Brexit Consequences to Come

The political elites and many in the economic community warned of dire consequences should Britain vote to leave the European Union.  Immediately following the announcement of the vote equity markets worldwide drop significantly.  However, one week later they have rebounded and are about back to where they started.

The action of the equities markets suggest either the predicted dire consequences were severely exaggerated, or as an alternative, equity markets with the assistance of continuous central banker interventions no longer believe that stock valuations can go down.  Neither is very comforting.

How the UK’s exit from the EU will affect the world economy remains to be seen.  The Daily Reckoning suggests that political elite Progressives will take a play out of Obama associate Rahm Emanuel strategy book, who infamously said: “You never want a serious crisis to go to waste.”  Using this strategy, they will use the Brexit vote as an excuse for more central bank spending and interventions into the economy.  Why not, that strategy has failed for the last eight years so let’s double up on it.

The Daily Reckoning reports that since 2009 central banks have printed over $12 trillion.  In addition, they have made 654 interest cuts worldwide.  This has succeeded in creating equity bottles that have made the wealthy wealthier.

The Daily Reckoning expects more Quantitative Easing, QE 4, and an even more radical policy called “helicopter money” where the Fed basically froze money to the masses.  These radical steps are not taken out of stupidity.  Instead, they are an acknowledgment by central banks that we are reaching the end game.  Without continuous and more aggressive interventions, the rebalancing of the economy will begin and it will be painful.  Irrespective of the central banks’ actions, that rebalancing will occur.  It is only a matter of time.

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UK Says “Yes” to Brexit

Flag United KingdomYesterday the United Kingdom held its referendum as to whether it would stay or exit the European Union.  The vote is in and the British decided to leave the EU.

Today, markets throughout the world have experienced turmoil, seemingly surprised by Brits’ decision.  This reaction is curious given that the various indicators, except the polls, pointed towards a British exit.

The British electorate’s decision to leave the EU is part of a broader worldwide phenomenon.  Governments and bureaucracies in many countries have been growing at increasing rates over the decades.  This has enriched and given additional power to ruling elites.  The masses accepted this until recent years when their standard of living stagnated.  Two changes affected the mentality of the masses:

  • A growing number of middle class in Western Europe and the United States have seen decreasing living standards.
  • Bureaucracies, unelected shadow governments, have exerted more influence through regulations.

Born of dissatisfaction, is a new type of revolution enhanced by social media and the Internet is occurring.  In the United States the phenomena is epitomized by the popularity of Donald Trump and Bernie Sanders.  Their popularity is resounding “no” vote for the status quo, irrespective of the potential consequences of electing untested populists.

Similarly, Britain’s decision to leave the EU is a resounding vote against the status quo.  The British people no longer will allow unelected bureaucrats in Brussels to create laws and regulations for the UK.  They also indicated their desire for stronger border controls.

The European Union was a mismanaged creation of the political class.  The goal was to create a United States of Europe increase economic activity and lessen the likelihood of armed conflicts, as so often happened in Europe.  Unlike the United States with a powerful central bank, European countries still control much of their monetary policies, irrespective of the single currency.  Also unlike the United States where the central government is elected by the people, Europeans have no vote concerning the bureaucracy in Brussels that creates laws and regulations that member states must abide by.  The British say “no more”, irrespective of the consequences of leaving the EU.

Since World War II the world has traveled through two different periods.

  • The Cold War between the United States and the Soviet Union for all practical purposes divided the world into two spheres. This period effectively ended in 1991.
  • Since the end of the Cold War, the political class worked to create a new world order where sovereign borders would be made moot. The beginning of the end of this period started in 2008 with the great financial meltdown.  This meltdown exposed the weakness of this new order that in part was built on flawed policies and excessive debt.

We are in the early stages of the next phase that involves rejection of the political elites’ vision for the world since 1991.  It is likely that the UK’s Brexit vote will be viewed historically as the start of this next phase.  It is difficult to visualize what this new reality actually means, other than significant change.  Progressives overreached in a power grab for themselves and their bureaucracies.  History has shown that this type of action generally leads to overreaction from the other side.

This Blog has repeatedly written of the illogic of the European Union from an economic standpoint.  One posting in October 2013 titled Noble Peace Prize Awarded to European Union reviewed rather incredulously of the European Union being the Nobel Peace Prize.  The turn of events since helps show just how far out of touch the political elites are, including those that award the Nobel Peace Prize.

 

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