Brexit ripples

No. There are no ripples in global financial markets. If anything, markets have blithely ignored Brexit and powered ahead. I am totally stumped. So, I won’t even try to rationalise financial market action and say that Brexit is a non-event.

Dr. C. Rangarajan, former RBI Governor, does not think so. In a piece for THE HINDU, he concludes on the following note:

Brexit is not a blow against globalisation per se. It is a vote against greater economic integration beyond the free flow of goods, services, and capital. Labour does not stand in the same category as capital, even though both are factors of production. Migration hurts when the economy is at a low ebb. Britain, along with other developed countries, faces a basic problem of coping with a growth potential which is far lower than the growth rate they had seen before 2008. The sociological economic implications of this phenomenon are yet to unravel. [Link]

He is partially right with his comment that BRexit vote is more against migration and labour flows than against globalisation. It is a protest vote, for sure. But, against what? We can keep discussing ad nauseam, ad infinitum.

The Bank of England held its policy meeting on Thursday (14th July). It did not cut interest rates as many had expected. Bloomberg had primed him for aggressive action. A small pleasant surprise but does not rule out future aggressive action. A plaintive plea from the FT Edit writers for monetary policy action – UK interest rates are at a princely 0.5% – indicates all that is wrong with the economic policy discourse in the world. They did not stop with a plea for a rate cut but also suggested a return to quantitative easing and helicopter drop of money down the road!

Ashoka Mody, formerly of the IMF, had a different advice for Mark Carney. Looks like Carney heeded it. For now, that is.

When push comes to a shove, these mainstream media and commentators are ready to abandon the lessons of the crisis of 2008 and much else and take refuge under easy monetary policy as the panacea for all ills – social, political and economic. Not only are they prepared to overlook the dubious economic efficacy of monetary policy moves but also their unintended consequences. These commentators and policymakers form one echo chamber. No wonder and no matter how many warnings are issued on walking further down the unconventional monetary policy path, policymakers keep coming up with more hare-brained ideas. They are not pushed back by the forces that they interact with, on a regular basis. Rather, they find their priors reinforced. Those who oppose – even respectable voices – are dismissed as eccentric and fringe.

A piece by George Friedman (‘The Surprise at Brexit and the Social Crisis Behind It’ dated June 28, 2016) is well written. It was written immediately after the Brexit vote happened. You can find it here.

Just a few extracts from his article:

We are living in a social divide so deep that serious people of good will and a certain class have never met anyone who wants to leave the EU or who supports blocking Muslim immigration or perhaps even who will vote for Donald Trump.

A democratic society cannot survive this divide. It occurred in the United States in the Great Depression, but was smashed by World War II when the young soldiers of all classes discovered that their lives depended on each other and social class meant nothing when the artillery opened up. The moderation of the post-war period had much to do with this experience.

Of course, World War II was unique and hardly the solution to a social problem. Nevertheless, something dramatic needs to happen. It will, as the situation becomes increasingly untenable. In the end, the palace doors may be kicked in. Hopefully, it will be done more politely and without the viciousness of the falls of the Bourbons and Romanovs.

Thanks to a good friend, I came across this story that, with the UK out of the way, Germany wants to boost its own army and seek closer military ties within EU:

“For a long time we’ve been looking back at the UK because it repeatedly told us it did not want to do such things,” German Minister of Defense Ursula von der Leyen said on Wednesday, as quoted by Reuters.

Von der Leyen said that London’s position “paralyzed the European Union on the issues of foreign and security policy.” [Link]

A lot is churning and it is too soon to conclude, based on financial market action, that Brexit is now behind us. Well, if financial market action indicates that, it is a lot safer to conclude the opposite!


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