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Semper Augustus

29 December 2016

Flora-Mallewagen.jpgJust as Gaul is divided in three parts, so now everyone also knows that the EU is founded on four pillars: freedom of movement of goods, services, capital and labour. Although “pillar” hardly seems le mot juste for such dynamic concepts. And one would require a lengthy gloss to discuss whether the fourth component is people or just workers. But while we are all focused on the tension between controlling immigration at the expense of suffering barriers to trade in goods and services, very little attention is being given to capital. That’s partly because virtually none of the UK electorate (and almost none of our MPs) understand the issues, and also because there are widely held misconceptions about capital to which even “experts” haven’t fully adjusted.

The Brexit issues for capital are indeed complicated, but there are some serious questions that are easy to grasp even if the answers aren’t knowable. The fundamental issue relates to how far flows of capital might be restricted. It is perhaps easiest to see this in the context of banking, and specifically the interbank trading which has come to dominate the London business. Essentially (unlike traditional lending or trade-related financial services) this is a zero-sum activity (less staff salaries and bonuses). Profitability depends on finding a loser. If that is a Japanese bank or a German Landesbank, then London benefits (and if the winner is the London branch of an American bank, UK taxpayers will still imagine they are ahead of the game through trickle-down from bonuses being spent or taxed in London). It’s a tradition that goes back to Sir Francis Drake. And when, as regularly happens, the loser is an incompetent UK bank, the UK taxpayer simply bails it out and (through the generosity of the Bank of England, labelled monetary policy) feeds it enough cheap money to stay at the table. Most people have only a dim idea of what is involved (how many understand the reason why savings earn nothing?), and the international dimension allows the picture to remain obscure. Mine was a lone voice in asking the various commissions and enquiries after 2008 to investigate the sources of profit in banking before rearranging the deckchairs with ring-fencing etc.

But suppose all interbank activity were restricted to UK banks trading among themselves, and you could see directly that every penny that Barclays made was paid for by RBS shareholders (that’s us, in case you had forgotten). Isn’t it possible that the penny might finally drop?

Or perhaps not. The stubbornness of stupidity in the face of the clearest evidence is of course the basis of populism – the cynical harnessing of prejudice, ignorance and superstition for the acquisition of power by a politician who should (and often does) know better. Like surfing on waves, it is what happens underneath that matters: and where contrary flows are overwhelmed, the resulting tsunami can have catastrophic effects.

There is a similar effect in stock-market bubbles: misdirection causes enough punters to pursue asset prices – be they equities, houses or tulips – to levels unrelated to fundamental value. That dissociation from reality is exactly what started with Brexit and with Trump. (The efficient markets hypothesis is flawed in exactly the same way as the process of democratic election – even if both ideas may be better than all the others.)

I have no predictions for 2017. There are too many moving parts.

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