The British people have shot themselves in the foot by voting for Brexit. This is what billionaire Richard Branson said recently. So let’s make a detailed economic analysis of who are the winners and losers as a consequence of Brexit. The most important consequence of Brexit is British Pound losing its value tremendously. British Pound is now trading at 31 years low. Pound Flash Crash that took place 2 weeks back has send jitters throughout the financial markets with all other currencies also showing signs of wobbliness. Today we have highly interlinked and integrated financial markets all over the world. Billions of dollars easily flow in one direction or another with just a click of a mouse. Have we build a house of cards? Let’s start our case study with the documentary that was shown to the British people why they should vote for Brexit.
https://www.youtube.com/watch?v=UTMxfAkxfQ0
As you can see in the above documentary, the case for Brexit vote was build on the premise of EU being run by a bureaucracy. You can watch the above documentary in full and hear all the arguments that were put forth in favor of Brexit. In economics whatever you do, you cannot fully predict the consequences. This is precisely what happened. People thought one thing and in reality another thing happened. Brexit was basically voted for by people who were told that EU open border policy was taking away jobs from them and giving them to foreigners. This is what happens after the Brexit vote!
Now with the British Pound touched 1.14000 level in the flash crash for just 2 minute before it rebounded and recovered to 1.23000 level. Analysts believe British Pound is going down and danger is it once again touches the support level of 1.14000. With British Pound getting cheaper, it is a boom time for tourists who can all flock to London and do all the sight seeing there. UK exporters will also have a boom time as their exports gets cheaper and more competitive in the global markets. But British Pound losing value will be painful for the British people as they will have to face a higher cost of living due to inflation caused by higher import bill. Did you watch this documentary on new millionaires and how they are making a living?
As said above main effect of Brexit is a massive Pound depreciation. This massive depreciation is expected to increase inflation by 2.2% next year. Inflation was almost zero in 2015. So British consumers will be the ones who will be facing the most pain. British companies will have to face higher input costs. This will eventually force them to raise the price of their products in the long term. So the initial benefit of cheaper exports will also overtime FTSE 100 surged 20% as a consequence of Brexit. But this was short term market sentiment. When the real costs of Brexit becomes more and more clear to the people this will change the mood of the market.
The most important question that comes to the mind of onlooker: what to do now? Proceed ahead with Brexit despite knowing all the costs. Hold another referendum? After all Brexit referendum was won with a close margin of 1% which means a lot of people had indeed voted against it but since 1% people more than them voted for Brexit, they had to lose the referendum. In referendums like these that have a crucial decision to make that can haunt the people for many generations in the future, do we need a rule? Something like 60% voting for the question for the vote to be yes. This ensures that the at least a majority did indeed vote for the question.
Whatever, with British Pound now showing wobbliness, we can expect it to go down again. This time it can go close to 1.14000 and stay there for a long time as compared to 2 minutes last time. In the end, if you have a competitive economy that can survive on its own, you don’t need to worry about the consequences of Brexit. Is UK economy strong enough to withstand the negative consequences of Brexit? Next few years are crucial in this regard. The decisions made by UK policy makers will tilt the balance and we will know how well Britain fared outside of European Union. You can watch this 1 hour documentary on passive investing.