Brexit or 2016 and all that

“Every might at six o’clock Alvar Liddell brought us news of fresh disasters. ….Never you mind the thousands of dead, I said, you put on the kettle and we’ll have a nice cup of tea.” (Beyond The Fringe skit).

What will happen next? The most accurate answer is that no one knows. We are pretty good at reporting what has happened and fairly hopeless at what will happen after some major event. In order to have forecast today’s global economic circumstances, investment advisor John Maudlin writes as follows (from his website for June 25, 2016).

“If I had come on to this stage four years ago and told you … that we were going to have 40% of the world’s governmental debt at negative interest rates, $10 trillion on central bank balance sheets, and $10 trillion worth of dollar-denominated emerging-market debt, and that global GDP growth would average only 2%, unemployment would be below 5%, and interest rates would be negative in much of the world and less than 50 basis points in the US, you would have laughed me out of the room. You would have all hit the unsubscribe button. Today’s world was unthinkable a mere four to five years ago.”

Maudlin causes pause for consideration for those who think that anyone has a good grasp of what is likely to happen in the political-economy sphere over the next five even two years. Economic and political forecasting is far less reliable than weather forecasting and that’s not saying much. The forces of globalization perhaps sums up what is happening, but that overused term needs interpretation and refinement in today’s world.

What appears to be happening?

The Brexit vote is described by some as a tectonic shift in world events. I have my doubts. In the past 110 years there have been two world wars, many smaller ones, as well as a great depression and numerous recessions. Another source of disruption is technological change. It has affected a wide range of activities with the introduction of the steam engine, trains, planes, ships, cars and more recently computers and communications technology. Schumpeterian “creative destruction” took place. Economies were shocked by these technologies, but adapted, sometimes more quickly than others, and life went on. Some people were affected more than others, but in general the standard of living in the world improved. There were winners and losers.

Coinciding with these developments world population was increasing, so that whereas median world income rose there would be more people in the lowest quartile of incomes. It’s a good or a bad news story depending how you spin the statistics. If your income is below the mean today, you are worse off than those above it, but you may be significantly better off than those below the mean twenty or fifty years ago.

With many more people, the current world economy also has more international trade and investment, and more crossborder movement of people as migrants, workers, tourists, criminals and refugees. Developments in communications technology allow people in different countries to have immediate information about conditions around the world, including through the use of social media. In this sense, the world has shrunk, not physically but in the ability of people to be informed about what is happening elsewhere, and in being able to visit and trade with each other. Just listing and mapping trade and investment agreements between countries produces a spider’s web of people and firms connecting around the world.

A similar set of linkages can be mapped by listing the supply chains of firms manufacturing goods and services. The inputs of items like cars come from many countries where part of the value-added is undertaken before shipping to another location in the same or another country. A Japanese car sold in North America may have been made there with few actual Japanese inputs.

Along comes an event like Brexit. Some view it as an unraveling of the movement towards economic and political union in Europe since 1945, and a return to nationalism and the antagonisms between nation states, especially if other countries decide either to leave the EU or weaken their ties to it. Others see it as a restoration of state sovereignty and the desire of countries to shape the social and economic environment within their borders. For reasons similar to why clubs are formed, people want to live beside other like-minded persons, as they do in neighborhoods, clubs and religious communities. Concerns are raised because state sovereignty can lead to nasty nationalism, but this is something that the promotion of human values tries to ameliorate, not always that well as the record of conflict shows.

My take is that things will settle down as people and firms view their options and make adjustments. These will occur in trade agreements, defense alliances, the way industries are structured and organized, .and the ability of people to move between countries.

What is the alternative?

If Brexit had not occurred something else would have to relieve the pressures caused by a combination of the crossborder movement of persons whether as refugees, illegal migrants or others, the debt situation outlined in the Maudlin quote, and the environmental movement.

The last does not seem part of the Brexit debate. It takes place in other circles but will likely become part of the dialogue. My take on this is that there are obvious visible signs of environmental problems such as air pollution in Asian cities, and water pollution in rivers, lakes and oceans. The plastic junk pictured in the Pacific and other oceans is a visible cause of concern with viable alternatives available to address the situation. The link between human activity and global warming is, in my mind, an interesting hypothesis but not one where the facts collected so far confirm the linkage, but that is for another day.

As far as Brexit is concerned, it will cause adjustments to be made. If the vote had gone the other way, the pressure for change would still have been there and would have become manifest in other ways. The pressure for change exists in continental European countries for reasons similar to that in the UK. In the current US presidential campaign, the desire for change is manifest by the widespread support of Trump on one side and Sanders on the other, together with a visceral dislike for Clinton by some. But for now as the opening quote said about the WW2 bombing of Britain,

“Never you mind……you put on the kettle and we’ll have a nice cup of tea.”


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