My
60 years of experience tells me the pound will plummet, along with your living
standards. The only winners will be speculators .
David Cameron, along with the
Treasury, the Bank of England, the International Monetary Fund and others have
been attacked by the leave campaign for exaggerating the economic risks of
Brexit. This criticism has been widely accepted by the British media and many
financial analysts. As a result, British voters are now grossly underestimating
the true costs of leaving.
Too many believe that a vote to
leave the EU will have no effect on their personal financial position. This is
wishful thinking. It would have at least one very clear and immediate effect
that will touch every household: the value of the pound would decline precipitously.
It would also have an immediate and dramatic impact on financial markets,
investment, prices and jobs.
As opinion polls on the referendum
result fluctuate, I want to offer a clear set of facts, based on my six decades
of experience in financial markets, to help voters understand the very real
consequences of a vote to leave the EU.
The Bank of England the Institute for Fiscal Studies and the IMF have
assessed the long-term economic consequences of Brexit. They suggest an income
loss of £3,000 to £5,000 annually per household – once the British economy
settles down to its new steady-state five years or so after Brexit. But there
are some more immediate financial consequences that have hardly been mentioned
in the referendum debate.
To start off, sterling is almost
certain to fall steeply and quickly if there is a vote to leave– even more so
after yesterday’s rebound as markets reacted to the shift in opinion polls
towards remain. I would expect this devaluation to be bigger and more
disruptive than the 15% devaluation that occurred in September 1992, when I was
fortunate enough to make a substantial profit for my hedge fund investors, at
the expense of the Bank of England and the British government.
Households would lose between £3,000
and £5,000 a year on average
It is reasonable to assume, given
the expectations implied by the market pricing at present, that after a Brexit
vote the pound would fall by at least 15% and possibly more than 20%, from its
present level of $1.46 to below $1.15 (which would be between 25% and 30% below
its pre-referendum trading range of $1.50 to $1.60). If sterling fell to this
level, then ironically one pound would be worth about one euro – a method of
“joining the euro” that nobody in Britain would want.
Brexiters seem to recognize that a
sharp devaluation would be almost inevitable after Brexit, but argue that this
would be healthy, despite the big losses of purchasing power for British
households. In 1992 the devaluation actually proved very helpful to the British
economy, and subsequently I was even praised for my role in helping to bring it
about.
But I don’t think the 1992
experience would be repeated. That devaluation was healthy because the
government was relieved of its obligation to “defend” an overvalued pound with
damagingly high interest rates after the breakdown of the exchange rate
mechanism. This time, a large devaluation would be much less benign than in
1992, for at least three reasons.
First, the Bank of England would not
cut interest rates after a Brexit devaluation (as it did in 1992 and also after
the large devaluation of 2008) because interest rates are already at the lowest
level compatible with the stability of British banks. That, incidentally, is
another reason to worry about Brexit. For if a fall in house prices and loss of
jobs causes a recession after Brexit, as is likely, there will be very little
that monetary policy can do to stimulate the economy and counteract the
consequent loss of demand.
Second, the UK now has a very large
current account deficit – much larger, relatively, than in 1992 or 2008. In
fact Britain is more dependent than at any time in history on inflows of
foreign capital. As the governor of the Bank of England Mark Carney said,
Britain “depends on the kindness of strangers”. The devaluations of 1992 and
2008 encouraged greater capital inflows, especially into residential and
commercial property, but also into manufacturing investments. But after Brexit,
the capital flows would almost certainly move the other way, especially during
the two-year period of uncertainty while Britain negotiates its terms of
divorce with a region that has always been – and presumably will remain – its
biggest trading and investment partner.
Third, a post-Brexit devaluation is
unlikely to produce the improvement in manufacturing exports seen after 1992,
because trading conditions would be too uncertain for British businesses to
undertake new investments, hire more workers or otherwise add to export
capacity.
For all these reasons I believe the
devaluation this time would be more like the one in 1967, when Harold Wilson
famously declared that “the pound in your pocket has not been devalued”, but
the British people disagreed with him, quickly noticing that the cost of
imports and foreign holidays were rising sharply and that their true living
standards were going down. Meanwhile financial speculators, back then called
the Gnomes of Zurich, were making large profits at Britain’s expense.
Today, there are speculative forces
in the markets much bigger and more powerful. And they will be eager to exploit
any miscalculations by the British government or British voters. A vote for
Brexit would make some people very rich – but most voters considerably poorer.
I want people to know what the
consequences of leaving the EU would be before they cast their votes, rather
than after. A vote to leave could see the week end with a Black Friday, and
serious consequences for ordinary people.
Source:theguardian.com
Source:theguardian.com
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