“Happiness is a candle. In fact, don’t laugh too loud, you risk putting it out.”
— Christophe Maé – Il est où le bonheur
“Brexit Armageddon simply hasn’t happened,” writes with delight the Guardian’s economics editor, Larry Elliot.
“The 1.4% jump in retail sales in July showed that consumers have not stopped spending, and seem to be more influenced by the weather than they are by fear of the consequences of what happened on 23 June. Retailers are licking their lips in anticipation of an Olympics feelgood factor.
The financial markets are serene. Share prices are close to a record high, and fears that companies would find it difficult and expensive to borrow have proved wide of the mark. Far from dumping UK government gilts, pension funds and insurance companies have been keen to hold on to them,” writes Elliot.
Perhaps this optimism is partly justified. After all, confidence goes a long way in financial markets, as any observer of emerging markets can testify. As long as you can project confidence, the battle is, if not won, at least not entirely lost. In most cases, anyway.
Still, I do find the Brexiteers’ rose-tinted outlook irksome. If anything, the markets are (still) positive despite the referendum, not because of it. Did you see how the pound quickly lost more than 1% last Friday after media speculation that Prime Minister Theresa May could trigger Article 50 in the spring?
If things were indeed as rosy as some of the Leave voters claim they are, the pound would have appreciated on this news, as it means that at least there would be certainty over when the UK will leave the EU. Instead, sterling weakened — which suggests that markets, far from “serene” about Brexit, still don’t like the idea.
Regarding government debt, yes, it is true that pension funds and insurance companies have held on to them for dear life — as a near-failure of quantitative easing showed recently. But with the Bank of England buying government and corporate debt in massive quantities and with these institutional investors forced to invest in bonds as they are considered “safe” assets, why would anybody expect a different outcome?
When you are both the issuer and the main buyer of an asset, you pretty much set its price. And when this asset is used as a proxy for confidence, you do want to make it look like there is a lot of demand for it, so you buy hand over fist.
Brexiteers seem to conveniently forget that it is Bank of England support, at huge expense to savers and to future pensioners, which is saving the post-vote day. What would bond yields look like if the Bank of England hadn’t been buying the debt and if it had raised interest rates where they ought to be, were it to stick to its mandate to fight inflation?
What I mean by “where they ought to be” is this: Real interest rates are deep in negative territory in the UK, eroding the present wealth of savers and fuelling future inflation. With inflation at 0.6% in July and an interest rate of just 0.25%, people are really forced to pay an additional tax of 0.35% on their earnings to keep public debt costs low.
And that’s before we take into account the damaging effects of the Bank of England’s purchases of gilts and corporate bonds, and not taking into account asset price inflation which has seen property prices spiralling out of control.
The truth is that nobody, not even the most passionate of the Leave voters, knows what a future outside of the European Union will look like for Britain. It all depends on the kind of deal the government is able to reach with the EU — which, as we know, is composed of 27 other countries. That is a lot of uncertainty ahead.