The Street Without Joy

One of the notable, early films to come out of the German speaking world was the ‘The Street without Joy’ based on Hugo Bettauer’s book (‘Die freudlose Gasse/The Street without Joy) and starring Greta Garbo. Set in Vienna during a period of economic hardship and high inflation, the story without getting into too much detail, is a morality tale borne out of the ways poverty stress tests our moral compass.

In today’s context of high inflation – still printing 8% in Germany for instance – and now an official recession in the USA (two consecutive quarters of negative GDP growth), moral compasses are whirring with the contortions that higher prices bring. Germany foreign policy is an example. As gas prices rise there is background chatter of taking a less aggressive stance on Russia. Hungary has long ago capitulated here.

In a number of missives this year we have noted that higher food prices in particular will make life difficult for incumbent centrist governments and relatively easy for populists (just look at Italy) and that there will likely be unrest in a number of countries (dramatically so in Sri Lanka).

Another profound effect of higher inflation is the socio-economic choice it pushes on central banks. If they decide to crush inflation, and continue rate increases until inflation overshoots to the downside then this will cause a recession but will likely result in a relative reduction in the wealth of the rich compared to the rest of us (though in absolute terms we are all likely worse off). If central banks veer away from monetary sadism, and permit structurally higher inflation, this could cause a run up in some asset prices which on balance will stretch wealth inequality to new, multi century highs.

Against this backdrop, if we bear in mind the results of research by some German social scientists and economists at the ifo institute (Funke and Trebesch) that showed how the echo of the global financial crisis manifest itself in the rise of the far right across Europe, then we must think of the social and political effects of higher inflation.

Looming behind all of this is the spectre of the 1920’s/30’s and while it would be nice to have the likes of Greta Garbo, and Marlene Dietrich back with us, a 20’s style collapse of economies and the political order is no longer an outlandish proposition.

The moral aspects of the pressures induced by higher inflation can be pernicious and extend well beyond the tendency for food companies to put fewer crisps in the crisp packet.

The first is that a range of companies will pass higher inputs on to customers and in the case of many banks, they will increase credit related charges to customers (credit card debt in the USA is at an all time high), with the end effect of further penalizing those who may most need credit.

A second is that in the longer run, what economists call ‘human development’ will suffer – people will arguably eat less well, may crimp on education and health expenditures – and it is now well documented (see Anne case and Angus Deaton’s work for instance) that human development scores (most notably life expectancy) in the USA are dropping sharply.

Third, geopolitically, the inflation wave is redistributing power, largely through the strong dollar on one side and emerging market stresses. Notably as the likes of Argentina go through more financial stress its position vis a vis its creditors and external institutions will diminish even further. It would be good to think that in such countries, yet another crisis will force a rethink on economic management, but it is likely to prompt more populism.

What also remains to be seen, and surprisingly was not the case, is whether there will be a decisive backlash against large businesses and landowners, internationally. Will Sri Lanka or some African states nationalize assets owned or loaned to China and will international property companies be targeted by protesters as is now the case in Spain.

In grave economic crises, this kind of political aftershock is often the result of an earlier macroeconomic crisis. We are seeing other signs – unionization in the USA is the lowest it has been in multiple decades, but in parts beginning to pick up. I am not sure that Andrew Yang’s new political party ‘Forward’ (very Macron-like) is a response to bad economics or bad politics, but such a bi-partisan effort is welcome (though I suspect it will not succeed).

Incumbent politicians reading articles like this might also wonder – what should we do? For that reason, I suspect we will see higher taxes on corporates (energy companies in the USA), potentially on property developers, and a greater effort to improve public services like transport and healthcare. The lesson of the global financial crisis is that policymakers did not go far enough in tackling the root causes and culprits of the financial crisis.  Let’s see if they have learnt this.

Have a great week ahead,


From ‘whatever it takes’ to ‘whatever’

I have started to write a new book – this time on democracy and politics in France (with Pierre-Charles Pradier), but with the usual impeccable timing I think I may have chosen the wrong subject at the wrong time. Against a backdrop where the Tory Party is about to choose Liz Truss as its leader, and Italy has proven too much for the admirable Mario Draghi, France is a bastion of political peace and stability!

At the time of writing, it looks like Mario Draghi’s time in Italian politics is over (he may yet become president) and given the way he led the country during the COVID crisis, oversaw a rebound in its economy and restored the authority of Italy as a foreign policy voice, this is a loss for Italy. Moreover, that someone of his credibility and achievement can be spat out by a political system is deeply disheartening.

From a political labour market point of view Draghi is the ‘opposite’ experiment to the likes of Boris Johnson, Liz Truss, Donald Trump and Jair Bolsonaro and a growing list of other opportunists in the sense that he entered politics from a position of strength and accomplishment and was likely more motivated by public service than self-interest. He may have lacked the popular touch, but at a time when most people are put off public life by its viciousness, the potential exit of Draghi is a pity, and a costly mistake for Italy.

The government he led collapsed for several reasons. One is that the populist 5 Star party has found its support shrink given its role in government. The decision of Luigi di Maio to leave 5 Star and pursue a more serious political career shows that for some at least there is a viable transition from populism to power.

Similarly, to 5 Star, the two right wing parties in the Draghi government, the Northern League (Lega) and Forza Italia (recall Berlusconi) have lost their lustre with voters because of their participation in government and have been surpassed on the right by Giorgia Meloni’s Fratelli d’Italia party. She is interesting, for mostly the wrong reasons.

To start with, there are at least two similarities with France. The first is that in terms of parties, Italy’s system is fragmented – comprising a centre (France’s centre is larger and more robust) surrounded by parties of the ‘far’ right and left, that style themselves as being against the ‘system’.

In recent years ‘anti-system’ parties in Italy have positioned themselves against Europe and the euro, though the new development is that whilst being ‘anti-Brussels’ Meloni’s rhetoric is more ‘anti-globalist’ (Draghi is seen as a high priest of this movement, whose capitol is Davos). Similarly French politics has switched from a left-right wing axis toward one where disenchanted locals pit themselves against the elite globalists (as they portray Macron).

Meloni is also interesting politically in that she cultivates relationships with far-right politicians in other countries – Le Pen in France (whose niece is also building an international network of neo-facists), Orban in Hungary and some Republicans in the US. Whilst this is not a novel development, there are few such networks, and in this case, it is a menacing one.

This made all the more worrying by the links that Italian political parties have to Russia, notably Meloni, Matteo Salvini of the Northern League and of course Berlusconi’s personal ties to Vladimir Putin. Given what is happening to Ukraine, these ties have, in the context of elections and a new government, the potential to undercut support for Ukraine from Italy, and to permit Moscow an avenue through which to destabilise Europe’s response.

There will now be an election on September 25, and polls suggest that the next government (a technocrat led caretaker government till next spring is also possible) will be formed of (far) right parties, possibly led by Meloni, orchestrated by Berlusconi. It is still possible that Italians revolt against the populist parties (one thousand mayors have signed a petition in support of Draghi)

Broadly speaking the policy agenda of the right lacks originality, and squanders whatever fiscal space Italy possesses. The ECB’s new ‘anti-fragmentation’ policy toolbox complicates things even further because the conditionality it demands is only found in economically upright, cooperative euro-zone countries. To that end, Italy may become a source of political tension with Brussels, and volatility in bond markets. The one important carrot Brussels has in the EU Next Generation Fund, where further disbursements are contingent on ‘good behavior’.

The greater challenge for Italy’s political class, having jettisoned Draghi, is to come up with either a leader or a set of policies that bring growth to Italy, and give it more of the prestige that Draghi brought. Like most populists, they will likely do the opposite. 

Have a great week ahead,


AI – The Final Problem

The Swiss government’s Spiez Laboratory, one of whose specialisations is the study of deadly toxins and infectious diseases, is located right in the heart of Switzerland, incidentally not too far away from the Reichenbach Falls, where Sherlock Holmes vanquished Professor Moriarty (more about him later) in ‘The Final Problem’.

Nine months ago, scientists at the Lab performed an experiment where they deployed their artificial intelligence driven drug discovery platform called MegaSyn to investigate how it might perform if it were untethered from its usual parameters. Like many AI platforms MegaSyn relies on a large database (in this case public databases of molecular structures and related bioactivity data) which it ordinarily uses to learn how to fasten together new molecular combinations to accelerate drug discovery. The rationale is that MegaSyn can avoid toxicity in molecules, and thus sift ‘good’ ones.

In the Spiez experiment MegaSyn was left unconstrained by the need to produce good outcomes, and having run overnight, produced nearly 40,000 designs of potentially lethal bioweapon standard combinations (some as deadly as VX). It is an excellent example of machines, unconstrained by morality (humans have willingly crossed this moral threshold), producing very negative outcomes.

Another recent example is the reported conversation between Blake Lemoine, a Google employee, and a computer program called LaMDA which Lemoine reported publicly as being sentient. Whether this is true or not, we are at a stage where AI is advancing towards AGI or Artificial General Intelligence, where computers can learn and begin to think like humans, not unlike Alan Turing’s famous ‘test’. Indeed, an AI program called GPT-3 can write half decent fiction.

Scarily still, there is already plenty of evidence to suggest that AI is playing a military role. In Ukraine, drones have been programmed to recognise Russian military equipment and to attack it. Larger nations can harness AI to weapon systems to make them seek and destroy their enemy and having seen the effect that drone technology has had in the Nagorno-Karabakh war, we may not be far from an AI driven war.

This example and the broader emerging debate around AI give us a sense that in the new world order that is being formed, there are multiple, complex axes. For example, much is made of the growing strategic rivalry between the USA and China, and part of this rivalry will surely focus on AI – in terms of computing power and access to large public and private data sets (Europe is ahead of both the US in seeking to rein in how data is used in AI). Within these large regions, another line of tension will run between humans and the impact that AI has on their lives (such as on minorities).

It is, however, not all negative. In a widely reported experiment last week, a project called Democratic AI allocated the outcomes from an investment game, in a way that was more egalitarian than the outcomes chosen by purely human actors. It suggests that whilst the research benefits (and dangers) of AI in settings like biotechnology are more tangible, there are also very clear policy outcomes (for democracy and public policy) as well.

At this stage, it is not controversial to say that most governments are far behind where they need to be in understanding and better marshalling the effects of AI on our lives (from insurance contracts to airline prices to the interaction between social media and politics). While I can’t claim to have a clear insight myself, I can recommend a few decent resources – the State of AI report, Kai-Fu Lee and Quifan Chen’s book ‘AI 2041’ not to mention the entertaining ‘the Love Makers’ by Aifric Campbell.

Now back to Moriarty, another man with dark dreams of being ‘world king’. Rumour has it that one of the people that inspired Arthur Conan Doyle’s characterisation of Moriarty was George Boole, Professor of Maths at University College Cork from 1849. Boole, one of the great mathematicians, created Boolean algebra which laid the foundations for computer language and is this the structure around which scientists use machines to mimic and ‘improve’ on human behaviour.

I spent years in the basement of UCC’s Boole Library, slaving away on AI – though I didn’t know it at the time. The trouble is that back then it was called regression analysis, data sets were very, very limited and computing power was, from today’s perspective, prehistoric (see my account).

If I had known that the regression caterpillar would turn into an AI butterfly I might have stuck with it. My lesson is that computing power, and in certain cases data sets, will improve further, and as they do, they will push the boundaries of law, moral philosophy and strategic competition between the large regions.

Time to bring back Sherlock!

Have a great week ahead,


The Pain Trade

In the film Mutiny on the Bounty, Captain Bligh declares to his militant crew that ‘beatings will continue till morale improves’. This tactic doesn’t end well for Bligh, though he eventually makes it to safety. Yet, the notion of ‘beating till the morale improves’ is perhaps better applied to financial markets. As a very simple rule, in the case of underlying imbalances or economic stress, they (market prices) will often extend to levels that cause pain.

The past number of weeks have been an excellent case in point. Extreme moves in commodity prices for instance have caused hardship, political turmoil, and increasingly, unrest (Sri Lanka for instance). This introduces several levels of socio-political complexity into the debate on markets. The value of free moving prices (as opposed to those under the spell of quantitative easing) is that they send signals about the health of the world economy and its moving parts. Policy makers should pay attention to these and map their implications (will we have fuel shortages and power cuts this winter?).

There is also a countervailing argument that extreme price moves that harm people’s livelihoods should be curbed. To an extent that is hard to do on a consistent basis and is ultimately the role of central banks at a broad level – most of whom have failed their mandates. We should expect that for the rest of this year, many nervous governments will deplete their fiscal capital.

One market signal worth paying attention to is the dollar, whose recent strength has manifest itself as yen weakness, and is now driving the euro down towards parity with the dollar. A range of emerging market currencies – Chilean peso for instance – have also sold off. At one level these moves can be interpreted as individual regional stresses (German trade weakness notably) but a more comprehensive view is that dollar strength is signaling demand by investors for safe(r) assets and money. Should dollar strength persist, it should be a cause for concern, as a signal of what is occurring in portfolios, and for the spillover effects that could produce a mini ‘dollar’ crisis (see this ‘our dollar, your problem’ note from David Skilling).

With the half year point now here and having been through multiple sell-offs (commodities being the latest), the pain trade is still likely with us, but could be expressed in two very distinct ‘pain’ channels, both of which depend on the reaction function of central bankers and will have marked socio-economic effects in years ahead.

It is possible that, mindful of the drop in commodity prices and especially the more politically sensitive aspects of these (gasoline prices) and the implications of this for headline inflation, central bankers begin to soften their message on ‘killing off’ inflation. In particular, it is not yet clear that central bankers have the levels of monetary sadism required to stomach the collateral economic and political damage associated with thoroughly suppressing inflation. In that respect they might adopt a ‘living with higher prices, avoiding recession’ stance.

While to a certain extent this is priced into interest rate markets (they expect the Fed to cut rates through 2023 and mortgage rates are dropping from a high level) an ‘inflation permissive’ message from central bankers would set in train a new market and economic regime.

Bond markets would weaken, commodities rally as an inflation hedge, as would the stocks of companies with pricing power. It may also be that the equity value of companies with large debt levels would rise, given the real effect of high inflation/steady rates on debt. Economically however, the prospect of a higher trend level of inflation could lead to upward pressure on wages, at least for those who have bargaining power, and in broad terms would lead to a relative transfer of wealth from asset poor lower income workers to wealthier, higher earners.

Another monetary piste down which the Federal Reserve and other central banks can travel is to persist in the fight to flatten inflation (for the moment the most likely scenario). This bid to reinforce their credibility would occur in the face of weakening economic activity (the Fed has unusually been raising interest rates in the face of record lows in consumer confidence), where they would continue to ratchet rates upwards until inflation overshot to the downside (early next year).

The effect of this in wealth terms would be more vicious deflation in asset values, most notably property prices in the developed world (Australia, Canada, the US are vulnerable). The economic effect would entail a sharp recession, and a large negative wealth effect on the wealthier classes. Politically, a number of governments would, simply by association bear the downside (though Biden’s approval ratings are already strongly negatively correlated with inflation) and we may well likely see a sharp deterioration in relations between politicians and central bankers.

Many central bankers would understandably wish that inflation would melt away, and to a large extent supply chain blockages and commodity price rises are ebbing. There is still the risk that service price inflation and rents push higher, and that these rises prove sticky and hard to reverse. Resolving these pressures will be complex and will involve a coordinated effort between governments and central banks to best distribute the economic ‘pain’, and at a time of great change, maintain social cohesion (mindful of the political consequences of the 2009 global financial crisis).

Have a great week ahead,


Thriller in Tanegashima

I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).  

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

Have a great week ahead,