Brexit is shorthand for the British popular vote which mandates the withdrawal of the United Kingdom from the European Union. It was widely anticipated that the majority of voters would want to stay in the EU but the surprising conclusion evidenced by the vote was just the opposite of what the pollsters expected. Apparently the crux issue motivating those who wanted out was the fact that EU policy requires all member nations (there were 28 of them) to exercise the same policies towards immigrants as all other countries in the union. Since immigrants have been flowing into other EU countries, especially Germany, at a rate far above what the British would have liked to see, they decided to get out and pull a Donald Trump-type semi-closing of their borders to keep those stinkin' foreigners out. Many pundits, including 90 year old Alan Greenspan, say that a domino effect is sure to follow and the world is doomed to enter another Great Recession as countries withdraw from the EU, erect new barriers to trade and create new tariffs to protect their domestic industries. Let's consider economic reality for a while today, shall we?
The main argument being advanced by those who believe the Brexit is an impediment to economic growth centers around the erroneous belief that the EU is a free trade zone. They believe that without an enormous bureau governing the most minute details of that alleged free trade people will not know what to do and all international trade will grind to a halt, thus causing a worldwide recession. Nothing could be farther from the truth. The EU has thousands of individual tariffs that it enforces upon other nations, just like the Socialist Democracy of Amerika enforces it byzantine code of tariffs upon others. Go here for the sordid tale of SDA tariffs and go here for a short list of 1000 tarrifs currently in force in the EU. Those tariffs change every week or so, thus ensuring continued employment for a legion of bureaucrats who make them up and enforce them, and are designed to protect the domestic businesses of the member countries. They are all anti-competitive and they have all increased the costs associated with doing business. Oh, and quite importantly, they have all reduced the rate of economic growth in the EU. Oh, in case I have not yet mentioned it, they are all in force today, after the Brits have left the EU.
The very notion of a government created "free trade" zone is an oxymoron. Here is a complete list of rules between the citizens of two countries with a genuine free trade agreement:
- Have fun.
As an economically and politically independent nation the UK has a strong incentive to continue trade relations with the EU. The belief being bantered about that the UK is suddenly going to become economically isolated is ridiculous. The Brexit rules themselves require the UK to take a full two years to get out of the EU. Two years from now nobody will even remember this day. Over the course of the next two years the Brits and the EU will abolish the existing agreements and establish new ones that will inevitably be essentially the same as the old ones. Remember the song by the Who with the lyrics, "Meet the new boss, same as the old boss?" That is what is going to happen here.
Those who believe that the Brits will now be paying and assessing new taxes and duties on goods imported and exported with the EU, thus reducing trade and depressing economic growth, are also mistaken. EU member countries already have taxes and duties paid on goods that cross their borders. Like I wrote, the EU is not a tax free zone. Exchanges across the geo-poliltical boundaries of the 28 member states are also politically protected by duties, thus decreasing trade and retarding economic growth. For example, go here and you will discover that the French have to pay a 17% tax for the privilege of importing Wellington boots from the UK. So, I ask you, how are things going to be any different after the Brexit? Answer: they aren't. The only difference is the Brits will be answering to a bureau in London rather than a bureau in Brussels. True free trade terrifies career politicians and bureaucrats and it will never be permitted.
Another point that has been generally passed over by the pundits is the fact that the UK never really fully committed to the EU in the first place. By retaining control over their currency (Pound) and refusing to adopt the Euro as their national currency they were already asserting a significant amount of national economic sovereignty. None of the other member countries in the EU has retained its currency like the Brits have. That allowed them to be protected from run away inflation of the Euro and it also allowed their central bankers to create run away inflation to pay debts to the EU in worthless pounds. Here is a graph showing the relative strength of the Pound to the Euro over the past five years. As you can see, one Pound has been able to purchase between 1.2 and 1.4 Euros over that period of time. Today a Pound will buy 1.23 Euro. That tells us that the Euro has been inflated only slightly more than the Pound over the past five years.
Many of those (George Soros in particular) predicting a world-wide economic collapse are doing so because they believe the Pound will collapse after Brexit. I would love for these folks to explain to me why it is the case that the stronger currency (Pound) will collapse when economic ties to the EU are severed? If anything, just the opposite should be the case. For comparison purposes, see this graph of the Pound vs the Dollar.
One Pound has purchased between 1.4 to 1.7 Dollars over the past five years. Today a Pound will buy 1.4 Dollars. That is a bit less than the average over the past five years and tells us that, amazingly enough, the Fed has been inflating the Dollar at a rate lower than the Brits have been inflating the Pound. Just for fun, here is the graph of the Dollar to the Euro:
Five years ago the Dollar bought .70 Euro. Today the Dollar can buy .90 Euro. That means the Dollar has strengthened against the Euro and we can conclude that the Fed has been inflating a little less than the EU has in the last five years. To put all of this into perspective, here is the exchange rate for the past five years between the Euro and the Venezuelan Bolivar:
That socialist heaven known as Venezuela has seen the value of its currency depreciate by 135% against the Euro in the past five years. Now that is inflation with a vengeance.
What is the point of all these graphs? Simply to prove that the rates of inflation being pursued by the SDA, the EU and the UK are all essentially the same and it gives us absolutely no reason to believe any of those three groups are headed towards hyper-inflation. Once again, there is no economic reason to believe that Brexit is going to create a global recession.
The fundamental presupposition which under girds both sides of the Brexit argument is that government, career politicians and sufficiently bloated bureaus staffed with career bureaucrats are capable of managing the economies found within their geo-political boundaries. When a change of management takes place, in this case from Brussels to London, panic ensues. This is no different than what happens when the company you have been working for is taken over by a new company. Everyone panics and runs around like a bunch of chickens with their heads cut off. The new management will select who will remain with the company and who will be fired, just like the new bureau in London will choose new winners and losers related to the "free trade" agreements it pursues with other socialist countries around the world. There will be moving and shaking but in the end it will be business as usual.
The belief that free trade between citizens of two different geo-political zones cannot take place unless a bevy of bureaucrats first writes thousands of rules regulating that trade explains why stock markets around the world are going bonkers right now. The level of fear in the psyches of investors today is shockingly high. Fear always drives investors to do stupid things. As I write this the German 10 year bond is delivering a negative yield. Yes, you read that right, a negative yield. Investors would rather lock in a guarantee negative return than deal with the fluctuations in the stock market. Nobody believes in real economic freedom. Quite the opposite, real economic freedom is terrifying to people who worship at the throne of government and adore the regulations government writes to protect them from the risks associated with true freedom in the marketplace. Don't be a chicken and abandon your long term commitment to the stock markets of the world. I predict that a year from now Brexit won't even be remembered in cocktail and water cooler conversations.