by Damon de Laszlo, ERC Chairman
In October I commented that “the turmoil of September continues and indeed seems to be increasing in many areas”. I had hoped that some stability would be restored to government in the UK, while the loss of the capability to govern, along with ineffective institutions, as well as the hope that China would stabilise after the Presidential elections, meant that we were reaching the bottom of a depressing cycle.
Hope does not make for good plans. China’s slight easing of Covid restrictions led to a rapid increase in the spread of the disease. The fear that this increase would overwhelm the limited available health service facilities has meant the reimposition of more restrictive shutdowns, leading to a mass outbreak of civil disturbance. The trigger for the disturbances would appear to be a fire in the far west city of Urumqi, causing the death of some dozen or more citizens in a high-rise building. So far, the huge bureaucracy of the Chinese Communist Party appears to have become paralyzed. Huge numbers of workers across China have broken the bounds of their quarantine, breaking down barriers, leaving their workplaces – frustration has boiled over. I suspect it is going to be difficult for the authorities to hold the line. Freedom of movement will dramatically increase the rate of Covid infections, probably overwhelming the health system, and the vaccination of the population, even with the moderately effective Chinese vaccines, cannot be rolled out at this stage to have much impact. The other domestic worry authorities face is the collapse of property prices, bringing defaults in the banking sector. The impact of supply chains on goods going to the West will reverse the downward trend, only just started, in manufactured product prices.
The only marginally good news for Europe is likely to be a decline in energy prices as Chinese consumption declines, but this will be little help to the European economy. We are likely to see some good news from sales and manufacturing for the fourth quarter, a sort of last gasp as the Christmas season goes into overdrive. The first and second quarters of 2023 are unlikely to have much joy in them. The Bank of England and the European Central Bank seem set to keep interest rates on an upward trend. All the signals are that they are more fearful of inflation than recession, even though at this juncture, raising interest rates or even keeping them where they currently are, will almost certainly trigger a recession and a credit crisis after the year end, when banks typically review overdrafts. They will start tightening as they see asset prices deteriorating in the property market and the many over-geared businesses struggling to pay their reset interest rates.
To add fuel to the fire, we still haven’t seen the cost of the carnage inflicted by our banking geniuses on the pension industry by selling them LDIs, or to give them their full name, Liability Driven Investments. The full name itself, one would have thought, would be a warning if not to pension fund trustees, then to the regulators. The Bank of England stood by because pension funds are not their concern, until they were forced to step in as pension funds dumped gilts onto the market to cover their own leverage, destabilising the whole market. The waves from this debacle have not yet washed up on the financial shores.
As if things could not get worse, we are now watching the unravelling of the market for Bitcoins. Bitcoins are a by-product of the brilliant Blockchain technology. Blockchain is a mathematical formula enabling the traceable transfer of a piece of information. This piece of information could be anything from a picture to a coin, as cleverly used in the word. The piece of information that identifies the object it is attached to is outside the scope of the authorities. The market is based on the idea that you can generate a limited supply and sell it to somebody who believes it will retain or rise in value. One use is to be able to transfer the ownership of the information or asset around the world without it being traceable by the authorities. You can work out the implications of this. In the last ten years or so, with liquidity and cash having been in oversupply, millions of people have been tempted to gamble with all sorts of instruments related to Blockchain. Whilst the most famous of these have been the so-called Bitcoins, there are others, and the Wow of the sale by Damien Hirst of NFTs (Non-Fungible Tokens) representing pictures which he has destroyed perfectly represent this gamble. My apologies for this rough and ready description which many who understand the concept better than I will correct me on, but I think I have explained the principle reasonably well. The important effect of all this is that there has been an enormous loss of value by those who gave good money for modern-day tulip bulbs!
One of the slow burning underlying issues of the inflationary bonfire is the ageing population in the northern hemisphere. Japan’s population has been ageing and then declining for some years, as has been the case in China, Europe and America. China’s recent prosperity has been driven by industrialisation and the introduction of all the modern techniques of production, but the side effect has been the de-industrialisation of Europe and the US, enormously disadvantaging the so-called blue-collar element of the population. The consequence has been the widening of the income gap between rich and poor. For America, the realisation that re-industrialisation may be beneficial was boosted by Covid and its impact on supply chains. The decline in the US working population is also encouraging business to invest and the trend seems to be improving. US government policies are also encouraging the trend, and re-shoring is becoming fashionable. This trend, which should be benefiting Europe, is startling by its absence. The UK government for decades has been blind to the point of being anti-industry, the last budget being no exception. In Europe as a whole where government has been, shall we say, agnostic towards industry, the energy crisis is also having a crippling effect. Hopefully, the longer-term trend of encouraging modern industrialisation will grow, it is critical that it should as industry is the most productive segment of the economy where enormous improvement can be made using modern technology, increasing the productivity of a diminishing workforce.
But this discussion is probably for 2024!
Damon de Laszlo
29th November 2022