The big story around the world has been the referendum for the United Kingdom to leave the European Union. But this story is creating a lot of side stories, some of which are just now getting some coverage.
Many Americans are wondering what the implications are for the U.S. So far, the two main implications seem to be the financial markets and the political scene.
In terms of politics, some are saying that the Brexit is favorable to Donald Trump and may help him win. But this may be confusing causation and correlation. I’m not sure that the outcome of the vote itself will help Trump. But I think it does give us a good gauge on public opinion and the silent majority who prefer nationalism to globalism.
In terms of the financial markets, most of the focus is on stocks, as usual. But while stocks went down, bonds went up, gold went up, and the dollar went up.
But to think that the U.S. is going to have reduced trade with the U.K. because of this vote is rather unrealistic. The main reason stocks are down is simply because markets tend to react negatively (and overreact at that) when something unpredictable happens that shakes the status quo.
If anything though, stocks may end up benefitting from the Brexit in the medium term, although I don’t say this necessarily in a positive way.
One area that has yet to receive a lot of attention (and this is one of those side stories) is the reaction of central bankers.
After the Brexit vote came in, both the European Central Bank and the Bank of England announced that they were ready to support the financial markets.
The ECB said that it “stands ready to provide additional liquidity, if needed, in euro and foreign currencies.”
The Bank of England announced that in order to support the functioning of markets, it “stands ready to provide more than 250 billion pounds of additional funds through its normal facilities.”
In other words, the central banks continue to be in loose money mode, or even more so than normal. It is crazy though, because there is really no need for this except to possibly prop up stocks.
The U.K. already has its own currency. This is one thing that makes its exit easier. It does not use the euro as its main currency. This simplifies things a lot. It also means that creating new money is really unnecessary and will only damage things further.
This isn’t to advocate monetary inflation, but if there is ever a time to do so, it would be to keep the banks from going under. But this should not be a major threat to the British right now. The exit from the European Union is to get out from under the rules and regulations from the bureaucrats in Brussels. It isn’t to get out of the euro, because they were never in it.
If Greece voted to leave the European Union, then that would be an exit that would cause further bank runs. The Greeks would have to reinstate their own currency and switch out of the euro. There would be a complete lack of faith in the new currency. Again, I’m not saying this would be a good excuse to print money, but at least it would be an excuse in terms of keeping the banks solvent. With the U.K. right now, there is no valid reason to create so much money out of thin air.
And Then There is the Fed
One of the side stories in the U.S. will be the Fed. It is only now just starting to be talked about with everything being digested. The financial markets obsess about what the Fed is going to do at its next meeting.
Over the last two years, the trend has been rather clear. The Fed keeps saying that the economy is growing stronger, but it still needs an “accommodative policy”. The Fed keeps saying it plans to raise its target interest rate. But over the last 2 years, as it has talked about this policy, the Fed has only raised its key rate one time, and that was by one quarter of a percent.
Every time it is time to raise rates, there is always an excuse – China is slowing, stocks are slowing, the unemployment numbers weren’t as strong as hoped, etc. It is an endless line of excuses.
As Peter Schiff recently pointed out on CNBC, “Janet Yellen can blame her failure to raise rates on Brexit.”
Schiff said, “She could even use this as an excuse to cut rates back to zero and launch QE4.” He continued, “As far as Janet Yellen is concerned, the British have given her the gift that keeps on giving.”
The FOMC will meet again near the end of July. Would it really surprise anyone if the Fed delays another rate hike yet again? This time it would be very convenient to us the Brexit as an excuse.
You can bet that as the meeting on monetary policy approaches, there is going to be more talk about this.
So even though the Brexit was devastating to the establishment and their dreams of centralized government, they are still finding ways to capitalize on it as best they can.
And if the economy goes south, you can bet that the establishment forces will be placing all of the blame on the 52% of the British voters who chose not to be ruled by a bunch of unelected bureaucrats in Brussels.
It will be used to deflect blame from bad central bank policy. It will be used as an excuse for more monetary inflation. It will be used as an excuse for more big government.
For those who favor the Brexit and liberty in general, our main defense is going to come in the form of bad economic news from the rest of Western Europe. When Spain, Italy France, Greece, and even Germany are suffering from major economic downturns, it will be hard to blame the British for all of their problems.
Still, it isn’t going to stop the establishment from trying to blame everything on Brexit. They have to find someone else to blame for their own ineptitude and corruptness.
