Tuesday, June 28, 2016

Warren Coats and Robert Pringle Offer Thoughts on the Brexit Vote

We have featured articles and ideas from both Dr. Warren Coats (former IMF) and Robert Pringle (former Director - Group of 30) here on this blog. Both of these experts provide us a window into the thinking of some who have worked inside the monetary system for many years. This kind of experience is invaluable to hear from because we know we are getting their unfiltered thoughts which may not always be the case with those currently employed within the system who must consider how their public statements may impact markets, etc. 

In this article we feature the thoughts and reaction from these two experts on the recent Brexit vote. Dr. Coats provided a comment for us to include with this article so we will start with that. 

Direct comment from Dr. Coats on the Brexit vote:

"I think that the success of Brexit was a setback for the reforms I think the EU needs to remain the strong force for a peaceful and prosperous Europe that it has been even with all of its problems. But hopefully I am wrong and it will shock the rest of the EU into strengthening the European Economic Area (the single market) that was the free trade foundation of the EU. 

UK participation in the European common market would require the very labor mobility (immigration) the drove some Brits to vote to leave. No one knows where all of this will go.  I am sorry that Britain’s (classically) liberal voice will no long influence EU decisions. I opposed the withdrawal of Scotland from Great Britain but now assume that it is inevitable and probably a good thing as England continues to shrink in importance in the world. 

More broadly, I fear that we are seeing a retrenchment from the liberal international order we have all benefited so much from. I elaborate that point in the following note: https://wcoats.wordpress.com/2016/06/25/brexit/"

Now some selected quotes from the blog article linked above written by Dr. Coats:

"My concern in this note is whether the underlying public sentiments that pushed Brexit over the finish line—the fear of job losses and cultural dilution as a result of excessive immigration—herald a retreat from the globalization that has dramatically raised standards of living and reduced poverty around the world in the last several decades."

. . . . .

"Trade across national borders could not exist without international laws and understandings about the nature of contracts and their enforcement, the description and measure of content and statements of value (unit of account), etc. Leaving the EU does not free the UK from the need to conform to such standards if they wish to continue trading with the rest of the world."

. . . . .

"The European Union itself was always much more than an economic (free trade) project. Following WWII after centuries of devastating wars, the European project was always more about establishing the mechanisms of political cooperation that would avoid another European war. It has been stunningly successful in this endeavor, but still struggles to find the right balance in the devolution of authority and the best formulation of European wide governments for preserving peace and promoting economic well-being. An excellent discussion of these issues can be found in Dalibor Rohac’s Toward an Imperfect Union: A Conservatives Case for the EU."

Robert Pringle wrote an interesting article on his blog (The Money Trap) in reaction to the Brexit vote (as a side note, we appreciate the link back to this blog in the last paragraph of this article on The Money Trap blog). Below are some selected quotes from the article titled 'Brexit Shows Need for New Rules on Money' :

"The vote for Brexit is about much more than the UK and Europe. It shows that new rules to guide the process of globalization are needed.
The policies followed since the financial crisis have two major errors.
First there is a failure to diagnose the true causes of the crisis. Second, governments have failed to ensure  that all sections of society paid their fair share of the cost.
Governments and central banks saw the problem as one of lax regulation and inadequate bank capital. They tightened regulation and raised capital requirements. In other words, the system was patched up. It was all basically “business as usual”.
Governments attempted to deal with the recessions by stimulating demand through easy money.  Again,  business as usual. That is what they had always done.
Preventing a widening of economic inequality was not one of the aims of these programmes. On the contrary. Central banks quantitative easing and other non-conventional monetary policies relied on boosting asset prices for their effectiveness, thus benefitting sections of society that already possessed significant financial or real estate assets. They made inequality worse.
Another highly damaging effect of these monetary policies was to cause wide swings in nominal and real exchange rates among major economies, amounting to competitive depreciation and currency wars.
All this helped to create the conditions for protests, culminating in BREXIT.
But as I argue in The Money Trap, the diagnosis used to justified these policies was always faulty. The policies have not cured the underlying liability to further crises.
They are not only insufficiently radical. They are just plain wrong.
Ordinary people sense this. They see that authorities do not have a real grip on banking and finance. They sense that baanking systems have not been reformed. Ordinary people pay through their taxes for bank recapitalization and continuing subsidies to the finance sector. This is grossly unfair. Banks are still not supporting the real economy and small businesses aas they should.
Economic recovery has been slow precisely because neither business leaders nor consumers feel the underlying problems have been addressed.
Meanwhile, Brussels, London and Washington have all become honeypots for corporate lobbyists securing special deals and favourable regulation for the interests they represent.

To prevent another Brexit, address the real causes

The unacknowledged causes of the financial crisis lay in bad national banking and international monetary systems. They remain unreformed."
. . . . . 

 My added comments: I know from reading articles from both of these experts that they have concerns about the future stability of the current financial and monetary system and both have interesting ideas on how to potentially reform it. In this case I wanted to see what they were thinking about the Brexit vote since it is a significant event. Below is a short bullet point list of what I think I see from their comments on it.

- Dr. Coats seems to be concerned that the Brexit vote may lead to headwinds for global monetary system reforms if nations take a more nationalistic view and turn away from a more global economic view. 

- Robert Pringle seems to view the vote as a signal that the present system policies are not working for the average person and need to be reformed. He seems to view it more as a call to action.

- Dr. Coats tends to emphasize the benefits he believes the existing EU system has provided over the past decades and suggests many Brexit voters may not have been aware of them.

- Robert Pringle tends to focus more on what he sees as the failures of the monetary polices used in recent years that he believes contributed to the Brexit vote.

Our interest here is to follow events like this to see if they result in some kind of major changes to the existing financial and monetary system. So far, my investigation suggests that there are a variety of ideas on how to reform the system and that major reform is more likely to take place under some kind of crisis condition because of the tendency for change to take place gradually without some kind of trigger like a crisis. Feedback I get from experts like Warren Coats and Robert Pringle also suggests to me that it may take some kind of crisis to generate interest from policy makers for serious reforms.
Both Robert Pringle and Warren Coats have ideas on how the system should be reformed. We will look at those ideas (along with some others) in a new article tomorrow. Whether the Brexit vote will lead to any kind of significant crisis situation is an unknown factor right now since the impact is likely to spread out over time.

Added notes: A thank you to a reader who alerted me to this document circulating in Europe that calls on the EU to respond to the Brexit by stronger integration rather than further decentralization. This article in the Express described the plan as a "European Superstate". With anti EU sentiment rising at the same time, expect all this to increase uncertainty and instability as the rift between those wanting less centralization and those wanting more seems to be ramping up. And this issue is also on stage in the US as well.

It's after the fact now, but here is the webinar Jim Rickards recorded on the day of the Brexit vote that turned out to be prescient. 

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