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,


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