Editorial note: Please note that today’s essay was written prior to the news on Friday of the murder of British MP Jo Cox. In response, the pro and anti-Brexit groups have temporarily suspended their campaigns.
Tensions are rising and shares are falling.
Gold has rallied strongly in the past fortnight, on the back of the uncertainty over Europe’s future.
Groundhog Day was played out in Washington. As expected, the US Fed has kept rates on hold. And there was ANOTHER (almost obligatory) downward revision for US economic growth. Ho-hum. Where is The Donald when you need a little bit of entertainment?
The real excitement — the stuff that’s making people jittery — is happening on the other side of the Atlantic.
The Brexit vote is causing angst around the world. The cosy status quo is under threat. Uncertainty and markets are not compatible bedfellows.
The Sun — Britain’s most popular newspaper — is urging its readers to ‘BeLEAVE’ and vote to exit.
Ambrose Evans-Pritchard, the prominent business writer for The Daily Telegraph, made this admission in his column on 13 June 2016:
‘With sadness and tortured by doubts, I will cast my vote as an ordinary citizen for withdrawal from the European Union.
‘Let there be no illusion about the trauma of Brexit. Anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan or a dreamer, or has little contact with the realities of global finance and geopolitics.
‘Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.’
Nationalism and immigration are driving the LEAVE debate. But these sentiments are not unique to Britain. This spirited debate is being had in other parts of Europe. Hence the rise of far right and far left parties in France, Spain, Italy, Austria and Greece…not to mention the confounding rise and rise of The Donald.
In the upcoming Australian election we are being offered the choice between a doormat and a soggy sandwich. The void in genuine leadership options among the establishment parties is making people look elsewhere. Opting for anything that upsets the entrenched privileged class.
Anti-establishment is pitted against the establishment, and the establishment do not like this pushback one little bit.
To counter the groundswell of support for the LEAVE camp, the scare campaigning is moving up a gear.
UK Chancellor of the Exchequer (Treasurer) George Osborne is evoking the fire and brimstone of an evangelical preacher when he warns that a vote to LEAVE will bring forth the need for an emergency budget. Apparently a budget ‘black hole’ of £30 billion (approximately AU$60 billion) is going to suddenly appear. Be warned ye who wish to leave — taxes will need to go up, and spending will need to be slashed.
However, the risk with overegging the pudding is that you can end up with some of that egg on your face. As British PM David Cameron found out, to his embarrassment.
In a recent TV interview Cameron was asked, ‘What comes first? The global Brexit recession or World War Three?’
The audience laughed. PM Cameron was not too happy with the question.
Once he regained his composure, he accused the interviewer of being ‘glib.’ But as we all know, many a true word is said in jest…which is why the audience responded as they did.
The interviewer was simply feeding back the ‘end is nigh’ warnings, in an irreverent manner, that Cameron and the rest of the REMAIN camp have been pushing to the (not so) great undecided.
The LEAVE campaign has also been playing a little loose with the truth. They have been downplaying the potential negatives of a Brexit. As Ambrose Evans-Pritchard stated, there should be no illusion about the trauma involved when a 43-year relationship heads for the divorce courts.
There will be bitterness, recriminations and unintended consequences.
If the LEAVE camp prevails, there should be no dancing in the street. The powers-that-be in Europe will act. Initially, there’ll be significant repercussions. This action will be taken, in part, to show other recalcitrant countries how difficult life can be if they choose to follow Britain and leave the Union. ‘Go along to get along’ is the veiled threat from the Brussels elite.
The grand bureaucratic dream of a united Europe is at risk of collapse. Big stakes are at play.
This trend is only going to get worse
If Britain leaves, the debate has the potential to spread to other parts of Europe.
A recent Dutch poll showed 90% of the population want a ‘Hollexit’ referendum. Talking with my wife’s Dutch relatives, this small sample tended to confirm the poll results. They may not necessarily vote to leave, but they feel it’s time for people to pass judgement on the EU experiment, refugee intakes and Brussels’ bureaucratic ways.
Standing back a few paces, my assessment is that the mood of discontent is a reflection of a broader trend in society. The mood has darkened since 2008. If you recall, before things went pear shaped in 08/09, climate change dominated the public debate. As a society we could entertain the grandiose idea and expensive ‘schemes’ to reduce carbon emissions. We did not talk about debt levels. When we spoke about markets it was in glowing terms…share markets were on the up. Interest rates were relatively normal. The China boom provided an abundance of well-paid employment.
Since the credit implosion in 2008/09 life has not been so rosy…for the majority. The gap between the small percentage of haves and the greater number of have-nots has widened. The weight of debt is bearing down on the global economy. The system is buckling under this debt load.
That pressure is being felt in stagnant wages, redundancies from well-paid jobs, business closures, governments threatening to trim welfare budgets, and the increased adoption of automation (reducing labour costs). Deflation is crushing in from all sides. Deflation is kryptonite in a world addicted to growth and inflation.
The unrest we are witnessing at present is decidedly civilised compared to what I think is coming as this deflationary pressure continues to build.
The central bankers have been powerless to stop the broader deflationary trend. All their actions have managed to do is inflate asset prices. This only adds to the resentment being felt in the broader community…99% turning their anger against the one percenters.
Taking back control is the motivating force behind the Brexit LEAVE campaign. The harsh reality is the deflationary forces at play cannot be controlled by the Brits, the Germans, the Japanese, the Yanks, or anyone. Too much capacity to produce too many things too few people want or need, in a world awash with debt, is not something you can control…it has its own life force.
Even if the Brits decide to stay with the EU, it will not be the end of the issue. The deflationary pressures will continue to intensify. Public discontent will continue to build to a point where the resentment will be expressed in a much less civilised manner.
And if you follow the money, the vote next week looks like it’s going to be to REMAIN.
People can tell the pollsters whatever they like, but it’s another matter when it comes to stumping up cold hard cash.
According to betting site oddschecker.com, the popular bets are divided 55% REMAIN and 45% LEAVE.
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This is a different story to the polls, but it’s following a similar pattern to the Scottish referendum. The neck and neck polls are not being reflected in the betting agencies.
Have no illusions, the solution will hurt
One more thing on why The Donald is connecting with more voters than anyone could have possibly imagined.
You may recall a couple of years ago the US government ground to halt over the debate on whether to raise the debt ceiling…increasing the limit on the government credit card.
A friend sent me this recently on Trump’s explanation of how to deal with the US debt ceiling:
‘Let’s say you come home from work and find there has been a sewer backup in your neighbourhood. Your home has sewage all the way up to your ceiling.
‘What do you think you should do? Raise the ceiling, or pump out the s**t?’
Pumping out the s**t is what the world needs. But, like the Brexit issue, there should be no illusions about the trauma this will cause the global economy.
We have reached the rather sad point in this grand experiment of debt accumulation to fund and pursue economic growth at all costs; when there are no good choices…we have the devil and the deep blue sea.
The best we can do individually is to take control of our own affairs, to ensure we can withstand the volatility that almost assuredly lies ahead.
That’s what I help my readers to do in my advisory service, The Gowdie Letter. You can read more about how I plan to help them weather the great deflation here.
Editor, Markets and Money
Editor’s Note: This article was originally published in Money Morning.