Is Britain poorer/doomed?

I fear there’s been a bit of  goal-post moving by the anti-brexiteers.  From “this will wreck the economy” to “the depreciation of the pound will have devastating long-term effects

People, believe it or not, the depreciation of the pound is HELPING the British economy. Manufacturing is up, recession has been avoided.

Tyler acknowledges this, but writes about how the 10% depreciation of the pound make the UK poorer by some fraction of that decline. And indeed that can be true. If British wealth remains constant in pounds, and some of it goes to buying imported goods (and 30% of British consumption is on imports), then they are indeed poorer.

But things are more complicated than that. First off, if Brits own dollar or Euro denominated assets, they are actually getting richer in terms of wealth for pound-based future consumption.

Plus British wealth in pound terms is NOT staying constant.

Pre-Brexit, the FTSE was settled in around 6200. It fell to 5400 after the vote, but it is now trading at 71oo. That is a 14.5% rise in the value of British companies (from the base of 6200 not 5400).

And that my friends, is British wealth going up in pound terms by as much or more than the pound is depreciating.

Of course, to the extent that non-Brits own British shares, that dilutes how much British wealth rises when the valuation of British companies rise.

In fact it’s pretty hard (I think) to figure out the exact net international position of a country’s asset holders.

We do know however, that there is a large home bias to asset holding and common measurements of national wealth just roll in the full value of the stock market.

Sure, the stock market is not all of wealth and the stock market could fall on further news. But the pound depreciation doesn’t affect all wealth either and the pound could rise in medium term (I know it fell further last week).

To my eye, for now at least, I’d say it’s closer to the truth that post-brexit Britain is wealthier, not poorer. At the very least, please just consider that the economic consequences of Brexit may not be as bad as our pundits are telling us.

 

 

11 thoughts on “Is Britain poorer/doomed?

  1. not convinced.

    less productive economies have exchange rates that reflect that. That’s why you can buy one day of an Ethiopian’s labour for less than one day of an Americans. If America suffered a negative productivity shock, its exchange rate would depreciate to reflect that. That would help American exports, but that would not fully compensate for the productivity shock. Hooray we’ve moved a bit closer to Ethiopia. Why do you think pound as fallen so much? Isn’t wealth= command over future consumption? How’s that looking considering we import so much?

    UK productivity has fallen because we have thrown sand into our trade transaction costs, we are going to have to dedicate lots of civil servants to expensive and pointless stuff (not just trade negotiations but customs officers) and we are going to lose productive capital investments by international firms. See everything the Japanese have said. And probably most importantly, we’ve probably royally screwed our main export industry: banking.

    Predictions of an immediate recession proved misplaced – probably because the impact of firms delaying investment decisions or starting to go elsewhere, takes its time to feed through, and there was not really any other channel for Brexit to hit the economy in the short run – at least two years before it actually happens.

    The FTSE rising is just a restatement of non-Sterling denominated assets just rising in value. Most FTSE100 firms have non-GBP earnings.

  2. “I’d say it’s closer to the truth that post-brexit Britain is wealthier, not poorer”. If you had phrased that as “some people in the UK are wealthier”, you’d be on the money.

    The fall in sterling represents a global expectation that the British economy will be less profitable relative to the rest of the world, but this in turn will boost the value of assets that Brits own abroad (which will ironically help the balance of payments in the short-term). This will bias towards the better-off, who are more likely to have a greater exposure to foreign property, bonds and equities.

    FDI is likely to decline for the same reason – i.e. cheaper UK assets reflect a discount to foreign buyers, but this is offset by the declining value of receipts (sterling transfers). Foreign investors looking for yield may be put off by lower productivity and political uncertainty, while those looking for capital gains (i.e. currency appreciation) may fear further devaluation.

    Clearly the forecasts of immediate doom were nonsense, but no serious commentator expected the result of a no vote to produce anything other than windy “sentiment” in the short-term. The consensus of the markets so far appears to be that the UK economy will stagnate at best and contract at worst. One conclusion we can draw is that British investors with larger than average foreign portfolios will do fine.

    • I see your argument for the better offs benefitting more due to affluence and buying property or shares outside of Britain.
      But a falling pound will also benefit blue collar workers chances to land a job, so even some less well offs will benefit.

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  4. “And that my friends, is British wealth going up in pound terms by as much or more than the pound is depreciating.” Wrong: if you convert the FTSE100 and the FTSE250 in either EUR, USD or some other major currency, they are in negative territory since the referendum (around -5% and -10% in USD on Friday, last time I checked). And both include companies with foreign currency income (preponderantly in the FTSE100, but also for the FTSE250 is quite significant). Additionally, this is most likely to soften the impact to richer people who have international investments, while mostly the less well-off will face increased inflation on import goods.

  5. Interesting post.

    I also wonder if macroeconomists have the right way of looking at issues such as globalized trade and baking systems, and immigration.

    Sure, in theory, for the global good, then more trade, immigration and globalized capital markets are better.

    But is there is legitimate desire for national stability and self-determination? Does the middle-class of a developed nation benefit from wide-open immigration and trade policies? In what nation does the middle-class believe that?

    In regards to the U.S., is a $500 billion annual trade deficit really the way to prosperity?

    Certainly, we understand when a colonized nation seeks self-determination, even at the cost of lower living standards. When does self-determination degenerate into “nationalism”?

    National governments are already too big and unwieldy. Globalized institutions are better?

    The globalist vision is probably not particularly appealing to vast swaths of middle-classes of developed nations, who deserve better than to be dismissed as Neanderthals or xenophobes.

  6. Yes, of course I know lot of poor Brits, tipically the kind of Brits voting Brexit, owning dollars and shares. I strongly suggest you to inform Brexiters they needed dollars and stocks before voting and now they are richer. Please inform me about their reaction.

  7. store of wealth here in the UK is property. this country is obsessed with real estate.
    and that’s all GBP denominated.
    and in GBP terms, it’s off 10% since May, if you look at london. in usd,eur,rub,jpy, etc. terms it’s down 30%.
    so no, britain is not wealthier. at all.

  8. “To my eye, for now at least, I’d say it’s closer to the truth that post-brexit Britain is wealthier, not poorer”

    That would be true, if Britain were actually post-Brexit.

    However, Britain is post-referendum, but still in the European Union and very much pre-Brexit.

  9. I take a different stance here. In my opinion this showed that Britain could not adapt to the reality of their economy due to them belonging to the European Union. I also think that in the long run this will be temporary because Europe is still in large parts in a recession. It all depends of the policies that are copied from the EU whether it is a success or not. If they imitate continental Labour practices then it will be hard for Britain.

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