
I wish I thought I could rely on our government to make the right choice. Time alone will tell if they will.
The lockdown threat to business viability
At the beginning of May 2020 it is very apparent that life is not returning to normal. Plans to end lockdown do, according to the Financial Times, include staggered working hours; rules to require social distancing in the workplace and shops; a ban on workplace canteens; a requirement that employers provide extra car parks (seemingly overnight) so that employees need not share lifts to work; a reduction in the number of people allowed to share lifts and a great deal more that makes it apparent that whatever work might be like after lockdown it will be nothing like what it was before it.
It is easy for the government to say this. And the rules could, possibly, be enforced. But the consequences need to be thought through, because they are staggering.
Of course it is theoretically possible that some companies could actually survive the substantial new costs that this way of working will impose. But I stress that the word ‘theoretically’ is doing a lot of work in that sentence. That is because the reality is that in all likelihood almost none can, or will. Our economy is not geared to work in this way. And by geared I do not mean physically, where it is apparent that our capacity for adaptation is already quite phenomenal. Instead I refer to financial gearing, interpreted broadly.
The financial burden on business
Like many households, a great many businesses are massively debt-burdened. They have both significant financial borrowings and / or substantial rent payment commitments. That is because they are both under-capitalised in many cases and do not own their own properties, with rent in that case pretty much representing interest on an expensive loan that they might have had to take if they were to have bought their property instead.
Importantly, these obligations are fixed at present. The government might have shrunk official interest rates to near enough zero, but the reality is that in the actual economy that is not the case. The burden on businesses to repay loans, interest on those loans, and rents, might have been subject to some minor concessions for strictly limited periods at present, and then only for some lucky businesses, but for many the obligations will be ongoing. And there has been not a hint, so far, of long term support on these issues. Instead new government-backed loans under coronavirus schemes will just add to these debt mountains.
What this will mean is that companies working with reduced efficiency and increased costs in markets where demand will be reduced will be under enormous stress. They will, absolutely inevitably, suffer reduced profitability from their trading activities, but will nonetheless be facing fixed financial obligations created in an entirely different era and market and, quite crucially, legally these obligations are not re-negotiable in most cases.
It does not take a financial genius to realise that this is a situation that literally cannot work. The vast majority of businesses cannot now survive if they are to meet those financial obligations. We are seeing this on High Streets already, where refusal to pay rents is becoming commonplace, but the problem will now extend to every industrial estate, office block and workshop in the country.
The tiny minority of businesses with no borrowings and their own, paid for, freehold premises might make it through this crisis. In addition, micro-enterprises working at home and with almost no employees might also do so. But with the lockdown conditions that are going to be imposed, the rest cannot. It will be as simple as that. I cannot be more blunt: on this occasion comments based on the extrapolation of obvious heuristically derived conclusions that reduce analysis of a situation to its barest essentials are both necessary and true.
The choice the government has to make
In that case it is also true that in the economy to come some fairly stark decisions have to be made if it is the plan of the government that we survive this crisis. Of these the most important (as ever when the reality of these situations is faced) is whose interests are to be prioritised?
Is it labour, and the need to preserve jobs, that has the highest priority?
Or is it enterprise, meaning that the preservation of trading entities becomes the core goal?
Alternatively, assuming that this can be done, is banking to be pre-eminent to prevent a crash? In other words, is capital preserved?
Finally, might instead the interests of landlords feature most highly?
To go right back to this most basic of economic questions, which factor of production is to have priority? Unavoidably, that question does, of course, have implicit class connotations attached to it.
Right now it seems quite clear that the government is setting its priorities in the reverse ordering of the above list.
To be precise, landlords have not really been asked to make any sacrifices to date: their interests and income streams appear to have survived almost unscathed to date.
Banks on the other hand are already subject to massive support for which they did not pay and are also now enjoying significant effective additional funding for loans from which they will make money. Quantitative easing has also helped them, and it’s back on the agenda.
Business loans, most especially to larger companies are getting through, but as loan capital those funds simply defer the day of reckoning that is to come because, as yet, the government is quite unable to differentiate cash flow, liquidity and solvency, let alone loans from capital. As such the wrong support is being provided, and the stress is growing as a result.
And furlough just disguises the fact that more than 6 million people are now likely to be unemployed in the UK. When the self-employed whose businesses have failed are added in it could be much higher.
My point is that this ranking of priorities – so natural to a political party established to support the interests of unearned wealth – is fundamentally misjudged now.
by Richard Murphy, Tax Research UK via Naked Capitalism | Read more:
[ed. Comments section is worth a read as well. See also: Federal Funds Must Go to State and Local Governments (Ian Welsh).]
