The social consequences of inflation are creeping in

This inflation thing is getting nasty. Strikes, protests, blame games and snarky comments are springing up. It’s as if all the textbooks and history books about inflation were right all along. It is a really bad idea to risk letting the inflation genie out of the bottle.

In Greece, the protestors are already busy with Molotov cocktails in response to higher prices and government cuts. This is an interesting departure from the more deflationary themed self-immolations that we saw in response to the policies of Christine Lagarde of 2012 during the sovereign debt crisis. At that time, she was running the International Monetary Fund (IMF) and – in relation to the Greek crisis – working alongside other protagonists at the European Central Bank (ECB) and the European Commission (EC).

The Greeks must be losing their minds that the same person who was criminally convicted for financial negligence during her time as French finance minister could force severe deflation upon them in 2012 while head of the IMF, and then, a decade later, serve up severe inflation as head of the ECB…

Even saving the planet has taken a back seat to people’s need to get to work to put food on the table and keep the thermostat on. Patience is wearing so thin with the eco-protestors in the UK that the police are ‒ finally ‒ looking around for someone to arrest…

You know you’re in trouble when even the police are against you.

People are also scrimping and saving (and in some cases scrapping) for the goods and services they can afford, with petrol shortages of 2021 and gas shortages of 2022 set to morph into diesel shortages next year.

And with diesel shortages come new supply chain dramas…

The Europeans have bought up the world’s non-Russian gas, leaving poorer nations “shut out of the natural gas market by Europe’s suddenly ravenous demand. It’s left emerging market countries unable to meet today’s needs or tomorrow’s,” reports Bloomberg.

I wonder what people in those poorer economies might do in response. Head for Europe perhaps?

A lot of people are giving up on the economy altogether and retiring or calling in sick, permanently. Reuters reports this phenomenon is worst in the UK:

Britain is trailing behind almost all rich nations in its post-Covid labour market recovery and is on track to become the only major developed country with employment below pre-pandemic levels at the start of 2023.

The reason? Early retirement and a surge in long-term illness means that 600,000 more people are electing not to participate in the work force compared to 2019.

And you were wondering why unemployment is so low? It’s because people aren’t even looking for work. Or they’ve had to get a second job to pay for higher prices.

A smaller workforce is probably no surprise in the wake of a pandemic. But the Reuters report helpfully throws in an aside that, of those who report leaving the workforce for health reasons, “the biggest rise occurred in 2019.”

Hmmmm.

Perhaps the missing workers all found themselves in the higher tax bracket thanks to inflation, and have discovered how much of a disincentive it is to work?

Bracket creep is one of those nasty little surprises of inflationary booms. It’s a bit like the moment you get your first pay cheque and realise that your quoted rate of pay is before tax…

Some workers are demanding wage increases in response to inflation. Nurses want 17.6% more, which would cost the government £9 billion. The government says it can’t afford it. It’ll cost about four times as much as Liz Truss’ ill-fated removal of the top tax bracket. And we know what happened to her…

That debacle might’ve been caused by inflation too. You see, her pro-growth policies would have accelerated inflation, necessitating higher interest rates, which is a big reason why the bond market crashed in the wake of the mini-budget presented by ex-Chancellor of the Exchequer Kwasi Kwarteng on 23 September.

Central bankers are terrified that any wage increases will trigger another surge in inflation. That is a bit odd, given the first surge didn’t feature anything of the sort. And they still seem mighty confused about what the actual source of inflation might have been…

The Bank of England’s chief economist reckons that quantitative easing (QE) might have had something to do with it. The ECB’s Christine Lagarde claims “inflation came from nowhere” after the creation of trillions of euros through QE programmes on her watch and that of her predecessor Mario Draghi.

All this chaos is par for the inflation course. There’s no shortage of quotes from famous clever people about the evils of inflation. It has insidious, hidden and undermining effects. It divides societies, reshuffles the alliances of groups within societies and reduces the ability to make sense of what’s going on in a society.

One of the things that observers noticed about the hyperinflations of Europe (for instance, in Germany in the 1920s) was how it divided populations into new groups. Those with real assets, debt and productive capacity (farmers and industrialists) did very well. Those with paper assets and paper capacities struggled. The middle class and the clerical class most of all.

Professionals like dentists, doctors, barbers and lawyers struggled as their services went from being necessities to suddenly elective.

People who had been rich could suddenly lose everything as bonds were inflated away. The rich who owned land did just fine. Those who were poor because they owned less productive land suddenly found themselves rich because they weren’t starving. Those on welfare… didn’t fare well at all.

People who lived off passive incomes, including charities, lost their source of purchasing power as inflation devalued it.

Breaking the law became a necessity for many. And once that is normal, it becomes a way of life.

Plenty of other redistributive effects played out in strange ways in Europe’s inflationary episodes.

It was an interesting reversal for an intelligentsia urban population which thought itself superior to those who worked with their hands or in the dirt…

But we have more recent examples than Europe’s hyperinflations. What did the inflation of the 1970s do to the fabric of society?

Let me know, along with your permission to publish your response:  [email protected].

The last time we asked about this, we were rather miffed by the response. We were expecting nightmarish stories of people’s savings evaporating and their standard of living plunging. And we got a few of those. But they almost all began with “I remember how my parents…”.

You see, the people who are now saving, investing and managing their money in the face of inflation were not in that position in the 1970s. As they recalled it in emails to us, the 1970s were quite a prosperous period for themselves.

Wages boomed, as did home prices. Unemployment was at the same record lows as now, allowing people to get good jobs easily. Interest rates were still negative in real terms. House prices were cheap, making even high interest rates affordable. And wealth was being built by the boom.

It was the hangover that was awful. The various components of the hangover included unemployment, the interest rates (and the time) it took to curb inflation, the defaults and the repossessions.

Perhaps there’s a lesson in this. The hangover is yet to come today. But it also points out the stark contrast to today.

Our bout of inflation seems to be especially bad. That is because it wasn’t driven by surging wages, like inflations of the past. In fact, real wages have been badly left behind. That’s why the nurses’ wage demands seem so wildly high. They want a real pay rise, not just an inflation adjustment. And, with inflation expected to hit 22% by one Wall Street investment bank, you can’t blame them…

The inflation hasn’t propped up asset prices either. It’d be some comfort if your stocks and property were soaring 20% alongside consumer prices. But they seem to be doing the opposite. Even gold isn’t up much in pounds.

One of the few good similarities to the early 1970s is unemployment, which remains low. But with poor wages, being employed seems to mean needing multiple jobs.

Today’s inflation victims seems to be suffering the worst of it all. They face rising prices but not wages, social chaos, reallocations of wealth and economic confusion.

It’s enough to make investors give up and call in sick too. But not these investors.

Nick Hubble
Editor, Fortune & Freedom