The realities of the world we now live in are daily becoming more apparent. I noticed an article yesterday that made me reflect on a post I wrote here more than a month ago. The article suggested that no more than 8% of dentists thought that they could be financially viable with the new requirements for PPE.
In the post I reflected on I said this:
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.
The issue with dentistry is precisely this. The only thing that the coronavirus epidemic has actually changed with regard to dentistry is the requirement for PPE. That, of course, is very real and will undoubtedly impose a cost. But, this one thing apart, our capacity to supply dental services has not changed since the onset of the coronavirus crisis. Instead, what has changed is the viability of providing that service through private practice, which is the way in which this part of the NHS (or rather, in very many cases with regard to dentistry, not the NHS) works.
What I also venture to suggest is that those private NHS dental contractors who were surveyed also presumed that the additional PPE costs would either have to be absorbed through price increases, or through the loss of profit margin having taken existing cost structures into account. Those who thought they remain viable despite the cost, and consequent price increase, no doubt serve affluent communities. There will, undoubtedly, be some who think that an additional £30 per dentist visit is neither here nor there. The other dentists realise that this is not true for many of their patient base and so they forecast financial difficulties for themselves as a consequence. In principle, they are right to do so: no one has yet suggested that there will be any change in their cost structure as a consequence of the coronavirus crisis.
But what I am suggesting is that when it is very apparent that the cost of undertaking many activities in society is now going to change quite significantly, at least a period of time and perhaps thereafter because of the need to protect us from coronavirus infection, then it is quite absurd to presume that this cost will be absorbed by abandoning many such activities even when we have the human and sustainable resources to deliver them simply because we insist on maintaining two things. One is the level of rent on the premises required to undertake these activities and the second is the level of financial burden to borne by those businesses that have, instead of renting, acquired assets which will no longer have the value paid for them.
The simple fact is that for many dentists rent or financial mortgage obligations will be one of the heaviest cost that they have. This will also be true of many other sectors, with hospitality being one that particularly comes to mind.
The reality is that sometime soon we are going to face a choice and that is the one that I outlined in my previous post, but which is worth reiterating nonetheless, because it is so vital to the future direction of our economy.
We can decide now that we are going to prioritise the preservation of jobs and the continued delivery of services that people want and even need, or we can decide to prioritise the ultimately hopeless goal of seeking to preserve the value of rents and financial assets when doing so will, inevitably, be in vain if there is mass unemployment (as I predict) and so no end user for these assets, come what may.
My construction of that last sentence does, of course, make clear that I think there is no real choice here. The reality is that we have suffered a significant, one off, and absolutely fundamental change in the cost structure of the supply of goods and services in this country. I happen to think (unlike the US stock market) that the reversal of this change is exceptionally unlikely to any material degree. Given that we have no idea when, or if, coronavirus will be eliminated (and you will note as a result that I have very little confidence in the vaccine currently being developed for this purpose, largely because it has not been cleared for use as yet, or even been subject to any successful clinical trial, and we have never, as yet, succeeded in creating a successful vaccine for a coronavirus) then what we face is a fundamental change in the cost structure of the production of many goods and services in our society.
In accounting jargon, gross profit margins are going to fall as a consequence. That means that there will be reduced capacity to cover overheads. Overheads include rents and the interest cost of servicing mortgages and other loans. And if services are to still be provided on a for-profit basis then either prices have to rise, or something has to give in that overhead cost base.
In some cases it may be that prices will need to rise. I cannot dispute this. Some aspects of our consumer society will no longer be viable. This is inevitable, and given the need to reduce our consumption to meet net zero carbon requirements, it may also be appropriate. But the need for dentistry will not go away. It is socially desirable, and necessary. And I suspect that many who work in the profession are already not well paid: most people in most parctices are not dentists, after all. Wages cannot, therefore, bear much of the cost change without real issues arising.
So, what do we do? Do we increase the price of dentistry? Do we increase the state subsidy? Or do we require an across-the-board rent cut from landlords and interest waivers from the providers of finance so that they take the hit of this crisis, as they inevitably will in the longer term as it becomes apparent that the capacity to pay rent and interest costs will, whatever happens, eventually be significantly reduced if vast numbers of businesses fail, as they will if rents are not cut. And, I stress that I say 'inevitably' for good reason, because rents and interest costs are always, in effect, an extraction of profit from an activity by unearned capital at cost to those who produce that activity, and those who pay for it. In other words they are always a burden on consumers and those who work.
So, I go back to the question I asked before, which is now ever more pressing, and which is, who are we to priorities now? Is it people who work, or the owners of assets? And I stress as I did before, that there is in reality only one real choice, which is labour, because the owners of assets can only preserve their value if people are at work, and they won't be if they try to preserve those values ar current prices. But, this does not mean that they will not try to do so. And if the government supports them what is coming our way will be very torrid indeed.
The World Bank has predicted a massive rise in poverty today. We will witness it unless the government demands that landlords and banks take the hit from this crisis and that continuing the productive economy takes priority. But that has for so long been contrary to their thinking I cannot see them doing that. And I am very worried as a result.
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whilst neither the landlords or the banking sector are held in any esteem what so ever, as you say the landlord retains the asset but are banks in any position to take the hit?
I am saying the landlords take the rent hit
And banks take the valuation hit
Prescient.
We know that one of the reasons why the private sector cannot cope is because they are so debt fuelled (to banks or to investors – or both) and that all debts must be paid of course no matter what.
The Government of the day asked banks to be tolerant in 2008 did they not?
For dentists, it’s not just the PPE, it’s the amount of time required to clean up the surgery between patients (especially the aerosol droplets). I saw someone in a practice in Essex being interviewed who said that they would probably be able to see no more than about 1/3 of patients compared with pre-coronavirus.
The example of dentists is very strong. I want my dentist to be happy and do well, goddamit. I don’t think anyone would argue for a cull of dentists, would they?
Surely it’s a no brainer to give them free PPE? Or, as you suggest, to lower their rents and mortgages to compensate for the increased costs.
I am no fan of landlords, I think they are completely useless. As long as we make sure they have enough to live on (as we should for everyone) then their income is not to be protected come what may.
I am struggling to understand why landlords are very different from most other businesses. They will need to adapt to a massive drop in their turnover and the expectation that re-building will be a slow difficult process, just the same as everyone else. (If our local high street is a representative indicator, quite a lot of retail businesses have already thrown in the towel and won’t be paying rent, and landlords are providing discounts to remaining tenants rather than lose them altogether).
Just like other businesses though, landlords will in turn need the banks to provide an interest payment holiday – or some sort of government subsidy with the same effect. So it all falls back on the banks, and government intervention by one means or another.
I can’t see why dentists are squealing, they look to me in a better position than most businesses.
Landlords take rent
They do not make profit
They extract, and do not add
And banks will have to give them a subsidy or write off their loans – again this is an inevitability
So they do not need state support as well
You are entirely correct but I fear Tory Governments will always protect their own and rentiers and landlords are at the top of the list.
We are a small manufacturer but closely associated with tourism. I have been contacting many of my customers and having a chat to see how they are coping, they are all closed at the moment. The tourist season in Scotland is not long and many are only open for the season or have a token presence in the winter. The season, effectively, will not exist this year. The employee scheme will end in October. The inevitable consequence is mass redundancy. Some will try to survive through to the 2021 season by using the BB loan scheme, particularly if they own their property. Where they are not owners then the prospect of continuing to pay rent is one of the biggest problems. Do they take on all that extra debt in the hope that all will be well by next year. Some, in retail, are already planning for a closing down sale as soon as they can open. Tourism won’t ever get back to previous levels and it really needs an effective vaccination. I can see a massive wipeout in tourist/hospitality capacity. The tourist sector will be last to revive but the Chancellor will do nothing to consider the differing time scales of the different sectors. Rents are one of their biggest worries. A few have more enlightened landlords and some have been granted rent holidays of up to three months. Mostly this is not the case and many Scottish Councils, like Edinburgh are refusing to take any political decision on this for their own properties. Indeed if you are in Edinburgh you have to sign a document promising to clear your arrears over a fixed, short period in order to get a defferment.
On the bank side the latest helpful proceedure is instead of the usual nod on the annual rewnal fee for an overdraft many are being charged more and the overdraft reduced. Very helpful!
Good luck
I know some people who are enjoying a mortgage holiday or can work from home -in safety. There are others who are still going into work where they have to be near other people-in shops, cleaning, in the NHS etc and are paying rent. Others are not in work and will owe rent when they return to work. Very worrying for them and the fact that many will be in the same boat is scant comfort. It seems like a social class divide or as the kids say, ‘not fair.’
The question that is see is, will people just put up with it or will we see more mass demonstrations on the streets? Or even our govt. reverse policy as the in the 1930s when the defence of the gold standard was reversed?
When people can’t feed their children because the landlord is threatening eviction they see red
will this government be wise enough to anticipate this? or wait until events push them?
I don’t have a lot of faith in their judgement!
They will get it wrong…
Richard should not therefore your Sustainable Cost Accounting include another category of costs namely: Fictitious Costs. Fictitious costs are all those charges included in the costing of any product or service that do not add any value, and are not consumed in the production process. This category includes as you rightly identify all associated land charges e.g rents, and we could add mortgages and their accompanying bank charges. Building costs would be allowed but land is God given and should not be in the gift of any entrepreneur. To this list we should also add patent, management, trade mark, planned obsolescence and such like charges. A prominent German economist (whose name escapes me at the moment) has calculated that the sum of all these costs accounts for between 40%-50% of the price of all products and services.
Worker Self Directed Enterprises (WSDE’s) as an alternative model of public ownership were a key policy of the Labour Party in both their last two elections. Their costing models would have worked to progressively eliminate all fictitious costs. WSDE’s would thus provide the ideal practical platform to deliver the New Green Deal at a much lower cost than the current Capitalist system. This lower cost would be delivered with an ever increasing real increase to Society’s share of the economic cake – as it should be.
The present cost trajectory of our economic system lies on a positive exponential curve. Every place you look disaster and chaos. The cure is to set our economy on a cost negative exponential curve. A place were human needs are met. Worker Self Directed Enterprises have the potential to make that major contribution.
Whilst not disagreeing with your premise, my sympathy for dentists is not great. I have been “forced” into the private sector for lack of any NHS dentist. The hygienist charge is phenomenal given that I’m sure her actual pay is not fantastic, as are all the other charges. I needed a root canal filling some years ago and practically had to take out a mortgage to pay for it. The dentists pay themselves very handsomely, so maybe they will have to have a period of time when their income reduces – I expect it will still remain above the national average. And if they have to move out of their very large houses into something more modest, so be it, although finding anyone able to buy their house will I admit be something of a challenge.
I would also question whether people really do need check ups with the frequency that most dentists suggest. Mine never found anything wrong at a check up so I paid for that and then had to pay when in-between I actually had a problem! I now go 2 yearly because the charge is so ridiculously high and that is only so I am just about still on the books in case I have an emergency. Most of my problems have related to over zealous dentistry in the past.
However, I do fear for the high street in general and the hospitality industry. For these I agree, rent reductions will be a significant issue.
A dire situation requires radical action. Better to over react than under react. Universal basic income should be progressed without further delay. Michael Hudsons book “and forgive them their debts” is an interesting history of debt since 3000 BC. Debt forgiveness or a modern equivalent might have some role to play. If the state can roll up and never repay debt they have created could this not be rolled out into the private domain as almost everything else?
Landlords and Banks will take a big hit whatever happens…. just a question of when/how.
EITHER – Government sanctioned rent re-negotiations. Property values drop sharply/quickly, banks take a hit through defaults on debt secured against property.
OR – Rent declines through attrition. Rents stay where they are until the renter goes bust or the lease expires. New rents are then much reduced. Property values drop sharply, banks take a hit but it happens more slowly as the last juice is extracted from businesses before they fold.
ALTERNATIVELY, it might be more attractive to generate substantial inflation. Increase benefits, increase the minimum wage, spend big on the Green Deal, allow the currency to devalue. Nominal rents might not fall but in real (inflation adjusted) terms they would do so.
Pros? Probably easier (philosophically) to get through than Government intervention in private rental contracts. Gets the Government spending more on what we need (Green Deal). Rebalances wealth away from the old towards the young.
Cons? Inflation takes time…. which we may not have. Not good for older Tory voters….. so may be impossible under this government.
Interestingly, the Stock Market seems to view the “inflationary, interventionist” approach as most likely, I fear a slow and steady decline as business buckles under high rents and low demand.
Thanks
“Not good for older Tory voters.” No better for older non-Tory voters either.
I am surprised that you want to refer back to what you said a month ago, given how wrong you were!!
“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.”
Whether something is massively overvalued or not is a subjective thing. However, what we do have is a marketplace where buyers and sellers can determine the fair price of something.
On that basis, it’s quite clear that there was a significant over-reaction and in fact at the time, you made your claim, shares and similar were massively undervalued as confirmed by the c.10% rise across almost all markets since that time.
You think stock markets are reliable indicators of value?
I despair…..
The market tells us where we can buy and sell securities…….. today.
I recall April 2007 when Household Finance (a sub of HSBC) declared a USD 1 bn+ loss (when USD 1 bn was serious money!) on it’s mortgage book. I said to my partner at the hedge fund we ran “mark this day in your diary – today is the day the music stopped”. Despite the gathering clouds that were pretty dark, stocks made new highs almost 6 months later. 18 months after that the market was more than 50% lower.
History does not repeat….. but it ain’t over until it’s over.
🙂
I really don’t get this irrational hatred of landlords. I have just finished a mixed retail / residential development in the SE outside London. The ground floor space was designed for a restaurant as I cleared the internal layout and added an extension for a new kitchen. We agreed terms with an occupier who was looking at buying the leasehold or renting. The building was built around their requirements and they spent £350k fitting it out. In the end they chose a 15 year lease and got three weeks sold out before lockdown closed them.
Why is it OK for me to develop a site and sell it for a profit yet if I let the same building suddenly I am a horrible rentier that deserves to be crushed?
I have no hatred of landlords
But you are extractors of value from society
And when I have a choice when returns are limited that makes landlords bottom of the pile
It’s really not hard to work out
So if I sold the building after development that would be fine? But if I let it instead I suddenly become an “extractor of value from Society”?
Why am I not an extractor if I develop it and then sell it?
You do know developer are also simple rent detractors don’t you?
Builders aren’t of course
But developers are
So, no difference
If, as you say, rent and interest are merely “extractions of value” from society, why not make it illegal for them to be charged? Do you think any interest or rent is economically or morally justifiable? If so, what amount or % return? If not, then why don’t you campaign for them to be illegal?
I argued for an interest cap of 60% (yes you read that right) on doorstep loans many years ago So I m nit averse to the idea.
But why not ban interest? A) Because like banning alcohol it won’t work and b) ending tax relief in interest payments by business over time would be a more realistic first step, and agreed desirable by most economists
If the economy is going to hit the wall then the banks will collapse anyway.
Perhaps better with govt support to phase in debt relief and write offs, and allow people and businesses to move forward into a new economic reality, save being forced into stagnation or collapse by old debts.
I guess it’s similar to the UK vs Iceland approach to the bank collapses in 2008.
Banks are going to collapse anyway…..I just don’t think almost anyone realises it as yet because they simply cannot join up the dots
“Ending tax relief on interest payments is deemed desirable by most economists”?
Citation needed!
Google is readily available to you
The idea is so commonplace I need not cite a source
As expected, no credible source for your claims.
Anyone can make absolutely anything up and claim “Google for details”, it’s hardly the actions of someone with credible evidence for their claims!
Start with the Mirrlees report and move in from there
In the meantime, you are now blocked for trolling
https://www.economist.com/briefing/2015/05/16/a-senseless-subsidy
Reading your blog posts each morning is fast becoming the equivalent of taking a cold shower.
If you are clear sighted in your prophesies you should relocate your soap box to parliament. I get the impression that those with real insight into our economic malaise are shouting from the side-lines. Time to get on the pitch…
You have argued against many of the ideas in the Mirlees reports (IFS) previously, so it’s slightly strange for you to want to cherry pick just one aspect of the report and ignore the others (when the whole premise of the report is that the various approaches need to work together to create an efficient system).
Did you not realise the contradictions between your claims and other aspects of the report or are you deliberately ignoring them?
James
Wow, because I disagree with a person on something I must disagree with everything they say?
Really?
What planet do you live on?
Don’t take up debating for a living, I rather strongly suggest
Richard – the point is that you’ve referred to a report to evidence your claims, seemingly oblivious to the wider context of the report.
To make the claim that ‘xyz is deemed desirable by most economists’ and then to ignore all the other things also deemed desirable by those same economists is somewhat disingenuous (at best) and highly misleading at worsts.
The point of the report was to look at the tax system in it’s entirety and how different aspects work together – cherry picking just doesn’t work, regardless of how you’d like to use it to suit you arguments.
With respect, that’s a massive claim
I was asked who might agree
I offered a source that does not usually agree with me precisely for that reason
And given Mirrlees was written by many authors to claim all agreed with everything is simply not true
So I’m sorry, but to be candid you’re making up a claim that makes no sense at all