June 25, 2016, Weekly Summary: Why did this happen, and what happens now?
Why?
We can all thank the enormous “con-job” that was put in motion by ‘trickle-down’ economics thirty-five years ago. That is where the answer to ‘why’ starts.
Reagan and Thatcher liberalized the financial markets and removed controls over the banking industry. This “Big Bang”, as it was known, included privatization of most government controlled utilities, cuts in government social spending, significant cuts in the upper tax brackets, and an emphasis on the individual rather than society.
There was a massive increase in Cold War related defense spending that resulted in large budget deficits, U.S. trade deficit expansion, and in order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion. The United States moved from being the world’s largest international creditor to the world’s largest debtor nation.
The newly deregulated financial industry introduced a constantly expanding universe of new derivative instruments with which to gamble and extract value out of the real economy and onto its own bottom line. Global free-trade agreements which allowed the free movement of goods and capital were implemented, as were legal restrictions on trade unions (especially in Britain). This was good for capital, but not so for the majority of the population.
In parallel with these organizational changes, we’ve had a technological revolution that has been as disruptive to the economic pyramid as the first industrial revolution was in the 18th century. By definition, technology is the production of labor-saving devices; we have saved so much labor that now we don’t know what to do with it all (it’s not needed).
This has been unfortunately timed to occur just as support for the individual was being methodically withdrawn. The idea that everyone should take care of themselves, and that if the top of the pyramid was nice and fat, some of that fat might trickle down to the destitute and allow them to survive, was sold as part of the American dream; ‘you too can make it if you try’. How is that supposed to happen if technology and free-trade is eliminating the need for Human labor? The asymmetric distribution of productivity gains is at the root of the revolution that we believe Brexit has started.
Every revolution that has ever happened, was rooted in economic inequality. That may not have been obvious by the time the revolution was effected, but inequality is the common soil out of which all revolutions grow. By the time they have begun, the blame will have been focused on two entities: the rule makers (who deserve the blame), and the ‘other’ (visible and convenient minorities) who bare no responsibility for the problem. The Brexit vote is a classic text book example of this.
What Happens Now?
Nobody really knows because there is no historical precedent. We can imagine a few scenarios, however, in no particular order:
#1
The EU ushers the UK out the door in a matter of months (not two years) and delivers an economic boot to the rear-end as an example for other members that might be thinking of leaving. If you leave, there is a price to be paid.
#2
Scotland is as good as gone. What happens if your flat-mate says he is quitting your common group of business associates and that you have to also? This is a no-brainer.
#3
Northern Ireland is likely to leave the UK. This would be an unbelievable outcome, considering the last 400-years of Catholic vs Protestant history, but seems possible at this point.
#4
A general election is called and one or more parties run on a ‘remain’ platform. The referendum was non-binding, which means that an elected majority government could just ignore it. This has to be done really soon, however, before the UK gets kicked out.
There are other possible outcomes that would affect other players on the global stage. For example, Putin has to be all smiles this weekend, since it was the UK that was the prime motivator behind the sanctions that Russia is suffering under. Without the UK, the EU is less likely to continue with a hard-line.
As far as the US is concerned, we don’t see Brexit having a big affect, other than perhaps providing a psychological push that sends the market over the cliff. Economically, it changes very little for the US.
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To summarize, we see Brexit as the beginning of the unwinding of the Thatcher/Reagan `trickle-down` economics experiment. Capital (the financial industry) has designed the system to optimize their extraction of value from the bottom half of the economic pyramid. The pyramid is now top-heavy and starting to tilt. Combined with the success of labor-saving technology and the refusal, or inability to distribute the productivity gains that have resulted from these technologies, the bottom of the pyramid on which the entire economy rests, is now anorexic and starting to convulse.
We see this as just the start. Either we go back to protectionist trading (bad idea), or we find a way of integrating and including EVERYBODY in the benefits of technology and globalization, NOT JUST CAPITAL.
ANG Traders is completely cognizant of the fact that what we do, by trading in the equities casino, is extract value, not create value. We create value for ourselves, but that is not the same as creating value in the economy. By sharing the gains more widely in society, we can grow the economic pie, making everyone richer, even the already-rich. A billion dollars in most billionaires’ hands would just become an entry in some tax hide-out somewhere, while every dollar that the bottom of the pyramid receives gets put straight back into the economy. This makes us richer, so why would we fight against it?
If this really is the start of something that results in less inequality, then we have profitable boom-times to look forward to.
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We wish our subscribers a profitable week ahead.
Regards,
ANG Traders
Quelle: Nicholas Gomez
