Lower growth and higher inflation. Or liberation from a “mosquito infested swamp and the greatest economy in the world.” You couldn’t get a bigger contrast of possibilities. But that’s how the public debate on Brexit is shaping up. Which side are you?
Let’s take the sober side first. The Bank of England’s Monetary Policy Committee has left UK interest rates unchanged. You can read the boring news here. The interesting bit is where the bank holds forth on the impact of a “leave” vote. It opens – emphasis added is mine – that:
A vote to leave the EU could materially alter the outlook for output and inflation… Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise… Sterling is also likely to depreciate further, perhaps sharply. This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation…
“The financial Dunkirk moment”
Earlier this week we were told that firms already had delayed investment because of Brexit. We were also told that sterling had already fallen, again because of Brexit. But maybe there is more in store. No one knows.
Peter Hargreaves is willing to take the other side of the trader. The billionaire owner of Hargreaves Lansdown told The Guardian that a vote to leave will be like Dunkirk again. That was eerily familiar. The Fleet Street Letter Investment Director Charlie Morris was all over “the financial Dunkirk moment” Brexit has brought us to, months ago.
Hargreaves used the same metaphor. But he means something different. He suggested that the very uncertainty created by Brexit will be a catalyst for positive change. It’s like Brexit is a disruptive technology. He says:
It would be the biggest stimulus to get our butts in gear that we have ever had… It will be like Dunkirk again… We will get out there and we will be become incredibly successful because we will be insecure again. And insecurity is fantastic… All the people in the City of London who I rate and are intelligent and talk sense actually say it would better if we left… All the government lackeys, all the bureaucrats and the people on the boards [who] haven’t got a clue what they are talking about want us to remain.
He has a point. Which one?
When you don’t have a lot to work with, you have to be resourceful. He said that when Singapore became independent from Malaysia in 1965, the island city state was a “mosquito-infested swamp with no natural resources… all they had were people with brains and hands and they turned into it the greatest economy in the world. I believe that will happen to us, too.”
This point came up in Amsterdam. “Dutch disease” is the curse of natural resource wealth. Countries with abundant resources and large extractive industries tend to become one dimensional, relying too much on their geologic good fortune. Natural resource wealth can stifle innovation (and desperation) because you just dig up what’s in the ground and sell it.
Of course the value added in extractive industries is comparatively lower than, say, in software. That’s why commodities are… commodities. Pricing power generally lies with the consumers, not producers.
Island nations have to work harder for their wealth. They usually do that by trade. That’s how the Dutch and the English got rich from the gold and silver the Spaniards took from the new world. The bullion ended up in vaults in London and Amsterdam because those countries were full of traders. The Spanish consumed their wealth.
Back to the present.
Manufacturing a little national urgency could be just the thing to reignite British growth in the 21st century. It’s risky. It’s bold. And it could backfire.
On the other hand, staying in a bulky, acquisitive, anti-liberty anti-democracy organisation like the EU? That’s a decision for ever closer political, fiscal, and eventual monetary union. If that’s your bag, you’ll vote to “remain”.
Category: Brexit