I have held off public comment (beyond reporting what I heard in England a month ago) on the Brexit referendum. Until the outcome of the vote was announced, I hoped that it might be a near miss, perhaps one that gave Britain new clout in their negotiations with the EU.
But, we do not live in a world of near misses. We live in a world of harsh realities.
Brexit, for the few out there who may have missed this foreign debate, was a national British referendum on whether or not to leave the European Union. Ultimately, the British people voted to leave, with a margin of over one million people. In hindsight, it was a mistake to put such a complex topic to a popular vote, where emotion so often carries the day.
There were far too many gross misunderstandings flying around England (which began to resemble our pending Presidential election) in recent weeks, which gave the edge to xenophobia, out-right economic protectionism, and simple nationalism.
But there it is. The people of Britain have spoken. What does it mean to all of us?
There are short, simple answers and long, complex answers, but it is important to remember that nothing is certain.
Fortunately, our trading relationship with Britain is unlikely to change dramatically. However, the world economy is an intricate, complex system, full of subtle, even invisible, interactions.
The Brexit decision may turn out to be analogous to the Smoot-Hawley Tariff Act. a grossly protectionist law passed by Congress in 1931. The United States was already in the early throes of the post-1929 stock market crash and had begun to exhibit the real signs of a recession. When Smoot-Hawley passed (despite thousands of experts had counseling AGAINST the law in ads in the NY Times and other leading papers), every country in the world followed suit and world trade fell by 2/3rd in two years and the rest is now history.
The world tumbled into an extended depression, which was followed by WWII, which ironically brought the world ultimately out of the depression.
Of course, Brexit is even more complex. Smoot-Hawley had no effect on immigration policy or the legal status of Americans living abroad. There was no project of European unification for Smoot-Hawley to threaten. Furthermore, it speaks to the complexity of the Brexit vote that the process of withdrawal from the EU could take up to two years and that legal scholars are not sure how it will actually progress.
Now, the hard—almost impossible—question is whether the Brexit maybe be seen in hindsight as a trigger for global catastrophe and/or a canary in the mine, signaling a coming collapse. My personal hunch is that the risk of a serious world-wide crisis has multiplied overnight.
The world is VERY different today than in the 1930s. The US economy and financial markets are in relatively good shape. There are a lot of hot spots around the globe that plague and vex us, but our slow, steady, and incremental political process has seen fits and starts of general progress. Hopefully, we should be able to withstand and recover fairly quickly from any short-term dislocations.
That said, there are signs all over the world that protectionist, authoritarian, and nationalist agendas are generating more and more support (in Russia, England, USA for starters). Some very smart people say that the Brexit success also foreshadows a win for Trump, given that similar forces drive both campaigns. Why in the world did he choose this moment to visit Scotland?
The more subtle, complex answer may require more space than a simple blog post, but it says to me “BEWARE BREXIT!”
While it may turn out to be simply a regional European problem, it just might be a real honest to goodness canary in the mine. A collapse may be coming, might its time be now?
As for your 401k, by definition, you are in it for the long haul, and in the long haul, we will all survive economically if we are prudent.