What if No Brexit Deal?

Popular Economics Weekly

Equalitytrust.org

We know why the UK voted to exit the EU—UK working class anger at not gaining many of the benefits from joining the EU, while experiencing its downside with the influx of eastern EU citizens that displaced domestic workers. But leaving the EU without a negotiated treaty will make it even worse for all Brits, rich and poor. It could spell another recession like the Great Recession, or even worse.

Both the Great Depression and Great Recession were caused by excessive speculation in the financial markets that created massive asset bubbles—whether in overpriced stock values or housing—which then burst. And middle and lower income- earners suffered the most.
But there was another reason. Record income inequality underlay both Great Downturns when these earners continued to borrow beyond their means to spend.

There are no asset bubbles at present, but a high level of debt exists because of the various QE programs that kept interest rates low to enable consumers to keep borrowing. So European and U.S. stock markets aren’t anywhere near Great Depression or Great Recession P/E ratio levels. And there’s no housing bubble caused by excessive overbuilding (Too few dwellings being built—so much so that California’s new governor, for instance, has pledged to add 3.5 million residences to California’s housing stock during his term).

However, the EU’s Great Recession was made worse by misplaced austerity policies that cut welfare spending and taxes when it should have increased public subsides as Ben Bernanke’s Federal Reserve did in 2009 that mitigated some of its effects, and enabled a quicker U.S. recovery.

Can you imagine what could happen if the UK doesn’t beat an orderly retreat from the EU? The UK chancellor, Philip Hammond, has warned of a “bad-tempered scenario” in which neither side acts in their own best economic interests, said the Guardian recently:

“Many Europeans regard the dispute over money not as an early round of bargaining but as a matter of good faith. If the Brits cannot be trusted to settle their past promises, why bother striking future deals? Walking out could therefore be treated as a legal default, with litigation in the international courts and even asset confiscation. Never mind free trade talks, such an atmosphere could make it impossible to agree a replacement for all manner of existing arrangements governing travel, immigration and customs.”

This is while the UK and EU economies are already slowing, and President Trump’s looming trade wars with allies and enemies alike will cut back growth even further.

So it’s vital that the UK and EU find an amicable divorce. What would it look like? The Guardian reports that Brexiters believe the UK can use WTO rules to trade perfectly successfully with Europe, as does Britain when trading with non-EU members. Though WTO tariffs are high for food and cars, most manufactured goods would see little change in export duties. “Over time, the hope is that Britain could return to the negotiating table to agree on rules that would facilitate EU trade in services and find other ways to compensate for lost agricultural markets by looking to faster-growing markets abroad,” says the Guardian

But there is so much more to cross-border agreements, such as custom unions, citizenship barriers, and the like. The real lesson is that U.S. and European economies are too fragile to allow anything but an amicable Brexit divorce; or better yet, no divorce at all.

Tradingeconomics.com

How do we judge the fragility of any economy? By its underlying growth factors. The EU and UK are both suffering serious slowdowns, with just 0.2 percent GDP growth rates in the latest quarters. The Euro area’s overall unemployment rate has declined to just 8 percent since the end of the Great Recession, with Italy’s unemployment stuck at 10 percent and Spain’s at 14 percent.

Then question is how much support would US give to the UK, if UK economy collapses, and the EU is unable or unwilling to come to their aid?

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Brexit and the Politics of Fiscal Austerity

Popular Economics Weekly

https://www.washingtonpost.com

The case can now be made that Briton’s vote to leave the EU was because of wrong-headed fiscal policies in the aftermath of the Great Recession. The housing bubble affected Europeans almost as much as Americans after 2008, busting their asset bubbles with stock market crashes and large job losses. And the UK’s response was draconian; raise taxes while cutting back on social welfare programs that benefited the not so wealthy.

This was to be achieved by a combination of UK public spending reductions and tax increases amounting to £110 billion, which made their downturn worse than that of the U.S., because U.S. Fed Chair Ben Bernanke and the Democratic congress advocated easing credit and spending some $787B to boost infrastructure repairs and depleted state budgets in the American Recovery and Reinvestment Act of 2009 (ARRA).

The Tory government of John Cameron did the opposite with a vengeance; beginning in 2010 to brutally slash £21 billion from its welfare budget that took away essential benefits from a large number of UK citizens; who then voted for the Brexit referendum in 2016. Tories used the standard conservative trope that public spending took away from private sector investments that could revive the economy by creating new jobs.


That is not a proven economic theory, however, as conservatives have never wanted to admit that corporations and other private businesses tend to hold back a large part of their profits to buy back stock and thus boost the incomes of stockholders and CEOs, rather than invest it into further growth and more jobs. Instead, austerity became the conservatives’ excuse for shrinking government services at the wrong time.

This is documented by the results of research from a University of Warwick economist, Themo Fetzer: “These reforms activated existing economic grievances,” said Fetzer. “Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.”

It has also been the case with U.S. programs that were put into place when the Tea Party took over Republican politics and began the series of austerity measures in 2011 that included a prior government shutdown and caps on public spending.

The result in both countries was that it increased income inequality, which enraged the newly disenfranchised, non-college educated males, in particular, that were most affected by the Great Recession. Brexit advocates blamed the EU for it budget woes, claiming that withdrawal would bring home all those revenues that went to support less prosperous members of the EU, while a huge influx of Poles and other Eastern European citizens flocked into the UK and took away less-skilled jobs that many Brits believed they depended on.

Nobel Economist Paul Krugman in a 2015 Guardian article wrote perhaps the best known critique of austerity programs that were enacted throughout much of the developed world as a result of the Great Recession: “Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Republicans, blaming the Great Recession on a bloated federal budget and too many regulations, attempted to cut almost all welfare spending, and even  abolish Obamacare when they controlled the House and Senate during the Obama administration 

But now that Repubs have all the political power? They are creating record budget deficits and national debt with their tax and regulation cutting policies. That tells us austerity was just an excuse to redistribute even more wealth to the corporations and Wall Street; rather than Main Street.


The Brexit Leave campaign, in other words, is the result of misplaced ideologies rather than tried and true economic policies.

Harlan Green © 2019

 Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Record Low Mortgages Rates?

The Mortgage Corner

Mortgage applications increased 7.2 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending July 8, 2016. It’s a result of mortgage rates dropping to historic lows.

The conforming 30-year fixed rate is now 3.0 percent, with a 1 pt. origination fee, and the Hi-Balance conforming fixed rate (with a maximum loan amount of $625,500 in high cost areas) now as low as 3.25 percent with a 1.25 pt. origination fee in California.

Graph: FRED

This is unheard of, with rates now the lowest since WWII, really, before there was even much of a housing market, and just one conventional GSE, the Federal National Mortgage Association, or Fannie Mae, created during the New Deal to offer 30-year fixed rate mortgages. This gave homebuyers longer payback terms, and helped to start the post-WWII housing boom.

Today’s record low rates are mainly due to a flight to quality as some large investment funds such as Black Rock predict England will fall back into recession as a result of the Brexit vote. And this is leading investors to put their money elsewhere, mainly the U.S. where bond and stock returns are still positive.
Britain will fall into recession over the coming year and growth in each of the next five years will be at least 0.5 percentage points lower as a result of Britain leaving the European Union, BlackRock Inc (BLK.N) said on Tuesday.

"Our base case is we will have a recession," Richard Turnill, chief investment strategist at the world's largest asset manager, told reporters at the firm's investment outlook briefing. There's likely to be a significant reduction of investment in the UK," he said, adding that Brexit will ensure political and economic uncertainty remains high, according to Reuters.

The Market Composite Index, a measure of mortgage loan application volume, increased 7.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 14 percent compared with the previous week. The Refinance Index increased 11 percent from the previous week. The seasonally adjusted Purchase Index was unchanged from one week earlier. The unadjusted Purchase Index decreased 20 percent compared with the previous week and was 5 percent lower than the same week one year ago. Last year, the Fourth of July fell on the prior week.

The refinance share of mortgage activity increased to 64.0 percent of total applications from 61.6 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.2 percent of total applications.

New York-based BlackRock oversaw $4.7 trillion in assets globally as of March 31. Of that, $1.5 trillion was in fixed income assets, said the Reuters report. The Brexit fallout will result in "materially lower" growth in the euro zone as investment plans are deferred, and have a "moderately" negative impact on U.S. and Asian growth, Turnill said.

So we are now seeing early results of the possible breakup of not only Great Britain, with Northern Ireland and Scotland wanting to remain in the EU, but right wing parties in other EU members such as the Netherlands and France making noises about leaving the EU.

Graph: Trading Economics

It is serious business, folks, with possible repercussions to US growth. At least 20 percent of US exports go to the EU, already teetering on the edge of a recession. Such low rates will give the US housing market another boost in the near term as we near full employment with rising wages reported in the latest US employment report.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Divided States of America

Financial FAQs

It is now becoming obvious that we are not a United States of America. There are many states that restrict voting rights, abortion rights, immigration, even the collective bargaining rights of workers that are no longer able to negotiate for their own living wages.

This is when the media is lamenting the possible breakup of the European Union with Great Britain’s Brexit vote to depart from the EU. But the US is breaking up in far more serious ways, even without the influx of millions of Muslim refugees that Europe has to deal with and is causing its drift to xenophobia and the fear of foreigners.

The US in many ways is still fighting the Civil War of 150 years ago, with the defacto apartheid of poor vs. wealthy neighborhoods, and the police killing of blacks at traffic stops. A recent study by the New York based Center For Policing Equity showed that African Americans are more than 3 times as likely to be beaten, bitten by police dogs, pepper sprayed, Tasered, or shot, according to the New York Times.

There are now 26 right-to-work states that either don’t allow workers to join unions, or pay dues, or bargain collectively for their wages, even when their workplace may be under a union contract. This has resulted in those states having the greatest income inequality and lowest wage-earners.

Graph: Wikipedia

There are a very similar number that restrict abortions—even in the case of rape for women—and restrict voting rights when the Voting Rights Act was gutted by a 5-4 Supreme Court vote in 2015.

And it is many of those same states that don’t allow convicted felons that have served their time from voting—as many as 30 percent of voter-age African Americans in southern states, thanks to the War on Drugs, according to Michael Moore’s movie, Where To Invade Next. GW Bush probably only won Florida because some 80,000 ex-felons were stricken from the voting roles—mostly in Democratic-leaning counties.

This is why African-Americans now comprise 50 percent of our 2.3 million prison population when they are 12 percent of our population. It provides the cheap labor that prison factories have used to generate products for most large corporations plus the military—another form of slave labor.

Florida leads the pack in the number of citizens excluded. According to Desmond Meade of the nonprofit Florida Rights Restoration Coalition, "Over 1 million people in Florida right now are disenfranchised. Nearly 1 in 3 of them are African American men.” If these people were able to vote, Meade continues, "Florida would no longer be a swing state."

But according to the Brennan Center for Justice, 48 states (exceptions: Maine and Vermont) prohibit current prisoners with felony convictions from voting and 29 of them also bar those on probation or parole. All told, felony disenfranchisement prevents more than from voting. And of the four states that permanently bar voting by former felons—Kentucky, Florida, Iowa, and Virginia—the latter three are battleground states.

Then there are the gun laws. Only 6 states restrict or outright ban the sale of military-style assault weapons, when more than 30,000 gun deaths are recorded every year, and Orlando-style massacres occur because of unlimited magazine sizes of those same assault weapons.

What is behind the defacto civil war still raging? Many economists says it’s the globalization and export of good jobs to developing countries with cheaper wages that have hurt those blue collar workers in the poorer states.  But too many blame immigrants, or nonwhites, or anyone not belonging to their tribe. But we also have to look at the monopoly power of corporations that have pushed such free trade treaties, suppressing their employees’ wages while paying their executives record incomes.

In fact, these states have in many ways already withdrawn from the United States of America in trumpeting state and local rights over inalienable rights. It is just a modern incarnation of our ongoing Civil War.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Did Brexit Happen?

Popular Economics Weekly

The shortest answer is the Great Recession and austerity policies of EU policymakers. The result will be a Lessor, or Little Britain, which was inevitable given the austerity policies holding sway in the EU. What austerity policies? In the UK’s case, it was raising taxes in 2010 while cutting government spending in an attempt to pay down debt incurred during and by the Great Recession. In doing so it has kept the UK close to recession level growth ever since 2008.

But standard economic theory tells us the opposite is needed. A recession or economic downturn of any kind is when private business (and consumers) begin to hoard (i.e., save more, and spend less), which the Great Depression and (WWII) taught US means governments have to spend more to preserve jobs and productive capacity, which will ultimately bring a more robust recovery and the means to pay down that public debt.

Nobelist Paul Krugman has been one of austerity’s most vocal critics. “By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.”

Graph: Trading Economics

But the Brits did just the opposite, with predictable results—near zero GDP growth since 2008. “I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere,” said Krugman. “George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world.”

This led to the scapegoating by demagogues quick to take advantage of diminishing economic prospects of working class whites in (formerly) Great Britain, and that Donald Trump is taking advantage of in the U.S. as well. Hence the Brits came to blame immigrants for taking away lower and mid-level jobs, when it was Cameron’s government that was downsizing itself at the same time of diminished private spending.

The scapegoating of Mexican and Muslim immigrants is really the only way Trump knows how to scare those people that don’t have another way to understand their predicament after his anti-Obama birther movement failed. I once wrote about the reason for the Tea Party supported by many of those same middle-aged US white voters who felt disenfranchised with a fast changing economy.

The Ted Cruz-led rebellion and 2011 government shutdown (while holding the confederate battle flag) brought in those still fighting the Civil War 150 years later. Big Government to them was the Northern Yankees bullying the Southern, more conservative states.

The EUs overall predicament has been the same, as ours—which is a poor growth record due to the austerity policies of political elites—both in Europe and unfortunately, the U.S. as well, where the Obama administration also allowed taxes to rise and government spending cut after the 2011 shutdown and consequent spending sequester that downgraded the U.S. sovereign debt rating.

Such policies have prevented the massive spending and investment programs that occurred during President Roosevelt’s New Deal, a New Deal that employed those many who could not otherwise have had the dignity of work during the Great Depression.

The result of our own austerity policies has been our failing schools, highlighted in Michael More’s latest film, Where To Invade Next, and Detroit’s toxic drinking water, the result of Michigan’s cutback in government services—which in Detroit’s case meant taking over control of Detroit’s government and replacing its elected officials with a state-appointed ‘manager’.

So can anyone blame the Brits wanting to become Little Britain again; or so many Americans that want to close our borders in order to Make America Great Again, because their predicament has been ignored for so long by those same Austerians?

Unfortunately, it is a lesson lost to European elites and even most American politicos, it seems, so a history of wall-building is on the cusp of repeating itself. Only this time, we have to find a better way than another World War to rescue our economies (and break down those walls).

Harlan Green © 2016 

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen