Now that a little time has passed, we can review the Brexit vote with more perspective and forecast its impact on the US financial system more objectively.
To do so, we believe it important to consider the following:
Brexit's main short term impact will be to restrict the ability of the Fed to respond to domestic economic and financial issues, already evident in their decision to keep rates low. Further, the Fed may have to create a special QE Brexit liquidity facility to support American firms in the UK who now need to move operations either back to the US or to the Continent. Finally, having announced at the House Financial Services Committee Monetary Policy Hearing this week a November conference to examine black unemployment, we predict this effort will be placed on hold as the Fed struggles to deal with the uncertainty that follows the Brexit vote.
Uncertainty is, of course, the greatest legacy of Brexit. Consider this: each and every contract signed in the UK when the UK was part of the EU will probably now have to be reviewed and renewed. This includes contracts for financial instruments, a huge burden. This alone may shave 1% from potential economic growth.
One group badly damaged by this vote are mainstream economists, who insisted on issuing alarming estimates of the economic damage a vote to leave would cause. As with missing the financial crisis of 2008, they failed to realize that the majority of voters in the UK were willing, on the day of the vote at least, to incur whatever Brexit costs. Make no mistake about it: what is at core here is a desire and a willingness to discriminate against Muslims, immigrants and even other Europeans in an attempt to restore some supposedly faded glory to a British Empire that no longer exists. This is the very definition of crazy.
Our Fully Adjusted Return Economic Forecast predicts the damage to the British economy from Brexit in 2016 will be smaller than anticipated by most mainstream economists. It will, in other words, be manageable. The long term damage will be greater, of course, but, by then it will not matter. The demonstration effect dominates. By showing that a right wing, extreme, nationwide referendum based on entitlement and bigotry can be successful, the Brexit vote all but guarantees that Donald J. Trump will be elected President of the US.
While what happens after that is anybody's guess, it probably will not be good for democratic principles and values.
