So What Just Happened??
As I type the Dow future contract is implying a 525 point plunge at the open. This follows a 230 point gain on Thursday that was clearly all about the betting odds and the majority of prognosticators assuring the world that UK citizens aren’t nearly bold enough to venture into an unknown that the world’s experts promise would be far too treacherous to traverse.
Ah, but those brave Brits (52% of them anyway) went ahead and voted themselves into the dark forest nonetheless! So what’s it all mean?
Well, perhaps first and foremost, they get their identity back. There’ll be no more subjugating to bureaucrats in Brussels and their cronies. They’ll control their own borders and, thus, their jobs market. They’ll preserve their social services for themselves and, thus, not see those resources depleted on behalf of immigrants whom Angela Merkel says they must embrace. And they’ll no longer contribute to, and succumb to, a regulatory regime that they believe stifles their economic growth potential.
So who could argue with that? And why are the world markets so upset?
For starters, Britain’s trading partners — Asians included — worry that the political and regulatory uncertainty would do across-the-board economic harm. The International Monetary Fund and the majority of mainstream economists had threatened of long-term negative effects. The UK’s own treasury warned that:
…the UK would be permanently poorer if it left the EU and adopted any of these models. Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU.
The negative impact on GDP would also result in substantially weaker tax receipts, significantly outweighing any potential gain from reduced financial contributions to the EU.
Here’s CNBC on the global implications:
And here’s why the fallout is global
Yeah, it does sound hyperbolic, but there are actually a couple arguments for why a British exit may hurt the rest of the globe.
In Europe, the EU could run into economic trouble for a couple of reasons. The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead tomore exits. Nationalist groups across Europe will be watching the referendum closely to see if they can use the results into their advantage.
Elsewhere, the economic risks are best understood as a function of uncertainty. EU uncertainty: If financiers and companies are concerned that they may get cut out of free-trade channels, they may find safer (which is to say, less productive) uses for their money. And British uncertainty: All those billions of dollars already invested in the U.K. and invested abroad by British entities could be in limbo as London rushes to negotiate new non-EU trade deals with key partners.
In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.
If even a small percentage of that is disrupted, it could reverberate across the globe.
Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.
And then there’s the issue of currencies…
With all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies.
Investors will (and have already begun to) dive out of the British pound and into cash that’s perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU.
While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations.
The fallout from those currency moves could be another source of short- and medium-term economic tumult.
As for the next potentially two-years of negotiations, will, as some believe, the EU play hardball with the UK ? Issuing a punishment that might deter others from following suit? Or does — as I believe — blogger Polemic Pain have it right?
Posted: 23 Jun 2016 08:15 PM PDT
Humankind has a natural inclination to avoid pain. If UK votes to leave and it threatens other countries’ economic stability then other countries will do what they can to alleviate it.
There is punishment and there is mutually assured destruction. It’s much like the cold war. Threats are made but when fingers are on buttons they will waiver and diplomacy will take over to avoid net sufferance.
I cannot believe that the EU, whose behaviour has constantly displayed a ‘whatever it takes’ response to survival, would let a Brexit vote paint themselves into a corner of sufferance.
As any parent knows, threats of punishment before the action are a different matter once the action has taken place. Negotiation and compromise is still most likely.
If we seriously think that, as the FT has suggested, the likes of the Mexican Peso’s fate is in the balance of Brexit then something is messed up. Shock is one thing but reality is another. The tertiary correlations should be faded.
Look at this as the Cuban missile crisis. Sense will prevail to protect the majority. If you don’t believe me look at the response to the global financial crisis. The masses were forgiven their debt to preserve society.
Here’s last night’s commentary in case you missed it: