Austerity Has Made People Less Prepared for a No Deal Brexit

Yves here. Most commentary on the economic impact of Brexit has focused on the effects on trade, commerce, investment, the financial sector….with comparatively little on how it will affect ordinary people.

By Duncan Exley, author of The End of Aspiration? Social mobility and our children’s fading prospects(Policy Press 2019) available here at a 20 per cent discount. He is the former Director of The Equality Trust. Originally published at openDemocracy

The government is keen to reassure us that it is preparing the UK to withstand an — increasingly likely — no-deal Brexit scenario. Fridges are being bought to stockpile medicines, and arrangements made for troops to camp outside Kent’s prisons in case prison officers are prevented from getting to work by traffic gridlock.

But the government isn’t preparing ordinary working families for the “short-term disruption” that even the most ardent Brexiters say we’ll experience before the “countervailing opportunities” arrive.

A sudden and substantial change to the prices and practicalities of international trade will inevitably cause some companies to lose contracts. (Non-UK businesses who want to avoid sudden rises in costs and logistical disruptions will already be looking for alternatives to their UK-based suppliers). Workers will lose jobs or working hours, the self-employed will lose clients. Some of those affected won’t have known they were part of the relevant supply-chain and therefore won’t have anticipated the consequences.

The government has, in fact, spent almost a decade making us lessprepared for sudden income shocks. If you lose your job tomorrow you’ll now have to wait five weeks until any Universal Credit payments arrive. As a result of (baseless) propaganda about ‘benefit scroungers’, the payments will be very low. If you have a third child born after 6 April 2017, you’ll receive no Universal Credit payments to cover their costs (which will, apparently, be your own fault for failing to anticipate a no-deal Brexit in family-planning decisions you made before the Brexit referendum ever happened).

This wouldn’t be too much of a problem if we all had sufficient savings to tide us over the ‘short term disruption’ until the ‘countervailing opportunities’ arrive, but we don’t. As a Resolution Foundation reportfound this month, “the sluggish recovery in incomes endured over the last decade has likely left low-to-middle income households more exposed to the effects of recession today than they were heading into the 2008 downturn… nearly 60 per cent of those on low-to-middle incomes report having no savings at all, up from just over 40 per cent just ahead of the financial crisis in 2007. There also appears to be less opportunity than there was previously for lower-income households to respond to an income shock by cutting back on spending… [because] the proportion of consumption allocated by that lower-income group to ‘essentials’ was 8 percentage points higher than prior to the financial crisis by 2017”. A financial shock is about to hit a country with worn-out shock absorbers.

Some of the implications of this are obvious. Large numbers of people will go into debt, or default on existing debts. Tenants will be evicted. Mortgagors will have their homes repossessed.

Other consequences aren’t so obvious. Advocates of Brexit promised us that >“cutting bureaucratic red tape would unleash entrepreneurialism” and the disruption would administer “a big kick up the arse”, that prompts us to “”. This school of thought (‘when the going gets tough, the tough get going’) is akin to that which become part of the mythology of the American Dream – with its tales of great businesses founded in the Great Depression. But as I discovered through researching my book (The End of Aspiration?) the mythology is largely a myth. The number of start-ups fell during the Depression, and later research showed that financial shocks actually reduce entrepreneurialism and our ability to grasp opportunities, with effects lasting for decades:

The effect of the 1920s and 1930s on most people was not a positive one in terms of mental attributes usually associated with upward social mobility. Economists who studied the financial behaviour of people who lived through the Depression found that the long economic trauma had made them less confident about the future, more risk-averse and less opportunity-seeking. This effect is especially strong on younger people, but the effect persists as they age.

The End of Aspiration? asks why the average Brit is more likely to be in a lower-status job than their parents had at the same age than they are to have a higher-status one, despite being better educated, and less likely to get a home to call their own. It draws on the experiences of people who have beaten those odds to achieve ‘ideas above their station’, and found that they “in their early years at least, overwhelmingly did not experience the feeling of being in financial free fall that traumatised people in the Great Depression… Some of my interviewees’ families experienced periods of unemployment, but the social security system in place at the time limited the financial distress”. Numerous academic studies show a similar phenomenon: we are much more likely to develop and pursue ambitious aspirations if we have stable household incomes and stable housing tenures.

The prime minister talks of “the opportunities of Brexit”, but even if these opportunities do materialise, the policies of the last decade have left us without the financial and psychological resilience necessary to grasp them.

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94 comments

  1. The Rev Kev

    Those insufficient savings weren’t just an act of god but an act of official government policy at work here. Several years ago I was watching two UK government wonks give a press conference to explain the latest government measure to get the UK out of the financial troubles caused by the 2008 crash. I forget the exact details but it was basically reducing interest for bank accounts.
    These guys were actually smiling as they explained that it would make people’s savings decrease in value thus forcing them to pull their money out and spend it into the economy which would get the country moving again. It was like a deliberate government policy to get people to live from paycheck to paycheck as deferred spending – aka savings – was not good for the modern economy.

    Reply
        1. workingclasshero

          Exactly who has enough savings assets to earn sizeable annual interest income to help live on but the upper 20% in any modern economy?banks had to be paying between around let’s say 9-20% interest for middle income people to even benefit and then others would be be selling blood,closing businesses or trying to slash wages to make interst payments on bridge loans.

          Reply
      1. Adam Eran

        The point of this (and all attacks on social safety nets) is “labor discipline.” The message: “You had better take whatever crappy job is on offer or suffer the indignities of poverty, perhaps even homelessness and starvation… and protest too much and we’ll incarcerate you.”

        Reply
      2. Larry Motuz

        Well, it’s ‘worked’ to reduce the interest earnings of people who depended upon those interest earnings in retirement, forcing them to take jobs among the precariat.

        And, given that the cost of living –if defined mainly in terms of biological and technological necessities– far outpaces ‘inflation’ per se, this can only grow worse, as does the problem of trying to save while also trying to get by.

        Reply
    1. Arizona Slim

      In their own peculiar way, they’ve made a different option all the more attractive And that option is often referred to as “sitting on cash.”

      Reply
      1. Clive

        Yes, when I hit my fifties, I’ll be, in essence, unemployable in my current field of work. That’s not any particular whining on my part (I’ll be happy to stop, in many ways) just a description of reality: when I look around my workplace, I see one or two guys over fifty. I see — once in a blue moon — someone still there aged, say, 55+. I see no one, absolutely no one, nearing 60.

        I might, just might, get some much lower paying work in another (probably ad-hoc) vocation. But then given how abysmal the environment is in our current workplaces, I probably would rather not.

        So I’ll need to live off savings from, say, 50-ish to when I can take my pension at par aged 60. I can take it early, but actuarial reductions are 5% per year of early drawdown, so, it would be a lot of money poured down the drain to do that. I’ll also have to contend with more crapification (e.g. the NHS) and more neoliberal infestations (e.g. transport, utilities) so I doubt I’ll get any upside surprises which mean my money ends up going further than I think it will.

        Therefore, Mark Carney, Christine Lagarde, Jay Powell and the rest of ‘em will have to blast my savings out of my cold, dead, hand before I splurge them on more “stuff”.

        And, just to end, there’s a tonne of EU Directives (and, to be fair, domestic U.K. legislation) supposedly offering age discrimination and workplace rights protection. None of them are worth the paper they are written on. Yes, I have rights I can enforce. But the systems they are created under (neoliberalism or ordonomics) rely on me, as an atomised individual, seeking and being granted redress (after a lengthy, costly and unpredictable legal battle). Not, I hasten to add, a path I will be treading down with alacrity.

        Reply
        1. BillK

          The problem the financiers have is how to solve the trillions of debt that their “recovery” has built up. If they decide to use negative interest rates and a few years of very high inflation then to protect your savings you will have to buy “stuff”. Preferably “stuff” that will retain some value as cash is drastically devalued in the name of debt forgiveness and resetting the financial system.

          Reply
          1. ambrit

            For most of us, that “stuff” of which you speak is basic necessities.
            What I am curious to know is whether that “short term disruption” ends up like the Great Depression was in england and America or whether it is more like the hyperinflation in Weimar Germany in the 1920s.

            Reply
            1. Clive

              Yes, I am in no way confident that I won’t find myself in my seventies or older unable to afford the necessities required for any quality of life because they’re all surrounded by various tollbooths.

              Any notion that I’ll buy a new car (I’ve weaned myself off private car ownership and even if I never had access e.g. to a rental, it wouldn’t bother me), better white goods, new TVs every few years, a mobile phone upgrade every 18 months, fancy vacations etc. etc. etc. which central banks might have, will remain a fantasy until Government demonstrably renounces forever neoliberalism. As that’s unlikely to be a happening event, I’m clinging on to every penny.

              Said more in sadness than anything else…

              Reply
              1. ambrit

                It is sad Clive. The wonderful modern life we were promised in the ’50s and ’60s if we worked hard and stuck by the rules has been cancelled for most of us.
                Franklin D Roosevelt’s “Four Freedoms” encapsulates it perfectly.
                1) Freedom of speech.
                2) Freedom of worship
                3) Freedom from want.
                4) Freedom from fear.
                The wiki: https://en.wikipedia.org/wiki/Four_Freedoms

                Reply
                1. Clive

                  It almost produces an actual sense of loss, akin to bereavement, in me when I think back to my childhood. And the hopes, which weren’t crazy, ridiculously over optimistic ones, that the future would be better than today. There was, genuinely, a case for optimism.

                  On BBC when I was a kid in the 1970s, there was a show called “Tomorrow’s World”. It was full of all sorts of “progress through science” stories — new materials, improved technology, interesting and innovative things in the home, the workplace, healthcare and so on. We didn’t watch it in naïveté, there was a societal wish that we’d progress, not regress.

                  Now, we get rubbish on TV about a supposedly better ride sharing app from Uber… and, as one wag in comments had it here the other day, perseverance porn.

                  Glad it’s not just me who realises what’s been lost.

                  Reply
                  1. ambrit

                    Full agreement from me.
                    There was a similar series to “Tomorrow’s World” on television in America back during the ’60s. My plaque addled brain cannot recall the details now, but it covered similar themes. I do remember an episode about the personal jet pack, which was actually made and tested back then.
                    We believed, which solidified and cemented the social contract of the time. Now that the social contract has been abrogated, what is there to strive for?
                    Enough defeatism for one morning.
                    I may be presuming, but if I was in England now, I would be preparing, (ie. ‘prepping’,) for an extended period of disruption. Stock up on lots of toilet paper! That’s something you will miss when it runs out. (A lesson learned during our sojourn in the “Katrina Experience.”)

                    Reply
                    1. Joe Well

                      In Cuba they used the pages of old books. Let’s just hope Britain’s libraries don’t get sold to overseas recyclers first.

                  2. Yves Smith Post author

                    I’m older than you, so my first cultural memories were of the 1960s, and yes, there was lots of optimism. That was one of the anchors of the Johnson Great Society programs, that America was rich and growing and we could and should do better for the poor and disadvantaged.

                    Just listen to the music. Most songs had happy chords.

                    Reply
                    1. JBird4049

                      I don’t know about optimism, but aside from Bomb ending civilization, there did not seem to be the fear and despair of today.

                      So what happened?

                    2. Michael Fiorillo

                      “Most songs had happy chords.”

                      Indeed, no more “Dancing In The Streets.”

                      Even the (far more varied) paint colors available for automobiles were much cheerier.

                  3. Eustache de Saint Pierre

                    Fully on page with you Clive – myself now aged 61 has long realised that I will work until I drop but I am at least fortunate in that I love my work. The problems are whether that work will remain available as it’s supply is declining & the fact that much of it is physically tough, particularly if there is a tight deadline.

                    I also recall that spirit of optimism as you mention for a potential brave new world that wasn’t supposed to rhyme with Huxley’s version. It is the kids that I feel most for as I remember that at the time Mrs T’s love affair with Hayak was developing in a material sense I screwed up by packing in my trainee management job with British Industrial Sand. Nowadays if in the same position it would be the act of a lunatic.

                    It worked out fine for me & I don’t regret it although my recent stint on Universal Credit which should have been named Shock Therapy gave me a lesson in the hard reality rather than just the theory of the present. Fortunately for me unlike many of the lost souls I saw queuing in the attempt to try & make sense of the Kafkaesque system & it’s labyrinthine internet portal which only clearly informs on how you will be sanctioned, I am getting back on my feet & making the attempt to downsize in every way that I can.

                    In comparison to the Republic’s present unemployment benefit system it is like the difference between white collar & blue collar prisons. According to a friend in the South whose son is doing community work as part of that, it is remarkably similar to that which I experienced in the early 80’s while briefly taking part in one of Thatcher’s community programs, which actually did a lot of good work reclaiming the old industrial heartland.

                    I imagine that any of the many stuck on UC if they were aware of the above whether Catholic or Protestant would definitely vote to get it together with the Republic.

                    Reply
          2. workingclasshero

            In most instances in japan where they used negative rates ,they only applied to higher income individual and business accounts.correct me if i’m wrong.

            Reply
          3. westkentim

            “financiers”? “politicians” methinks.
            A propos of which, FWIW, I believe central bank independence died in 2008

            Reply
        2. Joe Well

          Clive just explained why I’ve seen so many 50-something British expats around the world and why so many are so embittered. I guess they are making a mostly rational choice except for the bitterness part.

          Reply
        3. Yves Smith Post author

          Are you sure you won’t be employable till you are 60? At least from what I’ve seen here, you have a very valuable skill set, of being able to say things that are unpleasant to hear in a way that doesn’t get people’s hackles up. I infer you’ve been able to tell management “no” regularly (even if they didn’t listen) and survive. That’s not at all usual.

          Now you may not want to deal with another decade+ of BS and it’s wise to prepare for the high odds of being hit by a department-wide layoff.

          I know of two people in finance who are working way way beyond the usual sell-by dates, one over 65 and the other pushing 65. The first is in “alts’ fund of funds and the second in M&A, which is really dog eat dog and very age-intolerant. The first is a not-closeted gay guy (who suffered a lot of discrimination in his bonuses when he was at big firms, his being 6’7” and not looking his age is an offset) and the other a woman who has aged badly (shocking that she hasn’t had some plastic surgery with all her dough and being in NYC in a top-level client facing role).

          I know they are exceptions that prove the rule but I would not rule out being an exception if you can endure The Stoopid.

          Reply
          1. Tomonthebeach

            I do not know the data in the UK, but in the USA, the bulk of Americans retire at 62 (4 years early with a reduced benefit) and most Americans are retired by 68. However, a faculty study at the U of Wisc found that 20% of their faculty were over 70. A monograph I just completed on retirement planning focuses on academics and other professionals because too many of my colleagues over the years had indeed put off retirement until their expiration date – leaving their widows/ers to navigate retirement.

            Reply
            1. JBird4049

              Retirement is a nice idea. Reminds of what Gandhi supposedly said when asked what he thought of Western Civilization. It is a nice idea.

              If your body holds, work is what keeps you fed. How can you live on social security and whatever meager savings you might have? Social security tops out at something like $2,500 and that’s only if you make roughly $75,000 for three years each. What’s the national median wage? ~47,000 or $1565 a month on social security. Something like that.

              You can’t even rent a room in much of California. Well, maybe somewhere in a place like San Francisco’s Tenderloin. Half my teachers are adjuncts. They have Bachelors, Masters, and PhDs doing good work as teachers and they make peanuts.

              No, once I leave college I expect to die working or in my car. Too old to save, and in this gigantic Bubble-verse we all live in, just what would I invest in? I mean really?

              Reply
              1. The Rev Kev

                On the other hand, and no matter what the state of society, there is usually a place for a person that knows how to think.

                Reply
                1. ambrit

                  Unfortunately, that place is usually outside of the society. Now, if you had written; “…a person who knows how to scheme.”

                  Reply
          2. PlutoniumKun

            I guess it depends on your speciality, but I know tech people working well past retirement years due to them being the only ones who know how older systems work. Until this year in my office we had a guy who flew in from his retirement in France – he is well into his 70’s – to help the IT consultants deal with the very ancient data base system he put in place in the 1980’s, and was still somewhere working away in deeper levels. He eventually stopped coming he was so fed up with it.

            I used to work in an office that had a few tech design guys also well past retirement years who just worked a few hours a day – their role was similar – it was cheaper to keep them on contracts as they had so much past historic knowledge they saved the younger set of engineers a huge amount of work simply be remembering things like where certain pipes had been laid or what software system had been chosen for some obscure part.

            Reply
  2. PlutoniumKun

    The key point I think is personal debt, its very high in the UK. This makes people far more vulnerable to sudden downturns. Add into the mix small business debt and interest rates that are already rock bottom and you have a very combustable mix in the event of a financial crisis caused by Brexit. The government will respond with aggressive monetary and fiscal pumping, but in such an open economy this doesn’t always work as intended, especially if sterling goes into sharp decline.

    I’m sure though most of the Brexit backers in the Tory party will be fine, they all have their dollar and euro offshore accounts.

    Reply
    1. Joe Well

      If the debt is GBP denominated and Sterling crashes, am I missing something or wouldn’t this would be a Godsend?

      Reply
      1. PlutoniumKun

        Its only a godsend for the debtors if inflation goes up significantly – and even then it would take a couple of years to burn through the debt. In the meanwhile, the domestic banking system finds itself with vast amounts of defaults on its hands.

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      2. Odysseus

        Can you explain what effect you think would create that Godsend? Domestic relationships don’t directly change because of currency fluctuations.

        Weak currencies make imports expensive and exports cheap.
        Strong currencies make imports cheap and exports expensive.

        So yes, if the Sterling crashes there would be a lot of opportunity for British citizens to begin producing goods and services for export, and begin producing goods and services which were formerly imported.

        How far does the Sterling have to fall to make British labor competitive under WTO rules?

        How quickly can new agreements be signed which actually improve the British situation for either imports or exports?

        Reply
        1. ambrit

          Now being semi-deindustrialized, England would be in the position of a Second World country back in the pre WW-2 period. Reliant on overpriced niche machinery from abroad etc., and scrambling to catch up to the competition, which will lead to a downward spiral in the working class’s standard of living.
          Under neo-liberalism, “labour being competitive” is code for crushing unions and depressing wages, while not lowering the prices of basic necessities.
          The overall effect of Brexit on England might be worse than that of the original Great Depression.

          Reply
  3. Iorwerth

    I remember making the suggestion soon after the referendum that David Cameron might turn out to be the Gavrilo Princip of the 21st century.
    Scorn was heaped upon me of course, but I haven’t altered my view much. Are we going to set Europe ablaze?
    I’m talking about economically of course.

    Reply
  4. BillK

    Yes, ten years of austerity to assist the criminal banking system recover from their 2008 disastrous mismanagement crash.

    But also ten years under the ever-so-successful EU system.
    Note that it was mainly the Greater London area where the financial system resides that voted to remain in the EU.

    Austerity for the rest of the UK – No problem!

    Reply
      1. upstater

        +1

        Look no further than Obama. When he appeared 2 days after the election with the arsonists Rubin and Summers I knew the game was more of the same. Parties didn’t matter.

        Reply
      2. Joe Well

        In the US they try pretty hard to keep the young and the poor (and often specifically the black) from voting. So, it must be worth something.

        Reply
        1. The Rev Kev

          “The people who cast the votes don’t decide an election, the people who count the votes do.” – Joseph Stalin (20th Century)

          Updated to the 21st century-

          “The people who cast the votes don’t decide an election, the people who control the computer voting machines do.” – The Rev Kev

          Reply
    1. Keith Newman

      Re kk: While there is some truth in what you say I can’t agree people deserve what happens to them. Our media are so filled with relentless lies and propaganda that elections aren’t really democratic. I regularly talk to smart, progressive, well-meaning people who are completely befuddled by propaganda and nonsense. In theory they could take the time to sort through the propaganda and figure out reality. However that takes a lot of time. So even for those that have the interest it is difficult to do. The consequences of that befuddlement are very dire, especially for people at the lower levels of society.
      One of the roles of unions is to plow through the nonsense and inform workers what is in their interests and why. The decline of unions has resulted in a considerable increase in befuddlement. Which is one reason why they have been relentlessly attacked, especially in the U.S.

      Reply
      1. DJG

        Thanks, Keith Newman: Wishing suffering on others is too common on social media, and as you point out, the mainstream and social media so full of lies that the “conversations” are often lies about lies.

        And, yes, the attacks on unions, which are now only limping along in the U S of A, are a way of keeping people ignorant, quarrelsome, and poor.

        Reply
    2. Massinissa

      Family blog you. No matter which party gets selected the elites always win.

      Also the idea that “Leader bad, but if I kick him out I will get a GOOD leader!” is specious at best. New boss, same as old boss. Just look at Tony Blair. People ‘voted’ against the tories and austerity and got… New Labour and moar austerity.

      Reply
    3. Yves Smith Post author

      The UK is almost certain to crash out because a mere 160,000 Tory party members got to determine who is now PM and chose Johnson. I don’t call that a democracy.

      Reply
  5. Christopher Herbert

    Yet another dismalist writer regarding an independent monetary sovereign’s ability to forge its own pathways. Britain has the single most powerful financial weapon any nation can possess: It’s own currency. Britain can spend without borrowing a dime or fiddling with its tax structure. It can control it’s interest rates and determine the rates of all debts. It can employ anyone who wants to work, doing good for the economy not just a few bankers and their families. What will happen if Britain does all these things? A lot and almost all of it good and positive. New if we could just stop listening to people like the author of this neoliberal nonsense.

    Reply
    1. Ian Perkins

      Britain also has an extensive offshore banking network.
      Will those who run it, or those who benefit from it, be interested in employing anyone who wants to work, or in doing good?

      Reply
    2. eg

      Well, yes, as a monetary sovereign the UK has that policy flexibility — but no, it is not run by people who have demonstrated any interest in exercising it.

      Reply
    3. PlutoniumKun

      That would be great of the UK was an autarky self sufficient in food.

      Unfortunately, it’s not. It is in fact one of the most open economies in the world, highly dependent on imports, especially of food and energy. The ability for MMT policies to do anything more than improve things on the margins is highly limited in those circumstances. And Brexit is irrelevant to that debate, there is nothing in EU rules outside the Eurozone to prevent a country embarking on MMT style policies.

      Reply
      1. Clive

        Food is actually pretty much a rounding error. Energy is the big limitation.

        MMT is, unfortunately above my pay grade as a topic, but I’ve never been entirely clear how, for a country that depends on energy imports (like, say, Japan does, too) MMT plays out. In theory, if I understand it correctly, MMT could be used to invest capital in, say, renewables — the UK has to all intents and purposes, limitless renewable reserves, it just lacks installed generating assets. But it would need to import turbine components, transformers, switching equipment, inverter electronics — these are highly specialised products where certain other countries have monopolies or there’s only a handful of countries producing them. Then you’d need commodities, such as copper and bauxite for cabling. It would be nearly impossible to replicate these pre-perquisite components in manufacturing base in short order, no matter how much MMT you threw at it.

        I wish I knew better how MMT worked to say definitively what would result, if it was tried. Which, of course, it won’t be.

        Reply
        1. Synoia

          MMT that I have read appeasrs good for the Global Hegemon, or countries running trade surpluses.

          Harold Wilson tried in 1965 to 1967 and was brought up short by the IMF intetvention required. ..

          Extreme examples include Zimbabwe and Venezuela.

          Reply
        2. Yves Smith Post author

          That is not what other sources (including Richard North) have said. The UK imports ~ 30% of its food. That chart probably shows net flows. They are not long-term fungible. Richard North has pointed out that the UK food export sectors will quickly go tits up in a Brexit. There will be short-term surfeit as they liquidate intended exports that have nowhere to go (like live exports of critters) followed by even deeper shortfalls.

          Reply
          1. PlutoniumKun

            Yes, a key problem with EU agricultural policy is that it favours highly concentrated agriculture systems, everyone concentrating on what they are good at. This has led to the death of ‘mixed’ farm systems, with monocultures everywhere. Thats why a country so dependent on food imports as the UK also manages to be a major exporter of food. Its all to do with individual products and seasonal issues.

            The result is that with tight restrictions of food the inevitable result would be huge mismatches of supply and demand for food – monster surpluses meaning price crashes, along with severe seasonal shortages of key ingredients. And that’s before you even factor in production capacity (especially of dairy, where lots of UK milk gets processed in Ireland).

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        3. Adam1

          The key is the currency issuer can buy anything at any price that is priced in its currency. When you are talking trade things are no longer necessarily priced in your currency. In this situation you need to be more thoughtful about policy choices and who you let spend your currency reserves. You likely need to impose capital controls as well. If you aren’t careful you’ll end up with chronic currency devaluation and if you are dependent on imports for necessities like energy or food the chronic inflation coming through the import channel will cause lots of dissatisfaction and eventually unhappy elites who will use this to throw out the government and re-establish an elite friendly government.

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          1. Adam1

            I should clarify… chronic currency devaluation would occur if the trading parters who were accumulating the excess foreign currency chose not to keep this savings in the foreign currency. There is nothing that forces them to not hold the currency, but because they could choose to not keep it you have the risk of forex devaluation.

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    4. Yves Smith Post author

      I suggest you get out of your ivory tower and look at how the UK functions.

      The UK is already running large trade deficits, which include imports of food, energy, and pharmaceuticals. Those are part of household budgets. Trashing the currency = big cost increases = defaults among stressed households.

      The UK is positioned to run severe inflation it if were to go the MMT route (unlikely) because the effect of Brexit will be to destroy productive capacity. You are selling the BS that MMT = unlimited fiscal capacity. That is false. MMT stresses that the constraint is inflation, which is determined by the productive capacity of the currency issuer.

      It cannot control its interest rates and not affect the currency. And it affects ONLY short rates. QE does not directly control longer-term rates and no central bank has attempted direct control of longer maturities. Trying to do so would be seen as a sign of desperation and would lead to further currency depreciation, worsening inflation and the affordability of imports, and thus precipitating more household and business defaults.

      Go read Willem Buiter on how the UK is well positioned to be the next Iceland by experiencing a “triple crisis”: a currency, banking, and sovereign debt default crisis:

      https://srkaufman72.wordpress.com/2008/11/17/willem-buiter-in-the-ft-how-li/

      And the UK does not believe in MMT.

      Reply
      1. PlutoniumKun

        Thanks for explaining that far more coherently than I could…

        Its always disappointing to find that so many people have decided that MMT is The Answer to All Problems. MMT is a very important tool for policy analysis and for constructing a fairer society, but it has serious real world limitations in individual countries (especially small open economies) and is not a replacement for sound fiscal or structural policy.

        Reply
  6. Christopher Herbert

    Yet another dismalist writer regarding an independent monetary sovereign’s ability to forge its own pathways. Britain has the single most powerful financial weapon any nation can possess: It’s own currency. Britain can spend without borrowing a dime or fiddling with its tax structure. It can control it’s interest rates and determine the rates of all debts. It can employ anyone who wants to work, doing good for the economy not just a few bankers and their families. What will happen if Britain does all these things? A lot and almost all of it good and positive. Now if we could just stop listening to people like the author of this neoliberal nonsense.

    Reply
    1. Skip Intro

      It is amazing that people would neglect Sterling sovereignty just because of the UK’s level of dependence on imported foodstuffs, raw materials, pharmaceuticals, etc.. It’s not like the government won’t be willing to reverse their austerity fetish, stop the asset stripping of public infrastructure, and risk the dreaded ‘wage inflation’ by spending to reduce unemployment.

      I think a lot of people like to say that the glass is half empty, and just see a round of shock therapy applied to the population as the government and its owners ratchet up the ongoing ‘squeeze and skim’ operation harvesting blood from stones savings from the poor.
      I think people would be happier if they had a less cynical outlook.

      Reply
      1. Ian Perkins

        I’d probably be happier, at least in the short term, with a less cynical outlook.
        But the antics of our elites make me more cynical by the day.
        Harvesting blood and kidneys from the poor? I expect they’re planning for that.

        Reply
                1. ambrit

                  Interesting thought that. The Brexit as an analogue to the Opium Wars. I hadn’t thought that idea through last night.
                  Such an occurrence would also give the Channel Islands some much needed competition for the worldwide money laundering trade.
                  I can indeed imagine the Isle of Man or the Isle of Wight built up with a Chinese Dominant Elite. One would need to be trilingual: English, Mandarin, and Gaelic.

                  Reply
                  1. PlutoniumKun

                    One thing the English continually under-estimate is the deep humiliation of the formerly colonised and the desire for an ironic revenge – you can see this in the Indian governments cheeky demand for 2 million work visas for Indians as part of any trade deal and the love rich Indians have for buying iconic UK brands.

                    The 19th Century trade ports were a terrible humiliation for China and so they would absolutely love the idea of replicating it on the UK, just for the lols.

                    Reply
                    1. ambrit

                      Taking your observation about the 19th Century Western trade ports on the Chinese littoral, I suddenly realized that about all the major European Powers had one. Thus, the Chinese thirst for revenge would be against the West in general. The “Hong Wight” as you suggest would be just the first of a series. Perhaps Vancouver is next?

                    2. PlutoniumKun

                      I think the memory applies mostly to the British – the Shanghai treaty ports are a historic detail, but Britains occasional clumsy intervention in HK is a constant reminder to the Chinese of the Imperial past.

                      I don’t think they would deliberately seek out a treaty port as revenge, but if the opportunity arose they would immediately see the irony and I think would gleefully seize the opportunity to (very subtly) rub their former rulers nose in it.

                    3. ambrit

                      Spot on. Are any of the management contracts for a big port in England coming up for renewal?
                      The irony is delicious.

      2. Synoia

        Harold Wilson tried this in 1964 through 1967, and was rewarded with a devaluation, IMF intervention, and a slump.

        Dropping the value of one’s Currency appears to start a death spiral, ptevented only by austerity, a cut in import demand

        Why is now different?

        Reply
  7. sangell51

    Brexit was not exactly a ‘bolt out of the sky’. A referendum was held and ‘leave’ won. The government promised to implement that decision and Article 50 was invoked. Now more than 3 years later it just may happen.

    How much time to prepare would be adequate? 5 years? Of course many just wanted to reverse the outcome and made no preparation thinking that if no preparation was made it just wouldn’t happen.

    I have no doubt there will be problems. It wasn’t all smooth sailing when the United States withdrew from the British Empire as we didn’t, as yet, even have a government but we did have the liberty to establish one as we saw fit. The UK, now free of EU rules and regulations, can adapt and adopt policies as needed to deal with the consequences of being free again. Its not a ‘blood, sweat, toil and tears’ moment.

    Reply
    1. ambrit

      Oh, mes amis! You don’t have to live there for the next five years, do you.
      No planning worth the name has happened in England concerning Brexit. Don’t assume that the EU, out of sheer altruism will relax all those trade rules to help the ‘valiant Brexiteers’ navigate the swamps and miasmas of “The Change.” England is fully enmeshed in the global trade system. The rules are complex. It requires years of training and experience to know what you are doing, and avoid the snares set for the ‘unwary’ by the legions of ‘sharp operators’ involved in the globalist movement.
      Roughly, if several tens of thousands of UK citizens a year die because of avoidable bottlenecks, those ghouls won’t care. Imagine, if you can, England being treated like a Third World colony by Europe and America. Now go and read up on how England treated it’s own colonies. There you have a rough outline of how England will be treated for the next decade. Not a pretty picture.

      Reply
      1. Monty

        Au contraire! There has been plenty of planning… Sadly, the plan is to loot the place and sell the family jewels.

        Reply
    2. Yves Smith Post author

      In fact, Sir Ivan Rogers has said (and his view is confirmed by other experts) that it would take 5-10 years for the UK to reorganize itself to deal with the rest of the world on a free trade agreement basis.

      You might bother boning up before spouting off.

      Your example is so ludicrous as to prove the point.

      Reply
      1. Anonymous 2

        Yves is of course right. A further important point to consider, I suggest, is that there is now a very considerable prospect that the UK will disintegrate. Scotland seems to have pretty much had enough of the English and I hear anger is rising high in Northern Ireland at the way the clowns in Westminster are operating with precious little regard to the impact of their policies on the Six Counties.

        Whether much serious planning would get done while the country is disintegrating is doubtful. Even then you have to take account of the fact that the UK (if it does stay intact ) no longer has the weight to throw around to shape the world to its liking. Whatever happens, it will in future be a rule taker rather than a rule maker.

        Reply
        1. PlutoniumKun

          I’ve just been browsing through the sunday papers and there seems increasing panic among insiders about not just Brexit, but the way the constitutional order in the UK could well be on the verge of breaking apart. If the worst case scenarios about what Cummings and Johnson are planning are true, then this amounts to something of a coup. Andrew Rawsley in the Observer goes through the options quite well. The English might stand for this, but the Celts will not.

          There are the usual ‘oh no, its the 1930’s again’ comments among some observers, but I don’t really believe in historical analogies, every generation is structurally different. But there is a very real possibility now of an unstructured disintegration of the constitutional order in the UK now. And I have no idea what that will look like in reality, or what the outcome will be. Breakups can be relatively orderly (Czechoslovakia) or they can be Yugoslavia.

          Reply
            1. PlutoniumKun

              As an aspiring comedian I know once said ‘we’ll have the return of Wessex, Sussex, Essex and No Sex!’ Her joke was well ahead of her time…

              Reply
            2. PlutoniumKun

              More seriously, a few months ago on Irish radio the leader of Plaid Cymru (the Welsh nationalist party) was openly talking about growing interest in an alliance of Celtic regions remaining in the EU under the umbrella of Dublin’s membership, independently of their nationhood status.

              He was speculating that the EU’s proposal of allowing NI to stay within the EU while part of the UK opened up the possibility of the UK staying together, just individual parts staying in the EU. Complex and unlikely as it is, it would be a better model than a sort of random splintering of the UK Yugoslav style.

              Reply
              1. ambrit

                Interesting thought, but, wasn’t the old UK/EU arrangement of a similar hybrid nature? I see a much more probable outcome as the constituent parts of the UK entering some sort of confederacy of semi-autonomous regions. A proper devolution. This looks to be the future trend worldwide.

                Reply
                1. PlutoniumKun

                  Yes, there is a series of weird arrangements (I confess to not fully understanding the full details) regarding the Channel Islands and Isle of Man and the City of London. Technically speaking, the former two are not even part of the EU. Oddly, France’s remaining colonies (such as French Guiana) are ful members – not many people realise the EU stretches to South America…. The accession of East Germany and the odd arrangements for Greenland are other peculiarities that seemed to break the rules, but were overlooked for political reasons.

                  So there are definitely legal precedents for pretty much any sort of arcane complex constitutional arrangement you would want regarding EU membership. Essentially, they could declare themselves to be Crown Dependencies while exiting the UK, but accepting Dublin as their ‘capital’ when it comes to UK rules. It really comes down to whether the EU would be willing to turn a blind eye to the legal contortions needed to justify that sort of deal.

                  Reply
  8. Reify99

    Is Brexit necessary for the implementation of MMT or does it just provide a foil? As in- “never let a crisis go to waste.”

    And when the (family blog) hits the fan will there be new scapegoats or just the same old tropey ones?

    Reply
    1. PlutoniumKun

      Brexit is irrelevant to MMT. There is nothing in EU rules to prevent a country embarking on MMT style fiscal/monetary policies, once it is outside the Eurozone.

      Reply
  9. DHG

    Here in the US, I stockpile no less than 1 year worth of must have medications and plenty of food along with fuel for cooking that food. Water is not a problem plenty of that around, keep several years of purification tablets around to take care of that water. There in the Uk yes they are completely unprepared for a disorderly no deal Brexit. Really sad the leaders that we have to day but completely predictable by the time period we all live in.

    Reply
    1. Noel Nospamington

      Good for you and your specific situation!

      Many medications people rely on to live are highly perishable. Not to mention that many people do not have the resources (money, storage, security, etc.) to stockpile.

      Regardless of how prepared you are, you can still fall victim to accidents, natural disasters, violence, etc. which can occur during human-made disasters.

      It is not fair to allow victims to die in any avoidable disaster.

      Including those victims who were stupid and/or racist enough to fall victim to the unicorn lies of the leave campaign.

      Reply

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