Summer of 2016 has brought us chaos on the political scene, including the GOP conundrum of a presidential nominee that many top Republicans do not support - this for a party known for message discipline and falling in line.
Now we have the unexpected vote of citizens of the United Kingdom to exit the European Union immediately followed by severe decline of the British pound sterling and falling world financial markets. Financial markets characteristically overshoot and there is some rebound. But as the old cliche goes, "financial markets hate uncertainty." And there is plenty of that to go around.
The EU, a coalition of 28 European nations, was formed with the objective of unifying a continent long characterized by warfare, and to foster economic improvement for its people by reducing the economic impediments of national borders. Increased trade and mobility of European citizens was seen as key to increased prosperity for all Europeans.
Institutions are not perfect, and there is no shortage of criticism of the EU. But the 100th anniversary of the Battle of the Somme is cause for reflection. That World War I battle resulted in 57,000 British casualties, including 20,000 dead on the first day, the worst disaster in British military history. The 141-day battle resulted in 524,000 Allied casualties.
The history of Europe is one of continuous warfare. France, Spain, England, Germany and other nations were constantly at each other's throats, both on the continent and in colonies in America, Africa and Asia. Russia was invaded from the west in both the Napoleonic Wars and World War II. Two world wars devastated the European continent.
Surely, the spirit of cooperation manifested in the formation of the EU is testament to determination to avoid repetition of the frequent clash of the European nations. That is no small achievement for nations with such diverse cultures and languages.
But now the majority of UK voters who weighed in on the matter want out of the EU, the movement known as "Brexit." While that was a surprise to most observers, the conflict within Britain's Conservative (Tory) Party is just as interesting - read, confusing. Member of Parliament (MP) Boris Johnson led the movement for leaving. If the "leaves" unexpectedly would win, Johnson was in line to succeed David Cameron as prime minister, as Cameron favored the "stays."
So the "leaves" did the unexpected, even unbelievable - they won. So Johnson followed with the unexpected and unbelievable, declaring that he was not a candidate for prime minister. As one wag put it, it's as if Johnson believed he was in a high school debate, won the debate, suddenly discovered that, "Hey, this is real," and wanted no part of the chaos he was instrumental in leading.
Of course it probably had something to do with Johnson's partner in leading the "leaves," Justice Secretary Michael Gove, declaring that the flamboyant Johnson was ill prepared to be prime minister. So now, Gove, who declared he was never interested in being prime minister, was briefly the major candidate.
But not so fast. Johnson's supporters didn't appreciate Gove as having "stabbed Johnson in the back," and his star faded. Home Secretary MP Theresa May emerged as the favorite, having secured support of nearly 100 MPs. However, the problem was that May favored staying with the EU. It would be awkward to have the Conservative Party that favored leaving EU led by a one who favored staying with the EU.
With that, Energy Minister Andrea Leadsom became the favorite to challenge May, making the logical point that the Conservatives who wanted to leave the EU should be led by one who favored leaving the EU.
It seems that the Brits are doing what they can to rival American politicians in an exercise in absurdity.
So while the Brits sort this out, the question remains what the effect will be on the American and world economies. So far, even though financial markets have dropped, they appear to be recovering. This is at least partly attributable to belief that the world's central banks will provide the needed liquidity to avoid financial collapse.
For those who, irrationally in my view, pay more attention to the Fed than they do to the status of the American economy, they can take solace in that Brexit reduces the chance that the Fed will raise interest rates, at least in the near term.
This European uncertainty has contributed to the strengthening of the U.S. dollar with the usual effects. It reduces the competitiveness of American exports, making them more expensive to foreign buyers. It puts downward pressure on oil prices and makes imports cheaper, dampening inflation. It will be less expensive for Americans to travel abroad. All this further reduces the likelihood of an interest rate increase by the Fed in the near term.
And what about the effects on the American election? That can be argued either way. Supporters of Donald Trump applaud the Brexit vote, asserting that this is what the bureaucrats in Brussels who govern the EU deserve. Trump supporters draw parallels between the Brit vote for a "return to nationalism" and Trump's campaign to "make America great again."
On the other hand, in view of the chaos and confusion which will take time to sort out, a case can be made for a "steady hand at the tiller." Hillary Clinton is not going to do anything rash to roil the markets, or the world scene in general, for that matter. While a case can be made for needed changes, there is something to be said for predictability.
Brexit is uncharted territory and supporters of Mrs. Clinton and Mr. Trump will make what they will of it.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
Now we have the unexpected vote of citizens of the United Kingdom to exit the European Union immediately followed by severe decline of the British pound sterling and falling world financial markets. Financial markets characteristically overshoot and there is some rebound. But as the old cliche goes, "financial markets hate uncertainty." And there is plenty of that to go around.
The EU, a coalition of 28 European nations, was formed with the objective of unifying a continent long characterized by warfare, and to foster economic improvement for its people by reducing the economic impediments of national borders. Increased trade and mobility of European citizens was seen as key to increased prosperity for all Europeans.
Institutions are not perfect, and there is no shortage of criticism of the EU. But the 100th anniversary of the Battle of the Somme is cause for reflection. That World War I battle resulted in 57,000 British casualties, including 20,000 dead on the first day, the worst disaster in British military history. The 141-day battle resulted in 524,000 Allied casualties.
The history of Europe is one of continuous warfare. France, Spain, England, Germany and other nations were constantly at each other's throats, both on the continent and in colonies in America, Africa and Asia. Russia was invaded from the west in both the Napoleonic Wars and World War II. Two world wars devastated the European continent.
Surely, the spirit of cooperation manifested in the formation of the EU is testament to determination to avoid repetition of the frequent clash of the European nations. That is no small achievement for nations with such diverse cultures and languages.
But now the majority of UK voters who weighed in on the matter want out of the EU, the movement known as "Brexit." While that was a surprise to most observers, the conflict within Britain's Conservative (Tory) Party is just as interesting - read, confusing. Member of Parliament (MP) Boris Johnson led the movement for leaving. If the "leaves" unexpectedly would win, Johnson was in line to succeed David Cameron as prime minister, as Cameron favored the "stays."
So the "leaves" did the unexpected, even unbelievable - they won. So Johnson followed with the unexpected and unbelievable, declaring that he was not a candidate for prime minister. As one wag put it, it's as if Johnson believed he was in a high school debate, won the debate, suddenly discovered that, "Hey, this is real," and wanted no part of the chaos he was instrumental in leading.
Of course it probably had something to do with Johnson's partner in leading the "leaves," Justice Secretary Michael Gove, declaring that the flamboyant Johnson was ill prepared to be prime minister. So now, Gove, who declared he was never interested in being prime minister, was briefly the major candidate.
But not so fast. Johnson's supporters didn't appreciate Gove as having "stabbed Johnson in the back," and his star faded. Home Secretary MP Theresa May emerged as the favorite, having secured support of nearly 100 MPs. However, the problem was that May favored staying with the EU. It would be awkward to have the Conservative Party that favored leaving EU led by a one who favored staying with the EU.
With that, Energy Minister Andrea Leadsom became the favorite to challenge May, making the logical point that the Conservatives who wanted to leave the EU should be led by one who favored leaving the EU.
It seems that the Brits are doing what they can to rival American politicians in an exercise in absurdity.
So while the Brits sort this out, the question remains what the effect will be on the American and world economies. So far, even though financial markets have dropped, they appear to be recovering. This is at least partly attributable to belief that the world's central banks will provide the needed liquidity to avoid financial collapse.
For those who, irrationally in my view, pay more attention to the Fed than they do to the status of the American economy, they can take solace in that Brexit reduces the chance that the Fed will raise interest rates, at least in the near term.
This European uncertainty has contributed to the strengthening of the U.S. dollar with the usual effects. It reduces the competitiveness of American exports, making them more expensive to foreign buyers. It puts downward pressure on oil prices and makes imports cheaper, dampening inflation. It will be less expensive for Americans to travel abroad. All this further reduces the likelihood of an interest rate increase by the Fed in the near term.
And what about the effects on the American election? That can be argued either way. Supporters of Donald Trump applaud the Brexit vote, asserting that this is what the bureaucrats in Brussels who govern the EU deserve. Trump supporters draw parallels between the Brit vote for a "return to nationalism" and Trump's campaign to "make America great again."
On the other hand, in view of the chaos and confusion which will take time to sort out, a case can be made for a "steady hand at the tiller." Hillary Clinton is not going to do anything rash to roil the markets, or the world scene in general, for that matter. While a case can be made for needed changes, there is something to be said for predictability.
Brexit is uncharted territory and supporters of Mrs. Clinton and Mr. Trump will make what they will of it.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
