Ramming Speed

We gotta take these bastards. Now we could do it with conventional weapons, but that could take years and cost millions of lives. No, I think we have to go all out. I think that this situation absolutely requires a really futile and stupid gesture be done on somebody’s part!

Brexit: The Crisis Begins
by Yves Smith, Naked Capitalism
June 24, 2016

Brexit represents something much bigger than an economic or political crisis. Although UKIP played shamelessly on the anti-immigration fears, many of the Leave campaigners argued for national sovereignity and self-determination. And the Northern areas that came in strongly for Leave have been left behind as London and environs prospered. It is simplistic, although it will nevertheless be a popular stance among the elites, to depict the Leave vote as yet another proof that technocrats should be in charge. In fact, the very reason that so many UK citizens rejected the dire warnings of what was in store for them if they dared press the red Leave button was that those experts devised and implemented the neoliberal policies that have increased inequality, reduced their economic stability and accelerated political and social change.

Brexit is a crippling blow to the neoliberal order of unfettered trade and capital flows, and citizens being reduced to being consumers who have to fend for themselves in markets, and worse, increasingly isolated worker(s) who are at the mercy of capitalists who are ever more determined to reduce labor costs and hoard the benefits of productivity gains for themselves. Whether they recognize it or not, and we’ll find out over the coming months and years how well different Leave voters saw the choice they made, they have chosen a lower standard of living as a price worth paying for a hope of more control over their destinies.

What happens next is very much in play. In a radical departure from a failed prime minister stepping down immediately, Cameron plans to remain for 90 days to sort out party leadership. That sounds like a misguided set of priorities, and could possibly serve as cover for a rearguard effort to extract some concessions from the EU and try to schedule another referendum. Even if that is part of the plan, it seems unlikely to succeed, given that Cameron got almost nothing from his pre-referendum negotiations to extract waivers, and the German insistence that the British must be made to suffer as much as possible for this vote pour decourager les autres.

Cameron’s plan is that the UK will use those 90 days of his extended departure to sort out some of the elements of this messy separation; his successor would decide when to trigger the formal Article 50 separation process.

British banking assets then as now are rougly 450% of GDP. However, the flip side is that the UK has vastly less fiscal and monetary capacity to contend with a crisis than it did then. I suggest you read his carefully reasoned post in full. It discusses in detail the options and constraints faced by countries in this position, and walks through the UK’s exposure then. It’s a good framework for analyzing that that hazard now.

In the meantime, there are immediate consequences and risks. The Transatlantic Trade and Investment Partnership is probably dead. The sterling crisis and the less dramatic fall in the euro are likely to leave some UK and Eurozone financial institutions with large losses on net dollar and other foreign currency positions. While the British banks, given the magnitude of the sterling plunge, are the obvious focus of concern, many Eurobanks are undercapitalized. Worse, the Eurozone in theory will use a bank bail-in if any institution becomes impaired. We’ve warned that this is a prescription for bank runs. And it’s not just banks that are exposed; operating businesses may have foreign currency commitments they will struggle to meet.

The British government is likely to lose its AAA rating, which also means higher funding costs for its banks, since their borrowing rates are at a premium to the local currency risk-free rate. A recession is almost certain, since the UK exports services and imports goods and many of its imports don’t have ready substitutes, while the US and European banks will be doing everything they can to poach both British bankers and their clients, denting the UK balance of trade even more. Richard Smith also points out that a Brexit could imperil Ireland’s ability to operate as a tax haven. And that raises the issue that both Scotland and Ireland supported Remain. Is a UK breakup in the offing?

And with the US growth sputtering, our economy will feel the effects. Roughly 25% of S&P earnings come from Europe. The strong dollar will weigh on exporters. Europe is a major export market for China, and China may allow the renminbi to slide. Earlier this year, a devaluation of the renmibi was also seen as having the potential to trigger major upheaval. A flagging US economy going into the election hurts Clinton and Democrats generally. And this vote will embolden other separatist movements, most important, Le Front National.

No matter how this plays out, the UK and EU will have to blaze a difficult path. And this rupture is taking place when advanced economies almost without exception have singularly weak leaders. We are in for a rough ride, and the portents suggest it will be much rougher than it needs to be.

(Y)ou can’t hold a whole fraternity responsible for the behavior of a few, sick twisted individuals. For if you do, then shouldn’t we blame the whole fraternity system? And if the whole fraternity system is guilty, then isn’t this an indictment of our educational institutions in general? I put it to you, Greg – isn’t this an indictment of our entire American society? Well, you can do whatever you want to us, but we’re not going to sit here and listen to you badmouth the United States of America. Gentlemen!