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Tuesday, 30 October 2018


There is also acceleration in predictions of Recession in 2020 that might focus minds on how EU might be severely tested? Not all is original thinking or own analysis; they echo each other. But, that there is a tsunami of this thinking is beyond question and that the forecast could become true is strong likelihood. 2020 Global Recession: much media speculation about impending global crash and the fallout . Some of the predictions are by famous economists offering further bad news for all, merely recession may be optimistic. I’ve been predicting 2020 for a decade. Predictions risk a self-fulfilling prophecy including that 2020 will be similar scale crash to 2008/9 wreaking similar or worse havoc again. This is why government treasuries & central banks never issue such forecasts even if they believe in them, for fear of being thereby responsible for a recession-causing panic reaction. The Independent: “Next global financial crisis will strike in 2020, warns investment bank JPMorgan – sparked by automated trading systems.”1 · The Guardian “we are due a recession in 2020…”2 from Project Syndicate · Forbes: “2020s Might Be The Worst Decade In U.S. History – triggered by contagion from a global credit crisis.”3 · Mark Zandi, chief economist Moody’s, “2020 is a real inflection point.” · Investopedia: housing crash 20204 · Big Think, “…Economists: Second-longest …boom in … ends in 2020…”5 · US national Assoc. Business Economists “recession in 2020…”6 · Market Watch, “…selling your home? Do it before 2020…”7 · Yahoo Finance, “…monetary policy likely cause next recession”…”8 Guggenheim Investment " recession...start in late 2019..."9 _____________________________________________________ Newspapers, magazines, credit agencies & others’ References 1. Stubbly, P (2018), “Next Global Financial Crisis Will Strike In 2020, Warns Investment Bank Jpmorgan,” The Independent, 2. 3. Mauldin, J (2018), “The 2020s Might Be The Worst Decade In U.S. History,” Forbes, 4. And Roubini, N (2018), “The Makings of a 2020 Recession and Financial Crisis,” Project Syndicate, 5. Big Think 6. NABE 7. 8. 9. 10. White, W (2018), “Bad Moon Rising,” Project Syndicate, 11. Prins, N (2018), “4 Pillars of Debt in Danger of Collapse,” Daily Reckoning, Countless others could be cited.

Friday, 23 September 2016


Of all the world's passports a British Passport provides visa-free access to more countries than any other, to 186 countrie, which is most of the world. The next best Visa-free passports provide access to 170 or less. When the UK resigns its EU membership it conceivably risks losing access to 27, supposing the rest of the EU plays hardball in retaliation for the UK restricting the free movement of EU nationals to come to the UK? British Passports will eventually require a re-design to remove references to EU membership. While that and any travel restrictions in EU may be irritating, to go where currently far more British citizens travel to than elsewhere in the world, perhaps less irritating than loss of "passporting" rights to UK based businesses. Insurers, banks, and other financial services, half of whom are UK domiciled, that account for nearly half of the UK's trade, many rely on passporting rights to do cross-border business in the EU. Loss of EU membership and of The Single market would frustrate UK based goods manufacturers, who account for the other half of the UK's trade, of which 60% is currently with the EU, also ony half of whom are UK-domiciled. Ten per cent of UK trade in goods and services is with Ireland. Maybe there will be special arrangements in this case, but possibly not any longer allowable post-Brexit. Companies can re-register their domicile in say Estonia, Cyprus, or Malta and manage their business remotely from the UK. That may not work for very large companies who may have to genuinely move their head offices into an EU country, which then becomes their principal tax jurisdiction. Ten per cent of British citizens in the UK may qualify for Irish passports and thereby gain EU and or dual citizenship. Others sufficiently desperate can take up residence in another EU country and gain citizenship after five years or marry an EU citizen. Irish dowry prices just went up? It has to be a curious exchange that fifty million British citizens will lose a large amount of their freedom of travel only so that they in turn can restrict that of a few hundred thousands of foreign visitors to the UK and perhaps impose irritating visa requirements on 22 million visitors from the EU. They may feel some compensation, however, because of the lower pound exchange rate. Brexiteers argue that free access to EU markets will most likely continue because the EU has a large trade surplus with the UK. That cannot continue, however, if EU imports into the UK will become, as they already have done, 10 per cent more expensive. Hence, there is already less to lose by not granting the UK full or free tradeing rights in the EU, which anyway will thereby save itself much or most or all the UK's trade surplus in financial and other services. The UK has a trade surplus with Ireland in both goods and services. ireland a large trade surplus with the rest of the world but a deficit in capital flows with the UK, and may therefore improve its balance of payments by no longer permitting either of the UK's surpluses to continue, on top of which it stands to attract a lot of UK businesses seeking to re-domicile within the EU? While the sovereignty of borders in today's globalised world can offer little or no political-economy protection when there is free movement of capital across borders, sovereignty can make a difference to trade. The UK already has a high trade deficit of about 6% ratio to GDP in goods with very few sectors earning a significant or any trade surplus except finaancial and related services. The UK therefore will have to rely far more than in the past on voluntary inflow of private capital than annually for decades has been wporth about 2% ratio to GDP. But that is equivalent to borrowing and to selling net financial and property assets. For UK trade to take advantage of lower exchange rate and balance its external account better will require exports of goods to grow much faster than not only imports of goods but much faster than the likely shrinkage in UK exports of financial and related services. It is not hard to imagine the UK having to increase its borrowing (in hard currencies) from the rest of the world for years at an annual rate of about 5% ratio to GDP, and especially if UK banks persist in their four decades old habit of not growing lending to businesses but only to property and for mortgages such that today for every £1 lent to businesses, UK banks lend £6 for mortgages! If this continues there will be no prospect of the UK outside the EU becoming better able to pay its way in the world. It will become a massive nebt debtor, hardly a good foundation or recipe for economic independence and negotiating trade deals?

Wednesday, 29 June 2016


The Referendum voting 52/48 for Brexit (UK giving up its EU membership and its special privileges within it) was intended to restore full sovereignty to Parliament, but may yet find Parliament is indeed sovereign and not the people. There are many examples of parliaments overriding EU referenda results. But, so far all MPs who are asked state they will totally respect the poll result. Brexiteers may soon learn they are not getting what they hoped for and were promised by their unelected leaders. And further that they'll get the opposite of what they expected? Our MPs and voters cannot claim to be experts about trade, economics, immigration and international politics, but that does not restrain their sense of political certainties. They believe in democratic votes and majorities and sovereignty of the people and forget the elephant in the room is international big business who clearly said they don't want this. If voters don't take care to care about business, will business feel a duty of care for them? The Spectator magazine thinks Tories were never more divided since the Corn Laws. But Brexit is also a rural revolt and cities versus their hinterlands, and Little England versus Great Britain. Rioters attacked one of my great great grandparents, Prime Minister the Duke of Wellington, in his carriage and at his home in 1830 for his opposition to electoral reform (conceived partly as a solution to rioting by rural workers). he granted full civil rights to Catholics. The Iron Duke was so-called after he erected iron shutters at no.1 London to defend against stone throwing mobs. A similar mob who stoned Apsley House, voted on 23rd June mass against class and small towns against big cities. Our British love of irony is now being fully tested - possibly to destruction. Brexit's English supporters paradoxically say they want "Independence" without immigrants sounding just like Scottish Nationalists in 2014 except for the latter saying they need more immigrants. We will find out in coming months how much independence Europe will decide it wants to have from an anti-communitaire UK. The irony of this? It is that Brexit lost. Brexiteers don't know that much yet because Remain also lost big time and most people foolishly imagine that if one side lost it means the other side has won? I'll try to explain why Brexit has also lost, and done so bigtime?
Wellington as an anglo-irish patrician knew when to be defensive not offensive. He cared for his men like a landlord cares for the peasants far more than was usual and he wept after victory at Waterloo, knowing after nearly thirty battles he never wanted war again. He worried about, or just humorously quipped, when his men were over-exuberant in their cheering, in an aside, this won't do as it smacks too much of the men expressing their own opinions - he, not a natural or modern Democrat was not a one-sided nationalist. Wellington was a natural European, old school, if a mere "Sepoy General" according to Napoleon. he was a pragmatist judging by his wars and politics, not the type to ask the masses (who hadn't a vote) what they thought other than to check they knew what they were being told to think or do.
Voters are never experts or leaders but led. They have views, needs, fears and feelings, but for fixed opinions (like we all know to do, don't we?) they judge, often collectively or socially, if they can, about whatever it is they are told by leaders or experts or employers, and thereby where to place their trust or find out by dint of personal inquiry, asking questions. Too often questions sound to them, to us, like answers. We hear questions clearly but not the answers. Only education teaches us questions are not answers and travel teaches us how the same questions sound different in foreign places. Experts were more insulted (outfall from the last recession and financial crisis) in the campaign than both sides of the campaign insulted each other. Everyone it seemed wanted to agree the EU is a busted flush and blame the Euro, and creeping Federalism and low growth, notwithstanding these are not pressing problems in the UK or in many other member states or that UK by leaving would make risky problems considerably worse?
Democratic opinion is not pure, free, or bottom-up. And in this referendum there was precious little Q&A - everyone sounded like they knew for certain and if not then the question or answer was classed as humbug, dismissed as Project Fear or opportunist and populist lies. Voter opinion is heavily influenced by whatever is said top down and whatever confidence and belief in leaders is thereby won bottom up.(Legislators think restoring capital punishment would win a referendum. So, why refer EU membership to a referendum? One rule of politics used to be don't ask the voters a question you can't comprehensively answer!) On balance, honesty plus integrity versus their opposites, or intuition versus expert opinion, who do we think provided sounder argument in the referendum campaign? And do we think it was that simple or too complicated. What wins over the media's loudhailers, soundbites or paragraphs, directives or explanations? One thing we agree on is the matters at hand are not simple, no simpler than any political-economy gripe.
Whatever the outcome was going to be, this was not about playing safe, but gambling big - how exciting - Scottish referendum repeated with even bigger stakes on the table - all in, risked on a single throw or hand of cards, not a month's pay packet, but the house, job, and the childrens' schooling - maybe not all of that, but enough to worry about excessive risk and the vice of gambling, not fun, serious, and wild impatience if other ways of changing circumstances are safer with better odds, only slower, and no heroics, the Sinn Fein choice: bullet or ballot? And this is England, why should true English care about Scotland or Ireland if co longer feeling like colonialists or control freaks - anyway, maybe, it's them wild Celts who are trying it on with us Saxons - this was the view of a British Eurocrat with a safe permanent job after twenty years in Brussels whose pension had just gone up 10% in sterling terms? Gambling is said to be the last socially acceptable vice and the principal vice of politics and in both cases winning is temporary while losing is permanent. Gamblers get enormous Faustian buzz from throwing long term onto short term, the deeds to the farm, not just the car keys or gold watch, onto the green baize into the pot - such an aristocratic gesture - who knew the country contained so much reckless bravery, so much showiness, poker faces and fake smiles, so much esprit de nation? And doing so, this time, on never more than roughly 50/50 odds - what self-belief, can only be knowing confidence or a con trick, one or t'other, not both; one had to be false, surely?.
Winning is a dangerous fix for history's gamblers. They remember the dream even if they lose. Once gamblers experience winning against the odds or just dream it they are hooked on luck, doomed to try again and again until nothing's left. When Conservatives behave like this it is shocking to see them gambling the nation's past or present certainties for future uncertainty - that we expect only from extremist nationalists and social revolutionaries. Churchill did it when the country's back was to the wall and the threat to democracy and freedom most deadly. He gambled, but not by going to the country, yet knowing the struggle would be long, the costs bankrupting, potentially fatal,. However much he was a nationalist or Imperialist he was warring on for all countries. He was thoroughly an internationalist, not a Boris, Gove, Farage Little Englander.
But, today's circumstances are not extreme, the EU, Muslims at war with themselves and The West not the EU's fault, an evolving political economic product of 70 years of internationalism committed to democratic rights and free markets, however imperfect, still brilliant and wonderful. Yet, listening to Brexiteers one might be forgiven for thinking wartime and of EU as the Despotic Evil Empire run by demagogues (unelected Elect) conspiring to steal English birthrights by forcing us to accepts millions of aliens into our homes and social security queues. Our birthright is not to have to compete at home with Johnny Foreigner, aka Turks, Poles, and every 'other other'.... let's keep that competition out of sight, over the horizon, in trade and whatever aid, not let the buggers shop in our high streets and make out in our sink estates? Even if Brexit is somehow in some degree or reconfiguration better or best, and maybe just marginally so, this cannot be the best way of getting Brexit or of stopping it, won or lost by a single blow at the polls.
Brexit won a battle but lost the war and of course Remain has also lost and the EU has lost too. Who knew all could or would lose; don't games have winners and not just losers - this is not a game - except this sounds too much like saying everyone loses in war. But why has Brexit already lost its gamble too? One reason is that both sides are gamblers but neither of them are The House, the Gaming Club that always wins eventually, the world's multinational system, game without borders, mobile capital able to alter its home/host structures easily. Or maybe we should say the UK was a co-owner of the casino and decided it was more honest to join the players, become one of the little guys. Anti-establishment urges is surely something to do with that idea? Following the banking crisis there is very strong feelings against casino finance and plenty of voters who liked to say they would be happy to be free of the City of London and its greed and insulting attitudes to everyone and everything not playing in their game.
There are many ironies of why both lost, Brexit in particular: Brexit wanted to restore sovereignty to Parliament but that was shredded, devalued, pounded into brain damage, but the monitor's showing life and recovery likely, out of coma in 2-7 years, plus 10 to get well? What began as a solution to a tear in the Tory party flag has instead rent it asunder, Liberal Democrats were all but killed off but might now try digging themselves up to exit the graveyard Labour too, tattered and limp, the only other UK party of government available - take daily antibio + steroids. What was to free our economy is now bringing on recession, disinvestment and capital flight. A plebiscite to empower the majority only handed power to a cross-party minority, 37% of the electorate. Cutting immigration to take migrants' jobs from them will soon trigger mass unemployment Pressing for radical EU reform has bounced right back to become revolution at home - nice trade? Expecting to confirm our central place in Europe (only if Remain won) maginalized us in Europe and globally. Trying to unite the UK around a shared nationalism (or internationalism) now disunites poisonously, fatally? An effort to enthrone Conservatism dethroned it; all the kings men cannot put Tories back together again! Trying to secure national borders made UK more vulnerable, a victim of international forces. The irony list could go not.
Was there ever before in history, except unwinnable wars, a time when such a set of political choices led, in every major aspect, to the opposite of whatever was intended at the outset? - not just hindsight talking or is it; ask what risk assessments were done; why no Plan B or C? One thing for sure (to economists at least) recession was coming down our way soon. All the data told us economists we're well past cycle peak. The recession starting now won't however be blamed on Bankers or Bureaucrats but on Brexiteers. Had Remain won, the blame would land on bureaucrats and economists.
The recession starting now (2 years early) should force a substantial % of Brexiteers into a 90 or 180 degree turn around. Then parliament after a general election can reassert its legal sovereignty to declare the referendum void, voided by unexpected events, by the experts, shock surprise, having spoken true after all. We, maybe a few only, in time looking back may judge how much was really that and how much desperately manufactured to make it seem so by the elephant in the room, by the unelected commercial interests who have big stakes but don't get a vote except by 'voting' with their feet and their bank balances?

Saturday, 25 June 2016


The Brexit Vote in one day looks to have wiped $2 trillion off financial assets in world markets. One quarter of that roughly will be UK and sterling assets added to which in time would be a similar size fall in property values, beginning with a fall of about 10% immediately - a rough guess only so far. The hit to banks' share values will require additions to banks reserves and shrinkage in bank lending - many individuals and companies will have their bank loans pulled. Of mortgages currently outstanding, on average borrowers have lost because of the Brexit vote one quarter of their net housing equity. UK banks may benefit short term from rise in net foreign assets measured in sterling by about £25 billions, assuming 10% exchange rate depreciation. My guess is about £250 billions in loans to businesses by banks are now at risk of being called in early. But, thankfully, these loans may not be cut any time soon thanks to the Bank of England's standby fund with which to finance the liabilities side of banks' balance sheets (in the central bank reserves) to cope with the economic shock of Brexit of precisely £250 billions. This amount can support about half of all UK banks' loans to UK businesses, which were already severely cut, halved, since 2009. UK big businesses issued more corporate bonds and there were net private capital inflows and substantial foreign direct investment, though this has now turned sharply negative i.e. outflows. Across the rest of the EU in the last seven years business loans by banks were cut by one quarter. Lower bank lending has a lot to do with EU slow growth since 2009 in both the UK and the Euro Area (EA, also called eurozone). Low growth is also because private capital flows are not funding trade and payments imbalances as before but making them worse. Hence, trade volumes are down as countries seek to balance their current accounts in a confederation of 28 countries where one third run trade surpluses (worth 2 times China's trade surplus or two time Germany's with the counterpart deficits shared among the 20 EU net importers) and the other two thirds deficits. The main reason for higher national debt and lower growth has been zero growth in bank lending and a shift of several hundred £ billions over the past seven years from relatively productive business lending to relatively unproductive property lending. In the Euro Area the shift from business to housing loans was about Euro 850 billions equating to 7% of Euro Area GDP (For those who are sometimes unsure what GDP means it is net output of the economy = all wages and salaries plus net profits as how we measure the value of work plus whatever is the net foreign trade balance of each country in goods and services). When UK leaves the EU, the EU will have an external trade surplus with the rest of the world about the same size as that of China - hardly evidence of economic weakness, but perhaps worrying to the rest of the world, not least to the USA? Lower bank lending is inevitable in retail and commercial banking. How Brexit will shrink investment banking and wholesale markets in the UK is another question? The City of London and Canary Wharf's financial services may lose much of its international business including Euro-denominated issuance and secondary market transactions, forced to re-locate into a jurisdiction inside the EU or into the Euro Area to bolster its stability - at a cost in UK based employment, tax revenue and a worsening of the UK’s current account deficit with the rest of the world? On the one hand the ECB can for regulatory and systemic risk management reasons insist that Euro denominated capital market clearing transfer into the Euro Area. But that in itself may not mean institutions and thousands of jobs following too. London remains a profoundly large skills centre, attractive in many ways, and a possible refuge from transaction tax, and trading and issuance remain while clearing is elsewhere. The threat of systemic risk or other regulation requiring firms and trading to move may overlook that European banking regulations are part of UK law and not just part of EU law. The UK giving up EU membership does not automatically mean banks are no longer subject to Basel II/III, Solvency II and their formulation within CRD law.
In the weekend after the murder of MP Jo Cox, when the referendum campaign was put on ice, Remain Campaign leaders Cameron and Osborne had intended to talk about the economic bounce of hundreds of billions that would flow into the UK following a majority to retain EU membership. And in the Chancellors' annual Mansion House speech, George Osborne was to warn on the impact on threats to UK financial services if Britain leaves the EU. In major banks, such as JP Morgan, Deutsche, BNP Paribas, HSBC etc., jobs will go not only in London we are told, and that is going to happen. London and the rest of the UK have already lost several hundred thousand finance sector jobs since 2009. The BBC news site reported Mathilde Lemoine,former advisor to French Prime Minister Dominique de Villepin, chief economist at Rothschild Banque Privee and member of French High Council of Public Finances, saying transactions for firms across the EU in euro-denominated securities - a large and important part of UK based financial markets operations - would transfer into the eurozone for execution and clearing as an ECB supervisory requirement - adding that many foreign banks, European banks and also non-European banks will relocate to the eurozone. Some will transfer people and business to Dublin.
Some of the argument about the impact of Brexit on the finance sector in the UK and London is provided by the following paper: There is concern that UK based banks, insurers and asset managers etc. will not be eligible for the single market in financial services and its so-called "passport". But that is not obvious necessarily. All banks' branches have to be licensed and appropriately capitalised in each country anyway and they include many banks and other financial institutions from outside the EU in each major EU country. Home and host country supervisors can also overlook each other's reports to take a holistic view of financial institutions wherever they operate in Europe. Arguably, with a lower £ exchange rate the overheads and wages cost of operating in London and or elsewhere in the UK can become more attractive to foreign banks and others. Many banks have also domesticated more of their own borrowing and reduced their international balance sheets since 2009. The real damage to banks may arise only when full-blown recession arrives, when economic activity generally slows dramatically and property values fall. Euro Area commercial and retail banks have grown their exposures to property considerably to match and overtake UK banks so that generally property lending is now 60% of the combined total of all business and household lending. This is a greater risk concentration than in 2009. Mortgage backed securities will again deteriorate in cash-flow and ratings as default rates rise as many recent borrowers experience negative equity and higher delinquency and vacancy rates. Pulling business loans and shrinking banks' customer lending balance sheets will add to the downturn in business. And among contractors and other suppliers to financial services and all other business sectors there will be a rise in closures and bankruptcies. Brexit, even before it comes into full effect, should bring forward UK recession including a fall in trade both internally and externally and capital flight that will not be greater than increased savings by households and businesses as they refrain from new investment and are either voluntarily or forced into deleveraging (reducing their bank debts). Recession is to be expected anyway before 2020, but will now come earlier and be much worse than it would otherwise have been had UK voted to remain in the EU. UK unemployment that is currently just above 5% (1.7 million) will likely more than double and exceed current unemployment rates across most of the EU of 10% (and in EA of 9%), giving UK the third highest unemployment in Europe, which measn below that of Greece and Spain. There are currently about 17 million unemployed in the EU excluding the UK. UK unemployment can be expected to approach 4 million once recession is confirmed and has matured into a full-on Depression (meaning a longer period of falling output than six months) by 2018 (when the USA economy will also be turning severely down). Why should unemployment rise so high in the Brexit crisis and recession? Employment is at its highest just now for many years and unemployment at its lowest for 10 years. In 1984, it was over 12% with over 3.5 million out of work. There are almost 9 million people of working age in the UK who are not in the labour market and are deemed economically inactive. On the assumption that for every person not in employment of working age 3 people are required to support them who are in work, and that these three also support variously one and half others (children and pensioners with some help from the state and private funds), then 2-3 million more UK unemployment means 15% of the workforce out of work and another 3 million experiencing lower income or less support. When today 15% experience poverty that could almost double! In the countries worst hit by the sovereign risk crisis, where unemployment rose to between 12% and 25% and youth unemployment much higher, and given that Brexit triggers a sovereign risk type of crisis for the UK it seems realistic to expect unemployment to more than double to a level not dissimilar to that experienced in 1984. The high unemployment then did not trigger social revolution because the government was popular after winning the Falklands War. Whichever new Conservative government leadership emerges over the coming months it is unlikely to be popular. The question of immigrants is not an easily solvable one although there is little doubt that a sharp rise in unemployment will choke off the officially calculated, net inward, migrancy count. Even if a new leadership looks as if migrancy is being reduced that will coincide with higher unemployment and not therefore the result intended by many Leave voters who believed they were being outcompeted by migrants for jobs.
One irony in all of this is that youth unemployment will be expecially worse, much higher than the aggregate of say 12%. Youth unemplyment (those aged 16-24) are almost a third of all claimant count. 16% of youth are unemployed today. This will surely double to 30%. And yet it is the young who voted most fervently for remaining in the EU. Young voters however, while they voted by almost two thirds to one third to remain, only 54% voted (compared to 65% of all voters), but the young will live longest with the consequences of the country's decision, a decision won by those over 50 and over 65 who are already mostly out of work and pensioned off. Those who are heading for pension funded retirement soon and who voted to leave will have immediate worries about how far stock prices and property values will fall and what this means for their remaining quality of life and standard of living in retirement? While what is happening to UK youth job prospects may be described as ironic, for the older voters, for the 'turkeys who voted for Christmas' their votes may be described as a paradox. For all who voted to remain that the losses already recorded at over £4,000 per person, the amount that so-called 'Project Fear' warned of, but which are likely to get far worse before they recover, their anger at all this irony and paradox will be one of complete rage and disgust and in this I am with them. The next government leadership is facing internal and external challenges that will be as testing as what might be described as something similar to requiring intelligent policy-making equivalent to running a war-economy in peacetime?

BREXIT ECONOMY MONITOR - UK loses its no claims bonus

Voters on all sides of the EU vote including those who did not vote are in shock at the unexpected result – a majority of 52/48 for ending UK membership of the EU – and the rest of Europe and much of the rest of the world are also stunned. In any major question it is realistic to begin with one third for, one third against and one third undecided. In the outcome of the UK referendum only 37% of the UK electorate was sufficient for the 52% majority for leaving. 34% of the electorate voted to remain in the EU. 29% of the electorate did not vote. The political campaign of Leave and Remain failed to sway more than 15% of undecided or indifferent voters? Many of them may have been voters who felt unable to judge the complex question and who felt they could and should leave the decision to others who apparently did know what way to vote? The older the voters the more they voted to leave and only the oldest segments, those over 50 and over 65, voted in majority to leave but this was sufficient for a simple majority gained by 1.9% or 634,000 voting to leave instead of voting to Remain. Older voters had the least to gain or lose for themselves and perhaps felt freer to vote according to their gut-feel rather than according to any hard-headed assessment of consequences.
Older voters have most of their life experience in post WW2 decades of improved economic progress and of stability, recovery and protection from economic shocks, in decades when the welfare state and international policy making was growing and evolving. Younger voters' lives have been more dominated by experience of international economic crisis and awareness of global inter-dependencies such as global ecology and climate change, and have become more aware of, and open to, internationalism in culture, travel, education, employment, consumerism and internationally shared moral outlook and universal values. To younger people the world appears less intimidating in respect of differences in traditional cultures, ethnicity, religion, human aspirations, notwithstanding its various wars and conflicts, including economic migrants and political refugees. Differences across the world are for many young people matters of curiosity rather than threatening their own traditional values. At the same time young people are also the foot solders of armed reaction to defend traditions, but not we hope in large numbers in Europe thanks to Europe's internationalism, and not in the UK, not after its own recently ended 30 years of low intensity war about regional nationalism. The Leave campaign leadership celebrate what to them is peaceful revolution by the ballot box, and a revolution in direct defiance of the advice of the vast majority of the political establishment and of business and finance leaders and experts. There is now a renewed nationalist anger, however, in Ireland and Scotland because English voters appear to have ignored or dismissed the risk that voting to leave the EU could lead eventually to a splitting apart of the UK? There is immense anger among young people about how older people voted. Majorities for leaving in regions where two thirds of voters live, in all but three regions, most notably in the Midlands and on the East Coast where people living in poverty are between 20% and 25% of households and where cultural participation rates are lowest and jobs in tourism and tourist numbers are least. Differences in educational attainment or youth unemployment or other factors such as children living with parents and housing shortages do not seem to be factors that coincide with the voting pattern. Scotland and Northern Ireland are two regions with acute concerns about their status in the UK and whether it can continue or may be changed by the referendum vote. London is the most internationalist part of the UK in every respect and therefore had a strong and obviously compelling logic, economic, social, and cultural, for remaining in the EU. What is most striking, however, is that all regions of the UK voted to leave except Northern Ireland, Scotland, and London.
If the Brexit vote had gone the other way there would have been an economy boost and bounce in the UK and an affirmation of its majority commitment to internationalism, to its youth and to the future, to remaining dynamic and outward looking. The world's financial markets were on balance anticipating that. There are many UK and foreign investors who now feel misled and are facing losses they will by any means seek to recover from, and in the first instance by now expecting prolonged relative falls in UK output and asset values reflected in falling exchange rate and dramatically worsening current account (worsening financial balances with the rest of the world short term and longer term). The world economy and financial markets cannot resume business as usual; all major trends are disrupted and values (all relative) are made more uncertain and volatile. The UK is more than the 5th largest GDP economy ($2.8 trillion, 1% of world population and 3.7% of world GDP). In the last 7 years the UK economy recovered fitfully and slowly in line with the USA from the financial crisis and recession by attracting capital flows because of its relative status as a safe haven from other countries and regions of greater uncertainty, and did so because of the UK status as a stable democracy and conservatively managed economy, becoming also a major tax haven with a stable currency relative to other major currencies, and where property investment could expect far above average asset appreciation gains compared to those in other developed economies. With the Brexit referendum vote the UK has spectacularly lost its credibility as a safe haven, a stable currency, etc. Financial inflows that previously benefited the UK, on which the property boom in London relied, are now reversed. USA, Switzerland, Japan, Germany are the immediate recipients of capital flight from the UK. Risk is like insurance and the UK overnight lost its no-claims bonus. It will be years, possibly one to two decades, before trade, investment and capital flows will again focus on UK without a significant "tail risk" cost.
At this time it is very hard to imagine or foresee any event or agreements that could arise to offset or reverse the politics and negative economic consequences of the Brexit vote. Like an insurance policy, the UK economy will now have to pay higher premiums in all of its economy dealings for an indefinite period. The UK along with the USA are obviously both past the maturity peak of their closely conjoined economic cycle. Cyclical behaviour is unavoidable and inevitable and therefore it is not hard to estimate their next recession being due to arrive in 2018-2020. The Brexit vote and the accompanying economic shock with private capital flight will trigger the UK's next recession earlier than expected, beginning immediately, and make that shock downturn more severe and longer-lasting i.e. longer and harder to recover from. If negotiations and new agreements are conducted intelligently there can be a softening of consequences, but this will stretch and test the technical, legal, financial and general macroeconomic policy skills of UK and EU leaders extremely, and do so beyond all previous precedents. If the internationalism of Europe is to survive with its political credibility intact and economic benefits demonstrable and assured the EU dynamics will have to transform dramatically and urgently. Whatever happens the UK economy may become the victim of what the rest of the EU needs to do now for itself much as the Greek economy was squeezed almost mercilessly for the sake of protecting the EU's Stability Pact rues and assumptions? What did go wrong in the EU in the wake of the financial crisis in banking, the recessions, and the sovereign risk crisis, was painfully low growth recovery (near stagnation)as the EU switched from being a mutually supportive region of economic convergence to one of medium term divergence with the risk of long term divergence threatening its continuity and financial sustainability. The EU Commission was not allowed to grow its financial resources to deal with widening imbalances as private capita flows worsened the trade imbalances within the EU. A huge responsibility for the Euro Area was delegated onto the balance sheet of the European Central Bank. It responded well and even beyond anyone's expectations but without clear and coordinated political policy guidance and without lessons thereby learned and turned into new formal policy directions. The UK over 40 years has relied like all other EU members on the EU institutions for policy making and for many thousands of important agreements. Like an oil painting with many layers over many years and generations of artists refining the detailing, the UK has now taken an oil rag to that EU shared canvas and wiped its part not clean but into a mucky mess where the painting work has to start again beginning with many fundamentals, with a lot of surface preparation and under-painting. But are to avoid or mitigate first going through a painful relearning process that may include massive rise in unemployment, further major loss to the industrial base and a shredding of much of the UK's financial services and other industries? Just as the financial crisis triggered a massive questioning and self-doubt and general loss of confidence. much anger and few precise or agreed answers, the UK crisis, a crisis for itself, for the EU, and for the international system, the questioning will now have to embrace far more than just banking and finance. And, again, we may find it very hard to understand and agree policy solutions. There are dramatic events elsewhere and great economic uncertainties and fears. The UK crisis may just be one dimension, however poignant and intellectually challenging, perhaps even dangerous in security consequences including UK break-up, one dimension of a so-called 'perfect storm' gathering together and correlating globally? When the so-called "global financial crisis" did not lead to a revolutionary change or adjustment to the standard theories of political-economy, the macroeconomics profession may now be face with a bigger and more comprehensive challenge and one where our political constituencies and electorates will not have the patience for anything that sounds like more of the same as before or a re-booting to try to return to any point in the past. New solutions will have to be genuinely new and for that we have to work a lot harder and be open to embracing solutions that appear counter-intuitive and even profoundly paradoxical. Are the politicians and their electorates capable of accepting such innovations as may be necessary to avoid economic calamities and more new wars? At certain times in history the world appears to be about choosing between military action and economics, between armed conflict and coordinated trade policy (why the EEC/EU was created and the Cold War eventually ended), between nationalism and internationalism? The skills and political capacities of economists to respond effectively to what is happening in the world are perhaps never more needed or vital to the world's future prospects of peace or war than they are now?

Sunday, 11 January 2015

Joseph Stiglitz wrote

"At long last, the United States is showing signs of recovery from the crisis that erupted at the end of President George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world. But it is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening. If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long term. Then again, it could be worse. Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow. In most European Union countries, per capita GDP is less than it was before the crisis. A lost half-decade is quickly turning into a whole one. Behind the cold statistics, lives are being ruined, dreams are being dashed, and families are falling apart (or not being formed) as stagnation – depression in some places – runs on year after year." It is less that the damage is long term than that the efforts at recovery are the wrong ones. Europe's combined national governments could not agree on a communitaire coordinated responses that would mitigate the extreme imbalances, and so the job became perforce delegated to the ECB. The ECB had to replace Eur1.5tn roughly three quarters of bank deposits including inter-bank loans that afrom 2010 fled 'north' out of Portugal, Italy, Ireland, Greece, Spain. Two third of this has returned or been replaced. But, the renewed anxiety about Greece is causing a another phase of capital flight. Germany and other net exporters and UK (the first economy to benefit from US recovery) are not throwing money at the Mediterranean economies in crisis; the net flow is the other way about. The EU differes from USA insofar as extreme trade and payments imbalances are explicit within the EU and Euro Area without sufficient compensating rebalancing transfers as in the USA. Stiglitz sounds non-plussed by the EU's ineffective or negative action given that it at least has - "The EU has highly talented, highly educated people. Its member countries have strong legal frameworks and well-functioning societies. Before the crisis, most even had well-functioning economies. In some places, productivity per hour – or the rate of its growth – was among the highest in the world. But Europe is not a victim. Yes, America mismanaged its economy; but, no, the US did not somehow manage to impose the brunt of the global fallout on Europe. The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro. Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone. The current mess stems partly from adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition. Hubris has also played a role. How else to explain the fact that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong? These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed. In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. At least the International Monetary Fund has owned up to these intellectual and policy failures." There tends to be an asymmetry within cycles, in that US downturns are transmitted faster to the euro area (and the rest of the world) than upturns: it takes around two quarters for downturns to be transmitted from the United States to the euro area, while it takes around six quarters for upturns. Second, taking into account estimates of potential output and output gaps (using those provided by the European Commission), the euro area as a whole tends to exhibit milder downturns, but also slower rebounds compared with the United States. A third important stylised fact is that recessions associated with financial crises, as well as those associated with credit crunches and house price busts, have typically been particularly severe and protracted. japan is a ood example where government recovery measures focused on refinancing the banks rather than refinancing the underlying economy. Arguably much the same has been occurring in the EU post-2008. Similarly, refinancing government and or the banks combined with austerity measures in government programmes and no effective pressure on banks to maintain and grow but not shrink bank lending to the rest of the economy is not a recipe for boosting general GDP growth. Stiglitz goes on to say: "Europe’s leaders remain convinced that structural reform must be their top priority. But the problems they point to were apparent in the years before the crisis, and they were not stopping growth then. What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself, and a reversal of austerity policies, which have failed time and again to reignite economic growth. Those who thought that the euro could not survive have been repeatedly proven wrong. But the critics have been right about one thing: unless the structure of the eurozone is reformed, and austerity reversed, Europe will not recover. The drama in Europe is far from over. One of the EU’s strengths is the vitality of its democracies. But the euro took away from citizens – especially in the crisis countries – any say over their economic destiny. Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy – only to have the new government continue on the same course dictated from Brussels, Frankfurt, and Berlin. But for how long can this continue? And how will voters react? Throughout Europe, we have seen the alarming growth of extreme nationalist parties, running counter to the Enlightenment values that have made Europe so successful. In some places, large separatist movements are rising. Now Greece is posing yet another test for Europe. The decline in Greek GDP since 2010 is far worse than that which confronted America during the Great Depression of the 1930s. Youth unemployment is over 50%. Prime Minister Antonis Samaras’s government has failed, and now, owing to the parliament’s inability to choose a new Greek president, an early general election will be held on January 25. The left opposition Syriza party, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls. If Syriza wins but does not take power, a principal reason will be fear of how the EU will respond. Fear is not the noblest of emotions, and it will not give rise to the kind of national consensus that Greece needs in order to move forward. The issue is not Greece. It is Europe. If Europe does not change its ways – if it does not reform the eurozone and repeal austerity – a popular backlash will become inevitable. Greece may stay the course this time. But this economic madness cannot continue forever. Democracy will not permit it. But how much more pain will Europe have to endure before reason is restored?" Austerity policies are intuitively chosen by politicians who do not grasp how piublic and private sectors interact and who assume they can act significantly independantly of each other. There is limited understanding of how the public sector has sole responsibility for dragging national GDPs out of recession and how in EU especially this has to be an EU-wide effort. yet, the smaller the European economy the more it is assumed to be less dependant on EU-wide policy when the opposite is true.