The Consequences Of Leaving The Party

The collective decision of the British electorate is to reject the recommendation of its government, excepting those of its few dissenting ministers, that Britain should remain in Europe. It is a signal failure of government policy. Above all, it is a failure that undermines the state’s control over ordinary people. Time will tell whether it is just a temporary setback for the world’s economic planners, or the removal of a keystone supporting the whole structure of modern statism.

There are, therefore, two aspects of this development that must be considered, domestic UK politics and the international economic and political consequences.

There can be little doubt that David Cameron and George Osborne the Chancellor are now only caretakers, with the duty of managing a planned withdrawal from Europe until their replacement as executive politicians. The withdrawal will be a lengthy process, which over the next two years at least, will lead to the final, official separation. It is possible there will be attempts by the European elite in Frankfurt and Paris, to come up with proposals to keep Britain in the EU club and to force a second referendum. Any such attempt will fail, because it cannot even be entertained by a caretaker Prime Minister.

David Cameron’s days as Prime Minister are numbered and he now has no real authority. The Conservatives will have to elect a new leader, and the bookies’ favourite is almost certain to be Boris Johnson. He is likely to be elected by the Conservative Party by the end of this year.

Britain’s future will therefore be subject to the policies of a Boris-led government, which it has to be admitted, will have obtained power basically through the failure of the Remain camp to come up with a convincing argument. It was arguably Remain that lost, and not Leave that won.

While the Leave camp campaigned on an agenda, which by implication was for freer markets, it is another thing to assume that regulations and red-tape will actually be rescinded. Therefore, a cynic might with justification point out that instead of being controlled by one bunch of inept politicians in Brussels, the British economy will be run by another bunch of inept politicians in Westminster.

The reality is that Boris Johnson, if he becomes Prime Minister, and his future government are creatures of the system. Importantly, they lack the intellectual basis to confidently challenge it. Doubtless, they will consult the same advisors who supported Remain, not just in the civil service, but in the private sector banks and in big business. No politician, unless he really understands the economic challenge, is immune from the persuasive efforts of these lobbyists and vested interests.

Britain’s progress from being part of a European super-state to full independence is therefore unlikely to be smooth. The UK will, once again, be more exposed to the discipline of private sector markets. Sterling markets are not too big for speculators to attack successfully. There is a significant risk, in the short-term at least, that Britain will stumble from sterling crisis to sterling crisis.

We could argue that from today, nothing immediately changes. Britain will still be an EU member for the next two years. This is true, but it ignores the fact that markets are forward-looking, and will not treat government procrastination kindly. It will be a steep learning curve for Boris & Co.

Two bits of unfinished business will have to be addressed. There is little doubt that the post-referendum collapse in sterling was exacerbated by the derogatory statements of two men, George Osborne, the Chancellor, and Mark Carney, the Governor of the Bank of England. Both men in office have a duty not to undermine the economy or the currency in their statements. Some latitude can be given in this matter to an incumbent politician, but not to the head of a central bank.

If Remain had prevailed, they would have got away with it. But it did not, and the Leave vote carried the day despite their threats. The consequences of their scare tactics, it could be argued, have not only made things worse for sterling and sterling-denominated financial markets than they would otherwise be, but their statements have contributed to a wider market crisis. Both men are therefore likely to be forced from office sooner rather than later.

Black swans and just deserts

The immediate response in global markets to the Leave surprise has been one of panic, starting with Asian markets, and a yen soaring to under 103 to the dollar. Gold has been just about the only bright spot, jumping by over 6% to $1340 at one point. Given sterling’s weakness, gold has risen more dramatically measured in pounds, by nearly 20% to £1,000 per ounce. Asian equity markets are taking it badly, with the Japanese market down over 7.5%.

This is the overnight market news.  With a bit of luck, traders might be more rational when European markets begin trading properly later this morning. However, the global financial and economic situation is dire, and ripe for a crisis. At particular risk are the European banks, whose complacent bets on a Remain result will hurt them badly. Expect the share prices of banks such as Deutsche, UniCredit and Credit Suisse to plumb new lows, fuelling concerns about their solvency.

That is the black swan. Just deserts are the fare of politicians in Europe and the crew at the IMF. The EU is faced with populist demands for democracy, or at least a better system than on offer from the EU hierarchy. It will be lucky to avoid further disintegration, with ex-members seeking their own trade alliances. That is, if a systemic banking crisis doesn’t get it first.

The IMF also made a very bad and inappropriate call, with Christine Lagarde publicly supporting the Remain mantra of gloom and doom in the event of leave. This important institution, which issues the world’s SDRs, would have served markets better if it had kept quiet and prioritised risk control. Its credibility has been badly damaged.

I must end this report on one further gloomy note. The bullion banks in their complacency have built up large short positions in gold, which by 5.00AM London time this morning had soared $100 at one point. Unless, during the course of today’s trade, gold loses most of this remarkable rise, there could be defaults in this market. The gold market, being based on the one form of money that is no one else’s risk, is central to the whole financial system. This could turn out to be the largest worry of all.

Alasdair Macleod

HEAD OF RESEARCH• GOLDMONEY

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