Friday, June 24, 2016

Yeah! On Brexit!

Yeah Brexit is a reality! Signifies a few things:

  1. Politicians have misused / abused the Brexit debate
    1. The political and ruling classes are disconnected from the realities faced by the worker class. A sort of marxist dream has come true. Not only can't the politicians talk reasonably with the masses but they also don't seem to care. John Mauldin highlighted Peggy Noonan's protected v/s unprotected rationale - it is playing out now. Necessary corollary - we might be looking at a Trump victory.
    2. A sub-set of the worker class problem is the migrant issue. The migrants coming into do have a group of anti-community / anti-EU society that has entered EU creating social tension. While, most of the migrants are male - a statistic that is queer for war-related migration. I would have thought it should be more women and children (as per UN 62% of all migrants out of 800,000 that have traveled to Europe in 2015 are men). 
    3. Sadly, this has confused the domestic worker class about rational economic threat to their incomes and political threat to safety and well being. The first is short term set-back but results in long term prosperity. The second is a bit scary. The pro-Brexit vote is more because of second than first.
  2. Media hasn't done its bit to inform the average person.
    1. Media's lack of responsibility since the crisis has been alarming. But the polarised opinion on Brexit put up by media are disappointing. 
    2. The irrational rabble rousing has overwhelmed the thoughtful assessments and complexity of the issues has been trivialised. 
  3. Common people in developed countries are going to loose
    1. The discrepancy between easy capital mobility and difficult labour mobility affects the working class. If left unresolved, we will end up with capital controls. (Yeah it is a long way away but we are on that road). Alternatively, we can hope that labour mobility will ease up and people will realise their folly. 
  4. Our lack of understanding of economics has come to haunt us.
    1. Currently, only low income-low skilled people from under-developed countries want to migrate to developed countries because these people are squeezed to be producers in their own country. Similarly, the developed country people are tickled into consuming more than they can afford so that the status quo continues. The developed world citizens do not want to impair their life-style by migrating to developing countries. (That is because developing countries make it difficult to get the same life-style as developed countries - I mean in terms of law and order and quality of education etc.). This one-way traffic had to stop some time.
    2. With cheap capital, replacing a low-skill worker by expensive robots is feasible. This pains the working class no end. These people are caught between rock and hard place. They are being forced to go down to low-skill but on-site jobs. (the famous McJobs!)
    3. It is this anxiety that has been exploited for Brexit. So part of the blame goes to the economist and finance experts too. These are the very people who look shocked at Brexit vote.
After Brexit what next?
  1. In an age of increasing inter-connectedness a Brexit vote is first step trying to reverse the globalisation. There are reasons why anti-globalisation forces have followers - I wrote about this messy intermediate globalised system that is straining the worker class. But advantage really lies in globalisation and not protectionism.
  2. Unfortunately, the competitive raising of protectionist barriers will only increase. Marine Le Pen is demanding referendum for France. The northern EU members and Germany will soon be left looking stupid. So instead of PIGS defaulting and exiting - non-PIGS will drop off the union.
  3. The war on globalisation had to fought on "sovereignty" issue. It is a political war connected with Swiss bank hidden wealth, Tax havens and other "loop holes". 
  4. Once successful politically, these initiatives will turn on economic policy. The good work of integrating the world will be undone by economic and fiscal policies. 

Brexit will be a slow poison
The consequences of Brexit are far more dangerous but they will take time to play out. That means markets and asset prices will remain volatile. Consequently, long term investment in future shall remain the exclusive domain of governments. Add to this the renewed focus on austerity - 1937 looms all over again.

So it is said - may you live in interesting times.