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We warned two weeks before the vote that markets were dangeroursly complacent, here we gather some interesting perspectives from around the web., The first, from David Beckworth

The second reason the rising dollar matters is the rapid growth of what the BIS calls the 'parallel dollar system'. This is a system of dollar loans and dollar debt securities that has emerged outside the United States. This dollar credit to and from non-U.S. residents has tripled since 2000, while non-resident Euro and Yen financing has remained relatively stable. In fact, the dollar's share of this non-resident credit growth has increased from 62% to 75% according to BIS data. This means there is a lot of dollar-denominated debt outside the United States that is very vulnerable to dollar shocks. Brexit just increased the real debt burden of these borrowers.

So between tightening monetary conditions for the  dollar bloc countries and increasing real debt burdens for all the non-resident issuers of dollar debt, the global economy has been hit with a large dollar shock. Put more crudely, the strong dollar noose that has been choking emerging economies since mid-2014 has now been complemented by the opening of  trap door on the gallows via Brexit. This makes the strangulation of global economy complete.
A second reason Brexit might be pushing the global economy into a global recession is that it hastening the the frantic race to bottom on safe yields. As I noted in a recent post, yields on safe assets around the world have been going down since the demand for safe assets remain unmet. Given global capital markets this also means there is a race to the bottom on safe yields as noted by Caballero, Fahri, and Gourinchas (2016) :
In the open economy, the scarcity of safe assets spreads from one country to the other via the capital account. Net safe asset producers export these assets to net safe asset absorbers until interest rates are equalized across countries. As the global scarcity of safe assets intensifies, interest rates drop and capital flows increase to restore equilibrium in global and local safe asset markets. Once the ZLB is reached, output becomes the adjustment variable again. 
Brexit massively intensified this race to the bottom as seen in the the 10-year yield below. Incredibly, the yield fell from 1.74 to 1.43 this evening! Brexit, in other words, just jolted the demand for safe, liquid assets in a major way.

This frantic race to the bottom of safe yields will eventually run up against the effective lower bound (ELB). When that happens something else will have to adjust. And that something is output, as noted by Caballero, Fahri, and Gourinchas (2016)

So there you have it. The world has been hit with a massive global monetary shock. And via dollar bloc countries, the parallel dollar system, and the shortage of safe asset problem this monetary shock may be what pushes an already slowing global economy into a global recession.

Will central bankers and finance ministries be ready for it? I hope so.



And here is Krugman:

Brexit: The Morning After

 JUNE 24, 2016 10:21 AM June 24, 2016 10:21 am
Supporters of Brexit in London on Friday.
Supporters of Brexit in London on Friday.Credit Andrew Testa for The New York Times

Well, that was pretty awesome – and I mean that in the worst way. A number of people deserve vast condemnation here, from David Cameron, who may go down in history as the man who risked wrecking Europe and his own nation for the sake of a momentary political advantage, to the seriously evil editors of Britain’s tabloids, who fed the public a steady diet of lies.

That said, I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claimingThe political consequences might be much more dire; but many of the bad things I fear would probably have happened even if Remain had won.

Start with the economics.

Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.

But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it.

It’s true that the pound has fallen by a lot compared with normal daily fluctuations. But for those of us who cut our teeth on emerging-market crises, the fall isn’t that big – in fact, it’s not that big compared with British historical episodes. The pound fell by a third during the 70s crisis; it fell by a quarter during Britain’s exit from the Exchange Rate Mechanism in 1992; it’s down about 8 percent as I write this.

Here, from Bloomberg, is the pound-euro rate over the past 5 years. This is not a world-class shock:


Furthermore, Britain is a nation that borrows in its own currency, not subject to a classic balance-sheet crisis due to currency devaluation – that is, it’s not like Argentina, where the fall in the peso wreaked havoc with firms and consumers who had borrowed in dollars. If you were worried that fears about Brexit would cause capital flight and drive up interest rates, well, no sign of that – if anything the opposite. Here, again from Bloomberg, is the interest rate on British 10-year bonds over the past five years:


Now, it’s true that world stock markets are down; so are interest rates around the world, presumably reflecting fears of economic weakness that will force central banks to keep monetary policy very loose. Why these fears?

One answer is that uncertainty might depress investment. We don’t know how the process of Brexit plays out, and I could see CEOs choosing to delay spending until matter clarify.

A bigger issue might be fears of very bad political consequences, both in Europe and within the UK. Which brings me to the politics.

It seems clear that the European project – the whole effort to promote peace and growing political union through economic integration – is in deep, deep trouble. Brexit is probably just the beginning, as populist/separatist/xenophobic movements gain influence across the continent. Add to this the underlying weakness of the European economy, which is a prime candidate for “secular stagnation” – persistent low-grade depression driven by things like demographic decline that deters investment. Lots of people are now very pessimistic about Europe’s future, and I share their worries.

But those worries wouldn’t have gone away even if Remain had won. The big mistakes were the adoption of the euro without careful thought about how a single currency would work without a unified government; the disastrous framing of the euro crisis as a morality play brought on by irresponsible southerners; the establishment of free labor mobility among culturally diverse countries with very different income levels, without careful thought about how that would work. Brexit is mainly a symptom of those problems, and the loss of official credibility that came with them. (That credibility loss is why the euro disaster played a role in Brexit even though Britain itself had the good sense to stay out.)

At the European level, in other words, I would argue that Brexit just brings to a head an abscess that would have burst fairly soon in any case.

Where I think there has been real additional damage done, damage that wouldn’t have happened but for Cameron’s policy malfeasance, is within the UK itself. I am of course not an expert here, but it looks all too likely that the vote will both empower the worst elements in British political life and lead to the breakup of the UK itself. Prime Minister Boris looks a lot more likely than President Donald; but he may find himself Prime Minister of England – full stop.

So calm down about the short-run macroeconomics; grieve for Europe, but you should have been doing that already; worry about Britain.



And Steve Forbes(!)

The vote will intensify the centrifugal forces tearing apart the EU. The whole thrust of post-WWII diplomacy has been to bring the European nations together in order to avoid the disasters that plagued Europe and the world during the first half of the 20th century. The EU has made a series of major mistakes, in particular creating a massive, corrupt bureaucracy that has spewed out an avalanche of petty regulations (what the shape of a banana should be). For all its flaws, however, the EU played a critical role in enabling the former dictatorships of Spain and Portugal to make the transition to the liberal democracies they are today. It also did the same for the ex-communist countries of central and eastern EuropeThese countries made major reforms that went against powerful domestic interests in order to win membership in the EU. No wonder Vladimir Putin hates the EU and was horrified that Ukraine wanted in. He wants Russia to dominate Europe, and the unraveling of the EU plays right into his malignant hands.

Why The Brexit Vote Is All-Around Bad - Forbes

Apart from the massive, corrupt bureacracy stuff (the EU employs less civil servants than a medium city like Marseille), this is surprisingly on the mark.



Larry Summers:

The situation of European banks should and will receive extensive policy attention.  Even before the last 24 hours, several were selling at price-book value ratios suggesting alarm about their prospects.  And some, not only British banks are now down more than 20 percent.  Large flight to quality flows into the dollar and yen also risk bringing on alarm about emerging markets and a return to concern about currency wars.
For Britain, the economic effects are two sided.  On the one hand, a major jolt has been delivered to confidence, to future unity and down the road to trade.  On the other, the currency has become more competitive, and liquidity will be in very ample supply.  I would expect that a significant deterioration in growth and a recession beginning in the next 12 months has to be a substantial risk though short of an odds on bet. As suggested by the fact that stock markets in Italy and Spain are down almost twice as much as in the UK, the prospects for Europe may in some ways be worse than for the UK.  There is the real risk of “populist exit contagion” in a number of countries.  A credit crunch is a serious risk.  Unlike in Britain, the trade weighted exchange rate is unlikely to decline very much.  The central bank has less room for incremental policy measures.
The effects on the rest of the world will depend heavily on psychology.  I continue to be alarmed as I wrote in this space a few days ago that this unexpected outcome in the UK will raise the spectre of “Trump risk”.  If the UK can vote for Brexit perhaps the U.S. can vote for Donald Trump.  I fear this possibility will lead to a freezing up of spending decisions particularly on the part of internationally oriented businesses.  The odds of U.S. recession beginning within the next 12 months are I think now in the 30 percent range.  Also noteworthy is that an environment of increased risk aversion and flight to quality will complicate Japan’s problem of generating inflation, and China’s challenge of attaining currency stability.

Why Brexit is worse for Europe than Britain | Larry Summers



Martin Wolf in the FT doesn't mince his words:

David Cameron took a huge gamble and lost. The fearmongering and outright lies of Boris Johnson, Michael Gove, Nigel Farage, The Sun and the Daily Mail have won. The UK, Europe, the west and the world are damaged. The UK is diminished and seems likely soon to be dividedEurope has lost its second-biggest and most outward-looking power. The hinge between the EU and the English-speaking powers has been snapped. This is probably the most disastrous single event in British history since the second world war.

One point seems evident: it is now politically inevitable that the UK will have to bring in controls over immigration from the EU. That rules out what might at first glance seem the best option: membership of the European Economic Area, which would permit membership of the single market. At best, the UK might participate in a free trade area in goods. But the services, on which it depends, would be excluded from the single market.

The UK economy is going to be reconfigured. Those businesses that have set up in the UK to serve the EU market must reconsider their position. The City’s role in trading in euro-denominated assets will be undermined. Manufacturers will also have to consider how to readjust their productive capacity. Many will relocate. Businesses who depend on their ability to employ European nationals freely will have to reshape operations. Many will want to move inside the EU single market. Such decisions will not have to be made at once. But they will drive down investment now.

Brexit will reconfigure the UK economy -



Kenneth Rogoff:

A decision of enormous consequence – far greater even than amending a country’s constitution (of course, the United Kingdom lacks a written one) – has been made without any appropriate checks and balances. Does the vote have to be repeated after a year to be sure? No. Does a majority in Parliament have to support Brexit? Apparently not. Did the UK’s population really know what they were voting on? Absolutely not. Indeed, no one has any idea of the consequences, both for the UK in the global trading system, or the effect on domestic political stability. I am afraid it is not going to be a pretty pictureMind you, citizens of the West are blessed to live in a time of peace: changing circumstances and priorities can be addressed through democratic processes instead of foreign and civil wars. But what, exactly, is a fair, democratic process for making irreversible, nation-defining decisions? Is it really enough to get 52% to vote for breakup on a rainy day? In terms of durability and conviction of preferences, most societies place greater hurdles in the way of a couple seeking a divorce than Prime Minister David Cameron’s government did on the decision to leave the EU. Brexiteers did not invent this game; there is ample precedent, including Scotland in 2014 and Quebec in 1995. But, until now, the gun’s cylinder never stopped on the bullet. Now that it has, it is time to rethink the rules of the game.
For one thing, the Brexit decision may have looked simple on the ballot, but in truth no one knows what comes next after a leave vote. What we do know is that, in practice, most countries require a “supermajority” for nation-defining decisions, not a mere 51%. There is no universal figure like 60%, but the general principle is that, at a bare minimum, the majority ought to be demonstrably stable. A country should not be making fundamental, irreversible changes based on a razor-thin minority that might prevail only during a brief window of emotion. Even if the UK economy does not fall into outright recession after this vote (the pound’s decline might cushion the initial blow), there is every chance that the resulting economic and political disorder will give some who voted to leave “buyers’ remorse.”

Britain’s Democratic Failure by Kenneth Rogoff - Project Syndicate



Simon Wren-Lewis:

The triumph of the tabloids

There is a lot of talk right now about an angry, mainly old working class who used Brexit as a way of kicking back at an establishment that had brought them nothing but grief over the last decade. The Leave campaign managed to channel that into anger at the EU, even though it had precious little to do with the EUThe key is to ask how did that happen, and why did it not happen just one year ago?

In the 2015 general election Labour highlighted the decline in UK real wages, and promised more money for public services. They were defeated - no angry electorate wanting to get rid of the establishment then. Did that electorate feel passionate about European migration? UKIP only managed to get one MP elected.
In 2015 the electorate voted Cameron back in because they thought the Conservatives were more competent at running the economy, and that Cameron would be a better leader than Miliband. In the last few hours we can clearly see that both beliefs are incorrect, and some of us said it back then. But that cannot be the whole story because that same leader with the same economic competence has just been heavily defeated.
Did people just vote for the higher food and petrol prices that sterling’s depreciation will bring? Of course not. Nor did they vote for a possible recession. They did vote for lower immigration, but only in a small minority of cases because they dislike immigrants. People thought less immigration would lead to a better NHS, more secure jobs and higher real wages. They may get lower immigration, in time, but they will certainly will not get a better NHS and substantially better working conditions as a result.
It is tragic that we have left the EU. But what is equally tragic is that people who voted for that are very quickly going to find out that they were sold a pig in a pokeThey have been deceived, and that will only increase the disillusion and disenchantment with the political system. Of course we should blame Johnson and Farage and the rest: the UK has paid a very high price to facilitate political ambition. Of course we should blame Cameron and Osborne for taking the referendum gamble and stoking anger with austerity. But a few politicians alone are not capable of fooling the electorate so consistently. To do that they need to control the means of communicating information.
In 2015 I argued that mediamacro had won it for Cameron and Osborne, and pretty well no one took this seriously. Just a year later, the united voice of economists has been successfully dismissed as Project Fear. Not by the people, but by politicians working together with most of the tabloid press, and a broadcast media obsessed with 'balance'. The tabloid press has groomed its readers for Brexit. If any good is to come out of this, it will involve defeating most of the tabloid press, and then forever reducing their influence. And given the power of that media, this can only be done by a united opposition that is prepared to cooperate in an effort to beat Johnson and Farage.
There is also a very big warning here for the US. Clinton may be ahead now, but do not underestimate the power of the media (which is still giving Trump much more coverage) to turn that around.
Brexit is perhaps the first major casualty of the political populism that has followed the financial crisis and austerity. That populism triumphed in the UK because the establishment underestimated its power and did nothing to tackle the resentment on which it feeds and the misinformation on which it thrives. It has been strong enough to turn a traditionally outward looking nation into one that turns its back on its neighbours. The leaders as well as the people of other countries should not make the same mistake as the UK just made.


But Cameron’s aides told reporters that he has no intention of invoking Article 50—he plans to leave that option, and what would follow, to his successor. Indeed, there is some talk that Britain might not start the departure process until after French and German Presidential elections take place next year. If that happens, it could be 2019 or 2020 before Britain finally retreats to unsplendid isolation behind the English Channel.

Brexit Vote Throws Britain and Europe Into Turmoil - The New Yorker


Here is Scott Sumner:
At this point (midnight) the global economy has been hit by a negative monetary shock, one of the biggest in years. Here’s what to watch tomorrow: 1. Does the crisis show signs of spreading to the PIIGS? 2. What do the world’s central banks do, especially the ECB and the BOJ? … If I read the fed funds futures correctly, they are now forecasting low rates for essentially forever. T-bond prices must be soaring. David Beckworth says we are a monetary superpower—well we are now a lot more super than even 3 hours ago. I’d emphasize that this is an almost purely a monetary shock—in real terms it makes little difference whether the UK is in or out of the EU (especially in places like the US and Japan). It’s monetary. That means the ultimate effect depends ENTIRELY on how the central banks react.

Brexit: the monetarists weigh in | FT Alphaville


Still, the EIF is a key player in the European start-up space and the question of whether its funding continues to flow into the UK is the “biggest unobvious risk” for the country’s tech scene, says Hussein Kanji, a founding partner at Hoxton Ventures, which hasn’t taken EIF money. The full list of EIF equity investments, as of July 2015, is here. Here are some of the UK funds they’ve backed, including one from the recently listed Draper Espirit. And here’s the main beneficiaries of the EIF’s efforts, from the same paper previously quoted

The risk to UK startup funding after Brexit | FT Alphaville


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