Will Brexit Crash The Global Economy?

Brexit may be the catalyst that crashes the entire global economy.

On June 2016, 17.4 million voters in England opted for Brexit. The UK official left the European Union (EU) on January 31, 2020. Areas effected include law enforcement, data sharing and security, aviation standards and safety, access to fishing waters, supplies of electricity and gas, and licensing and regulation of medicines. Currently, the UK is in a transition period till December 31, 2020 and must negotiate a new trade agreement with the EU by this date. If a trade deal is not negotiated, the UK could be facing tariffs to the EU.

How did Brexit happen? Because of the Great Crash in 2008, European debtor nations sustained severe austerity problems that lead to massive unemployment and economic malaise. In addition, political refugees from Syria, Somalia, Bhutan, Iran, and Afghanistan fueled massive racism as well as escalate social service spending. The growing divide between the rich and poor and racial tensions have stoked the fires of populism and anti-EU sentiment.

As a result of Brexist, the sterling pound should massively devalue. Unlike the last major sterling pound devaluation in 1992, the Bank of England this time around will not be able to cut interest rates to soften the severity of the devaluation. In addition, the UK has a current account deficit that it didn’t have in 1992 and is very sensitive to the whims of the global bond market. A vicious cycle will also be created by the sterling pound devaluation. The 27-countries of the EU will feel threatened by deflationary pressures from super cheap English exports and likely start a trade war with the UK.

In this nightmare scenario, the US after unilaterally altering the Iran deal will not have the ability to eliminate the trade war. However, the Fed will be able to lower interest rates to soften the blow of sterling pound devaluations. China current sits on a leverage bubble similar to the US prior to the Great Crash 2007; a EU trade war could bring down the Chinese economy.

Brexit is eerily similar to the currency devaluations in 1921 in Germany followed by the sterling pound devaluation that followed. Currency wars lead inevitably to tariffs and a breakdown in global trade and lead to the Great Depression in the 1930s.

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