There was some possible market panic on Friday, June 24, as major world stock indices generally fell more than 3%. However, some of the financial market turbulence was simply unwinding or reversals of investments established to possibly benefit if the United Kingdom had voted to remain in the European Union.
But it truly seems like the headlines about near-term ramifications to the world economy may be exaggeratedly negative. More likely, it is the medium- to long-term periods that should be of concern, and those concerns should have existed prior to the Brexit vote outcome.
First, the UK does now have more flexibility to weaken its currency, and thereby make its exports more attractive. While England did not use the Euro, there was an implied monetary support to the British pound from the European Union. Without that support, Britain is now more free to exert aggressive fiscal policy (likely through higher government spending) to attempt to improve real GDP growth there. Any further increase in debt-to-GDP or debt service costs for the UK will likely weaken the pound against the Euro, the US dollar, the Japanese Yen and other major world currencies. Simply put, the UK just joined the global currency war that has been going on for several years now amongst the European Union members that used the Euro, Japan and the United States. If in fact,the UK will more aggressively weaken the British pound in coming years, then the future of fiat currencies worldwide is even more uncertain than in prior periods.
Second, and just as concerning, the vote in favor of exiting the European Union was driven by the population outside of the major financial centers of the United Kingdom. This is quite concerning because it is quantitative validation of concerns regarding the growing worldwide wealth disparity. When the "have nots" have much less than the "have" by a wide margin, revolutionary forces such as this Brexit vote and in the USA the popularity of candidates such as Bernie Sanders can rise significantly. This phenomenon is important to monitor because aggressive monetary policy actions (i.e. "printing money") tend to exacerbate wealth disparity; those who own land, stocks, and all forms of "dirt" such as gold and silver experience wealth increases in nominal terms, but those that are on fixed incomes and live paycheck-to-paycheck feel their reduced purchasing power is a growing injustice and form of inequality.
I expect that my views on the important ramifications of Brexit are not mainstream or consensus, which is nothing new for me and that is not something I am uncomfortable with. Someone said (and I agree), great investments are made in the dark, and I agree.
Jim Lane
