I know I said I would not be blogging over the last few days, but that gave me time to think. I thought about the economic consequences of no deal on Brexit, which I am beginning to believe by far the most likely outcome, simply due to the sheer incompetence of the government and the inability of anyone to force a change upon them due to the disabling of parliamentary democracy by Cameron and Clegg.
No one, of course, has a crystal ball, but the consequences of no deal are not hard to imagine.
If we resort to WTO rules and the EU does impose tariffs, as they inevitably will, the price of goods exported from the UK will rise. The only way that they will remain competitive is by the value of the pound falling. We know that the pound has already fallen in anticipation of Brexit. No deal will, I suggest, mean it will fall somewhat further, where 'somewhat' means by a significant amount. I would expect at least another 10%, and maybe more.
It will not matter what the UK does on tariffs in that case: the price of imports will rise. That is inevitable. That does not mean that all prices will rise by the same amount: we do not, of course, import all we consume. But there will be a knock on effect. And it will be significant. But remember, we will notbget an export boost; the tariff will absorb that.
Of course, it can be argued that in the long term this might be good for us. As Nick Shaxson argues in his book 'The Finance Curse', we have long suffered from overvaluation of the pound as a result of the harmful activities of the City of London and this has had cost to us all. Adjustment to be more appropriate exchange rate levels may be overdue. But that does not mean it will be easy, especially if as unmanaged and chaotic, as this adjustment is going to be.
Chaos has a considerable price. I suggested some time ago that it will not be cost that will push businesses under in the case of no deal. A lack of liquidity will do that instead as supply chains lengthen, goods get stuck in transit and critical processes fail, including cash flow. I imagine substantial fall out from this. Given that 'no deal' will be punished by the EU this is inevitable. I simply cannot imagine them making life easy on a border. Why should they? In that case, expect a substantial number of businesses - including many in the transport sector, who will be hit especially hard as all their capital assets will simply sit still for long periods on behalf of customers who will not b able to pay for them to do so - to fail during the early summer of 2019. That is pretty much inevitable.
But that is only the direct impact of no-deal. There is, for example, the Bank of England reaction to consider as well. Falling exchange rates will give rise to a knee-jerk increase in the interest rate on their part in a hopeless and entirely misplaced attempt to support the value of the pound. Whatever Carney has said to date can be ignored: central bankers raise rates when currency values fall unless ordered to do otherwise. Philip Hammond has the power to over-rule such rises (there is no independence for the Bank of England in reality; it is all a sham, as I have previously explained) but will he? Given Tory loyalty to the City and Hammod's deep and innate desire to see ‘normal' interest rates restored, which is a sentiment that runs deep through his party, I cannot see that happening.
The impact of these rate rises will be dramatic and quite rapid. Many households will be immune from the shock at first because of fixed-rate mortgages, but not all will enjoy that advantage. And most businesses will not. Rapidly rising interest costs at a time of inflation, resulting from rising import costs, with the resulting likelihood of real incomes being in free-fall when personal debt levels are already very high and net saving has disappeared will be catastrophic. If border chaos does not create an insolvency crisis then increasing interest rates will.
Insolvency crises are personal, traumatic and always costly for society at large. But they also have systemic consequences, and that risk is transmitted through and to the banking system. The Bank of England says the UK banking system is now more robust than it was. I think there is some truth to that: it would be churlish not to agree. But banking faces its own shocks in the event of no deal. No one can be sure what the end of financial services passporting really means. And no one can be sure whether or not all derivatives will be legally enforceable when EU regulation ceases to apply. The scale of the shock to banking is already hard to assess in the case of no deal. We can be fairly sure that given the scale of the City's enthusiasm for staying in the EU they think that the risk without the spillover from liquidity and interest rate induced crises is significant. Add an insolvency crisis into that mix and who knows what will happen? All that can be safely said is that the scale of the risk is real and significant.
And all this is before three other factors are taken into account. The first is the disruption to supply chains. The second is, then, contractual failure with consequent loss of profit claims. And the third is skill shortages as people, quite reasonably, refuse to come to the UK any more to take work. This also has a fourth, knock-on effect, which may be rising wage costs, although if businesses fail to the extent that I imagine it is actually possible that the exact reverse may happen, and there may be a spike in unemployment and no net wage increases.
Out all this together and there is only one possible consequence of no-deal and that is economic mayhem. I wish it were otherwise but unless the EU decided to impose no sanctions on the UK for leaving without a deal (and I cannot see a legal way that they could do that) then nothing else is at all likely, especially as they will seek to maintain a border even of the UK is likely to be almost wholly unable to do so.
What to do in this situation? That's the subject for another blog. But nothing will really save the day.
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We need more time. God we need more time……………
The biggest risk for me is who will prosper politically from the mayhem? It might not be Labour.
There is a tendency for people to vote for more extreme Governments when the shit hits the fan.
That’s how we got a Thatcher Government in the first place. We’ll get even worse next time. I’m sure of it.
A couple of posts ago you wrote: “It’s the coincidence of sentiment that provokes fear in markets and that’s happening right now”. I agree – except I would place at least some emphasis on what is happening in the EU itself. You didn’t actually mention Italy! That’s probably the immediate danger point.
If you are right, the world will change very rapidly in the next year. Maybe even in the next few months. It’s quite possible the fixed exchange rate /common currency Union which you support us being a member of, even though you think these are a bad idea, albeit with the UK being the only allowed exception, won’t be around much longer. It is difficult to see how the EU would cope with GFC part 2 when they haven’t yet managed to work out what to do about GFC part 1.
Anyone would have to be very brave to go into any kind of detail about just what we are in for shortly. But yes, it’s going to be a bumpy ride whatever happens.
Peter
I am bored by you lying
I have made it abundantly clear I have no time for the euro and do not support it but you still lie that I do
You will always be deleted now
Richard
If I’m lying I’ll apologise.
But the European Union is a fixed exchange rate /common currency Union with, as I have said the exception of the UK. Possibly we could add in Sweden ( but I believe Sweden is required to join at some point), but certainly not Denmark which, even though it doesn’t use the euro, pegs its currency to it.
So what your exact objection?
You know full well those are not the only countries with floating rates
And as a result the EU is not what you claim it to be
And so you are talking nonsense and will join the banned list
The following states are EU member states but not members of the Euro, listed in order of GDP per capita:
* Sweden
* Denmark
* Czech Republic
* Poland
* Hungary
* Croatia
* Romania
* Bulgaria
There is no pressure for Denmark to join the euro – they have an opt-out from the Maastricht treaty. Theoretically the others should join when they meet the convergence criteria. The fourth criterion is exchange rate stability, measured (in part) as at least two years membership of ERM/ERM II. However, joining ERM II is not mandatory. In fact Denmark is currently the only member, and Sweden chooses not to join ERM II to avoid having to join the euro (which they are otherwise obliged to do as part of their accession treaty, and are compliant with the other criteria).
If we continue to run high budget deficits and debt to GDP ratio, we would not be accepted as converging anyway. In my view we *should* do that to boost our recovery – spend before tax*, as Richard keeps pointing out.
All this is kind of passive-aggressive rubbish – we should take the lead in sounding the alarm and pointing out that the Stability and Growth Pact is nothing of the sort – and that if you’re going to have a common currency, you have to have a common fisc. That means transferring money from rich areas to poor areas to boost development and growth in those areas, and improve wealth equality across the whole Eurozone. (And indeed across the whole UK…)
* or other means of destroying money, such as government borrowing.
Peter –
Here’s the objection…
“It’s quite possible the fixed exchange rate /common currency Union which you support us being a member of…” – so in this statement you say Richard supports the UK being a member of a currency union. Utterly incorrect. That’s a lie.
Anyway, you seem to think the Euro is the root of all evil, which is fair enough. In it’s current form, it certainly can be an effective tool for elite political manipulation and misery spreading… so we’ll take that as an accepted point. Euro = bad.
“…albeit with the UK being the only allowed exception”
You see the point? The awful, evil thing that exists that we are not a part of cannot be a reason for us hating our position in the EU.
Somewhere underneath it all, you might have decent points to make about Europe… but when you mask it with bullshit statements like this, nobody takes you seriously. That’s a bit of a shame, because the debate suffers.
Don’t gild your lily… just make your points and they can be considered. I’m sure they’re good enough to add something of value to the debate.
Very depressing. If we take, along with your description of financial affairs, the news that stockpiling of essential supplies is under way the word which comes to mind is “siege”.
Historically this was attempted on Britain by naval blockade and submarine activity. Today it is being applied administratively by a tiny Conservative coterie.
It is high time this nonsense was brought to a halt – by whatever means.
Yes, this all reads true. And inevitable. Almost two years since I tried to dispassionately analyse Project Brexit, and it pains me greatly to say I was/am right. The outbreak of Post Imperial Stress Disorder in England will, if we are lucky, lead to the break up of the UK. “Lucky”? Well the outbreak of PISD in Germany after WW1 was the worst thing that ever happened. I hope we are spared Tommy Robinson as PM.
Indeed, it’s no doubt not coincidence we’re witnessing a rise in the Right. They’re preparing. Where there’s chaos, there’s their chance to rule as people sick of disruption will be attracted to any who offer order, albeit in reality a dread one.
If you look at the numbers for “United Kingdom Foreign Exchange Reserves” you can see this has more than doubled since 2009 even after allowing for inflation. In round numbers it could cover all of the UK’s imports for 3 months. Stripping out non-essentials, items which can be substituted and non-EU imports then this could be a contingency pot of foreign exchange which could easily be stretched out to 12 months and more with good management by the government.
Will it be required in your view and is government capable of good management of it. If not, then who is?
Your theory may be appropriate
The reality is that we have no idea just what will happen
And no time to choose alternatives to those who are running things now
We don’t have the infrastructure to facilitate those imports under WTO rules, even if it turns out we’re actually allowed to do that, nor exports to any degree. It seems likely very little will be coming in or going out.
I think we can safely say Jeremy Corbyn understands little of your economic arguments in regard to Brexit Richard as his refusal to openly engage with the Brexit arguments and lead suggests. We can safely surmise Corbyn’s economic illiteracy because of his condoning McDonnell’s economic illiteracy. Indeed it might be said that the ERG Group Tories, as opposed to Labour, do have an economic strategy of sorts, albeit mindless and unfair, which is to drive through a No-Deal based on a substantial downwards devaluation of sterling accompanied by a dismantling of workers’ rights, a sort of fascist Northern Hemisphere Singapore! Such a conversion would, of course, also be of advantage to the City in that international suppression of tax haven manipulation and money laundering could be avoided.
I would like to draw your attention to this:
https://www.cbc.ca/news/politics/wto-reform-trade-canada-1.4872996
Notice who is there and who is not.
Oh and has anyone been paying attention to what the BBC is peddling? The latest one I heard was about Peterloo. Imposition of martial law anyone?
It would be nice to have your suggestions about what we should do now to mitigate against this scenario to protect our assets.
Hold cash or gilts
You depress me but I still believe that she will get a deal – of sorts – and she’ll come back as the conquering hero. The right wing press will hail her genius and she’ll be re-elected for another five years. But that is all much more depressing for me than a no deal Brexit so no deal might be better than the alternative. Best to remain positive about these things. My mind can’t cope with too much reality. In the meantime I’m still building up a supply of tinned food to get the family through April 2019. How much should we stock?
Who knows?
I think your scenario is quite likely.
The Junckers of this world are not keen on a no deal, he’ll want to retire on a glorious success story, and a no deal would cause hardship and chaos in the EU too remember. The border areas (sea borders, airports +Irish border) will be in economic and infrastructure distress.
It’s not just about the UK, although with our government level of incompetence and Post Colonial Stress Disorder (I really like that, fits the ‘condition’ so well) anything is still possible.
I’ve more or less opted-out already and agreed a couple of final contracts abroad before full retirement. I feel guilty, but there doesn’t seem anywhere to push against intransigence and the hidden agenda. Richard is likely mostly right and I’ve felt the same since the dismal pre-referendum non-debate. I’d close Westminster and have direct rule from Brussels until we could set up a regionalized electronic Parliament. Though one can see a fuzzy range of leaving outcomes in the numbers like a likely pound crash, the obvious certainty is we will continue with our disastrous politics with buffoons dog-whistling in a media circus for first past the post majority of about 40%. We don’t see, as a public, what this Brexit disaster has revealed – for me the mammoth incompetence of Westminster and a captive press.
I can juxtapose Ancient Greek critique of democracy against what we have seen for the last two years, or for that matter Mein Kampf chapter 6 and the sloganeers of Brexit, from the marionette Farage to the later Maybot. Corbyn looks like Rip van Winkle, off for a long kip and skittle playing, hoping to come back later, after the battle. The old issue of the masses being uneducated and too thick for sophisticated learning has been to the fore, along with BBC balance of the one guy in red braces against 99% of climate scientists kind.
If things get really bad – and there may be a cliff to fall off given our real state below such rot as 4% unemployment and the general upbeat Tory lying – what plans (other than mine of running away) do we really have to get the country right, or at least on the ‘left’ be in a policy position more than ‘I told you so’? Broken by Brexit or not, I see an economy and political system already a decadent paradigm, largely ignoring the resources it uses and in personnel a duty to develop. We’d have been better off German in so-called real terms. Now our only hope is for a green phoenix to rise from ground Brexiteers plan to asset strip before burning it to the ground. At least the white cliffs of dover will look good as I leave them behind. Anyone else noticed the cunning way newsrooms are now saying we are so bored we just want the deal done? We need to force a new people’s vote.
Meanwhile hidden away in the news is this tidbit well worth the read and showing just how incompetent this Tory government really is:-
https://uk.reuters.com/article/us-britain-eu-wto/uk-signals-failure-of-bid-for-quick-brexit-transition-at-wto-idUKKCN1MZ2CX
Poor old Liam. It was all meant to be so easy.
It was Steve Keen who brought my attention to the fact that Neo-liberals tend to over-simplify complex issues in economics. A way of saying (perhaps) that they are essentially….ahem….a bit thick maybe?
Keen points to one of the N-L tropes being to present a single unified supply and demand curve for ‘the economy’ when Keen contends that each sector – each supplier even – has its own unique supply and demand curve and to try to unify them is ….. well…. a bit silly – especially if you are making policy.
It also indicates that N-L really is a religion based ideology that self-justifies rather than being a proper theory of how the world works.
‘Cutting and pasting’? Really? Embarrassing. Mind you it will be all the WTO’s fault in Fox’s eyes. If that is the case then Fox should have stayed in medicine – we have enough quacks in economics and trade as it is!
PSR suggests Fox should have stayed in medicine. What a horror show that would have been. I suppose the net effect would have been less. Just a village or part of a town destroyed.
Rod
My aside was in relation to the fact that Doctors these days have to have a proven level of minimum competence and that there were no quacks (or fewer than before at least).
You can’t say the same of orthodox economists who continue to churn out thick young things to man bogus orgs like the IFS which is like a duck pond to be honest for economic quackery.
It’s very difficult living a normal life after reading blogs like Richard’s and Bill Mitchell’s. As a physicist I tend to look for simplicity in an explanation and MMT has arrived as a delightfully simple account of money and the economy. It frees one up from all the rubbish we’ve been fed before so in the week preceding the budget when the media is full of questions like how Hammond can end austerity the answer is blindingly obvious – stop bleeding the patient to death. As soon as I get to the point in an article where the journalist mentions borrowing I cease reading. Our economists – to take your medical analogy – are bloodletters – like a former chancellor – if the treatment’s not hurting it’s not working. It’s the only paradigm. If these economists/medics had been brought up in a time of bloodletting they would still continue the practice long after the introduction and demonstration of antibiotics. I wonder when and how it will end? When will scales fall from their eyes?