This could be a momentous day many of us will later remember – perhaps as big as the crash of 2008 or 9-11.
Or else not.
There is a lot of panic as to what will happen in markets. Currency traders are moving about like tasered boa constrictors, not sure what to grab ahold of for the next meal after recoiling.
I think it’s time we all thought about money, markets, trade, and profits in a clear and sensible manner.
Money can ‘come out of the sky.’ Governments can print it. However, value canNot come out of thin air, and freely printed money is generally devalued – its existence inflates the prices of all things that money can purchase.
That American and European Central Bank ‘quantitative easing,’ where one agency prints money and buys bonds from another, and that manoeuvre has not created inflation, is one of the conundrums of today’s world of finance.
Money can ‘disappear into thin air.’ Governments can literally collect and destroy cash and equivalent paper. Generally this causes prices to fall, as less money is chasing the same goods.
If that were all we had to worry about, there’d not be much to it. So the UK decides to treat the EU somewhat differently. An Audi car still has the same relative value as a diamond ring or a Swiss cheese or a British pub pot pie. No reason for panic here, eh?
The problem is ‘con-fidence,’ and I use that term in a pun-ishing sense.
Most of the money you and I (and governments and corporations) actually earn, spend, invest, save, et cetera, is not real money. It is an accounting fiction, created in an electronic record in a bank. To give a really dumb example of this, consider myself foolishly lending my Bank a hundred dollars. I’m getting less than one percent per annum on this deal. The Bank, however, due to its ‘reserve ratio,’ can lend that money perhaps a dozen times (when I went to Economics 101; it’s much higher now) and earn a lot more than a mere percent on each of those times.
So my ‘saved’ hundred dollars becomes a spendable thousand or more.
Businesses (and governments and central banks and rich individuals) similarly create non-paper money by swishing magic wands that create mortgage-backed securities, interest rate swaps, credit default somethings, trade finance loans, and much more.
Like my ten or dozen or more friends who are borrowing based on my hundred dollars (many of them using credit cards, or simply credit,) these large footprint actors run their world (and a lot of ours) on assets created as offsets to debts, all of which is electronic and only ‘real’ because everyone behaves as if it is. So long as everybody pays on time, and the system stays ‘liquid,’ all is well.
The crash of 2008 was largely a crisis of liquidity. Even a Bank has to have a ‘reserve ratio’ of ‘real’ money in case its electronic account holders actually ask for theirs. When the reserve ratio is a lot more than one, and a reasonable fraction of account holders (like me) ask for their money in hand, the system stalls.
Brexit is a potential confidence breaker. Traders know that confidence in world finance starts with ‘con:’ the assurance that all will be well and all notional funds can actually be produced as cash, so long as not too high a percentage of holders actually ask for it.
Brexit is a potential confidence breaker. If you live day-to-day with revolving loans, a small hiccup in your access to new credit could lead to business disaster.
Brexit is a potential confidence breaker. Currency exchange includes an element of risk. Normally, funds traders profit from the simpler minds of those who only exchange currency for purchases and sales of real assets.
It’s a bit like horse betting, or card-counting at BlackJack. If you’ve got lots of hands in the fire, and are informed enough to beat the odds faced by lesser mortals, you can make money exchanging currency.
Currency exchange is a big deal in international / trade finance. The EU managed to get most members onto the Euro, with a few holdouts like Britain. But even the EU countries must trade with the USA, China, Japan, … it’s a long list. So businesses need foreign exchange, and professional gamblers / traders supply them – for a fee, and often, with a view to making a profit on exchange rate moves.
So for large corporations, large financial institutions, and central banks, Brexit is a threat to the easy stability and predictable volatility of foreign exchange.
Thus we can expect many traders to sit out what might be an unpredictable storm of exchange rate shifts, coming in waves based on consumer, and their own, fluctuating sentiment.
I think post-Brexit trade agreements can be made. I think the final equilibrium will not be drastically different from before Brexit. I think other issues (migration, for example) will be settled easily enough.
I think the real wealth of countries will not change much.
However, the imaginary wealth created by bank accounts may change drastically.
A dumb example might explain this latter point.
In a fictional story, the anti-hero escapes wartime Italy with fabulous wealth hidden in his clothes and hand luggage. Unfortunately, in the USA, table salt (extremely valuable in wartime southern Italy) is worthless.
A man can become rich and poor holding the exact same assets.
What matters is, do those around think those assets are valuable, or not.
panic is in the eye of the beholder. If the gurus and wizards of finance panic now, we’ll have another ‘adjustment.’
Those who created illusionary wealth might suffer. Or, watch for bailouts.
Citizens might find sudden goods or job shortages: can’t get potatoes in England; can’t sell tea to Germany.
Real value (whatever that means) will remain.
Now for the dumb questions:
- Is much of ‘the money supply’ created by financial institutions as ‘deposits’ in the accounts of borrowers? (and in their credit card ceilings?)
- Is one function of ‘global trade’ to move jobs and the means of production to the lowest bidder, least sustainable-practice enterprise, cheapest human rights jurisdiction?
- Does all of this lubricate corporate profits at the expense of employment (pay and opportunity) in developed countries?
- Will this be disrupted by Brexit?
If there were no human costs to Brexit, would any of us mere live persons care?