Influential UK economist predicts complete economic implosion

By TruePublica Editor: Richard Murphy is a British political economist who advises the Trades Union Congress on economics and taxation and is a long-standing member of the Tax Justice Network. He is a Professor of Practice in International Political Economy at City University London. Murphy was named by International Tax Review as the seventh most significant person having an influence on tax policy, practice and administration in 2013. He is not a ‘quack’ and I have followed his work for some time.

Below is a highly compressed version of what he believes will happen over the coming months and what should be done to prepare for it. You can read his article at Tax Research UK HERE.

As TruePublica readers know, I am not optimistic that the UK economy will recover from this crisis easily at all and that many businesses will fail, debts will escalate and so will bankruptcies and repossessions. However, by trade, I am not an economist. My personal opinion is this is alarmist at best but frankly closer to hysteria. It also gives some insight as to what some people want from a crisis like this. Murphy’s ideas on tax were taken up as proposed policies by the Labour party, which became known as ‘Corbynomics.’ Perhaps it is this style of thinking that in some way contributed to the catastrophic loss of voter support at the last election.

If what Murphy says comes true (and the government does not do what he suggests) then he is saying something like three-quarters of all businesses in the UK will collapse and 30 per cent (minimum) permanent unemployment will become the norm, that property prices will completely implode, that all the banks are now insolvent and need to be nationalised, that money will be forcibly taken from deposit accounts, that landlords will lose everything and that the £6 trillion stored up in pension funds will be valueless.

If Murphy’s prediction comes true – make no mistake what will happen – civil society will completely breakdown as a result of the total failure of capitalism. What will follow will be anyone’s guess.

Brace yourself, here is what Murphy says is coming our way:

On the financial burden on business – “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. The rest cannot in the new, imposed lockdown conditions. It will be as simple as that.”

On businesses and jobs: “Right now most businesses in the UK cannot be profitable unless major costs and cash flow outgoings are immediately removed from their overheads. And since very few have the capital to survive any significant losses the reality is that unless rents are firstly frozen and then cut, alongside bank loan payment deferrals, then the majority of UK businesses are going to fail. The 30% effective unemployment that we see today is both going to become permanent and grow. Jobs and businesses have to be in the lifeboat – bankers and landlords have to be left behind. The essential challenge facing government is to choose priorities. It can choose landlords and then banks as the priority and the result will be the real economy will almost completely fail, at catastrophic cost.”

On property:  “The choice appears to be between seeking to preserve the appearance of value and wealth that is implicit in our overinflated property values and which underpins UK banking, or seeking to preserve the ability of this country to make a living. The choice is illusory. In reality, the value implicit in land has already disappeared. It is folly to pretend otherwise. The only reason no one has yet begun to realise this is that we have a completely frozen property market at present. When that reopens prices will, as a matter of fact, tumble. And so too will new rents.”

On banks:  “The real issue is banking itself, without which we cannot survive. 85% of UK bank loans are supported by property collateral. Whatever happens property values are going to collapse across the board very soon. It may be worse for business property than private property because of changes in work patterns and the number of business failures that the UK is going to suffer come what may, but it is going to be universal. And so bank balance sheets are going to collapse. It’s just a case of when, and not if. The value that underpinned them has gone. Banking cannot survive this in its current form. The losses are many, many times greater than any capital that they possess. No bank will survive without nationalisation. And the only way the losses can be managed is by wiping them out by the issue of perpetual bonds, which will then be subject to QE and thereafter be forgotten forever. The balance sheets of the banks can be restructured. There will, however, be real costs. First, it will not be possible to guarantee all bank deposits. Some amongst the wealthy will take a haircut (which refers to a writing off of value).”

On landlords: “What will become of landlords? Even if every landlord fails now, the properties that they own will still be there: in other words, even if their financial capital disappears, their physical capital does not. What that means is that the economy can survive the failure of landlords more than it can survive anything else because whatever happens to the current owners of these properties they will still exist. We cannot say that of any other part of the economy. In that case what is required now are statutory rent holidays, at least for the rest of this year. Thereafter rents should be reduced, drastically, and by law, and right across the board. 80% cuts or more may be appropriate. Whatever is necessary to ensure business can survive.”

On pensions: “It is in pension funds, not banking where the biggest haircuts will occur. There is, supposedly, £6 trillion of pension wealth in the UK at present. I suspect that a very great deal of that will now disappear. I also stress that if what I suggest does not happen then it is likely that almost all of it will disappear: only the bank and land-based assets need vanish into thin air if what I suggest is done. In either case, the haircut is bound to be reflected in the pensions of current and future old people. What to do for pensioners? I am afraid that they, like so many who have until recently been in work, will have to fall back on the state: there is simply no alternative.”

 

We have no way of knowing what is coming next. We can be assured though that there will be many workarounds to whatever fails – some through technology and others simply through the will to succeed. For instance, bartering may be a significant form of currency in future. One thing Britain should not do is make any big decisions (domestically or internationally) about the way forward until it is known more or less what we are dealing with. A national government of unity would be a start to help us all through the near future because this government is not up to such a big challenge as this.

 

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