Brexit and Bitcoin both start with the letter “b”. Does the similarity stop here? As it turns out, no. Both these words refer to concepts that are quite alike. Of the two, Bitcoin is probably the least toxic.
There is a widespread view that the Federal Reserve will have to raise interest rates at a steady pace this year, because it cannot afford to fall behind the curve.
I would argue that it has already fallen behind the curve and has no choice but to remain there. And it is not the only one in this situation. All major central banks are playing the same game; they have no choice.
Beyond the depressing, backward-looking policies that the Brexit vote and the election of Donald Trump as US president seem to have brought, there is a ray of hope.
People elsewhere in Europe, seeing the first ugly consequences of populism, might find enough motivation to go to the polls in elections just to try to keep populists out of government. I am talking about the decent people who are tired of politicians but aren’t seduced by the populists’ siren calls.
Among the analysts and politicians criticising the single European currency, perhaps the most numerous (and vocal) come from Britain.
This should be no surprise: the UK itself is a currency union, and those working within it should know a thing or two about why such a regime does not really work.
This is going to be a crucial year for the European Union. There are more and more voices predicting its disintegration. With the political events that are ahead, it’s not a possibility that should be taken lightly.
Politics are back in play in most of Europe, and this doesn’t bode well for central bankers. Even the almighty European Central Bank had a moment of weakness last week, when it broadcast a message so complicated to markets that it should not be surprised it fell wide of the mark.
The way the markets have reacted to Brexit, you’d be forgiven to wonder what the fuss was all about.
Well, it’s no use crying now. What’s done is done – the UK has voted to leave the European Union, so there’s no point hanging around.
There’s nothing like old proverbs to help explain the reasons for this monumental failure, so here are three of them:
Proverb 1: He who conceals his transgressions will not prosper
David Cameron fell on his sword and had to resign. I bet he couldn’t believe it. After all, his cunning plan was going so well: immigrants and the EU were getting all the blame for what was wrong with the economy, while he and his government were getting away with mismanagement.
Among the most glaring economic mistakes: encouraging the distribution of wealth to the already wealthy by banking on house price increases to prop up the economy, encouraging the central bank to keep interest rates artificially low thus robbing savers of even meager returns, and keeping up a system of subsidies and benefits that ultimately helps the rich (salary subsidies ultimately help employers, housing benefits help landlords).
The UK economy has been propped up by these subsidies and by central bank stimulus, instead of reforms to encourage investment, the construction sector or upgrading of infrastructure. This is not sustainable in the long run.
However, for most people, this is too complicated to even follow, let alone understand; so they blamed the sluggish recovery on immigrants stealing jobs and/or living on benefits.
Proverb 2: If you sow the wind, you will harvest the whirlwind
This old proverb is incredibly appropriate at this time. In February this year, when the date of the referendum was announced, I wrote that Brexit is a huge PR exercise that endangers the UK. The issues that people care about are not the ones they voted about.
People are unhappy because inequality is rising, because they become poorer and because public services are deteriorating. They are unhappy because they are priced out of a housing market where foreign investors are encouraged to buy properties and keep them empty, all in the name of contributing to an enormous housing bubble.
Nothing was done to resolve these issues, on the contrary. The recipe for recovery and prosperity remained the same: blow up the housing bubble with various subsidies such as “Help to Buy” programs that boost demand, and hope that people will borrow against their homes to consume more. It worked for a while, but has created huge resentment.
This resentment was channeled by the tabloids and by the extremist UKIP party, led by Nigel Farage, against immigrants and specifically against those from Eastern Europe. David Cameron saw how Gordon Brown was crucified when he called Gillian Duffy a “bigot”, and did not say a word to try to slow down the rising wave of hatred against foreigners.
His calculation was that immigrants don’t vote and therefore he has nothing to lose by not defending them against pointless attacks. As things turned out, he couldn’t have been more wrong.
Proverb 3: A friend in need is a friend indeed
Britain had, for a long time, a lot of friends abroad. British culture is admired the world over, tourists flock to visit London every year. It could count on the support of European countries within the EU when big decisions needed to be taken about standards for goods and services.
This form of cooperation has helped the British economy enormously, but because it was carried out in the informal, understated way in which friendship and trust work, it has not received the recognition it deserved.
Increasingly, however, the UK became more and more detached from its EU allies, often kicking them when they were down rather than contributing with ideas to help them recover. During the eurozone debt crisis, strident criticism and lecturing often were the norm when British politicians talked about the EU and the eurozone.
Now the tables have turned, and the UK finds itself isolated. Last Friday, David Cameron went back on a promise he made to the British people in February, in parliament, when he said Article 50 should be triggered soon after the result of the referendum if the people vote to leave.
On Friday, Cameron said it would be up to his successor — to be selected by the Conservative party between now and its annual meeting in October — to trigger the official departure of the UK from the EU. But EU officials, including the European Commission President Jean-Claude Juncker, insist that the UK hurry up, as the EU needs to focus on its own issues now.
There are lessons to be drawn from this, of course, not in the least about the role of the media – a lot of people in the UK were influenced by vitriolic hyperbole in the tabloids portraying Eastern Europeans as benefit scroungers or criminals – or about the role of opposition parties – Labour’s Jeremy Corbyn was all but invisible during the campaign and before.
Interestingly, a petition requesting a second referendum had gathered more than 1.6 million signatures by Saturday afternoon, and another one, requesting that London break off from the UK and remain in the EU, had almost 150,000.
The limit for parliament to debate a petition is 100,000 signatures, so it looks like MPs will have fun with these two. But there’s precious little that can be done now to reverse course – nor should there be. At the end of the day, Brexit is the will of the people. Perhaps the best proverb to sum it up is: “be careful what you wish for”.
As investors ponder whether to “sell in May and go away,” strategists say we’ll either see a “summer of stocks,” or a “summer of shocks.”
If anyone was looking for more proof of how central banks’ actions are distorting the markets, here it is: investors are trying to “front-run” the European Central Bank (ECB) – in the words of analysts at Bank of America Merrill Lynch — by buying investment grade bonds.