God is a Capitalist

Wednesday, June 29, 2016

Brexit! The UK's independence day!

Last week the Brits voted for independence from the European Union. Maybe now they better grasp why we colonists divorced King George over 200 years ago.

The Adam Smith Institute has the best pieces on Brexit here and here and with the video Brexit: The Movie.

I had hoped to avoid writing about the British exit from the European Union because I never saw it as an important event, but the hysteria drummed up by the media has made it difficult for me to keep silent. So here are my two bits.

First, why the hysteria? There are two reasons for it. One is that the media have but one purpose and that is to create hysteria. Fear keeps people tuned in and more people paying attention means greater advertising revenues. The great newspaper editor Mencken once wrote, “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.” Because he was in the business, he blinded himself to the fact that the media is an accomplice of politicians in crime.
The other reason for the hysteria is that the media worships large and growing states. They view progress as nothing but the growing power, intrusiveness and brutality of the state. They are like the historians who bow in reverence to the ancient, ruthless monster, the Roman Empire. Any restraint on the power or growth of the state is for them a descent into the chaos that historians used to call the dark ages of Europe. Baylor University historian Rodney Stark reminds us in his books How the West Won: The Neglected Story of the Triumph of Modernity and The Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success that most historians now call the dark ages a myth. Stark thinks the collapse of the Roman Empire was the best thing to happen to Europe.

So why did stock markets tank around the world, some as much as eight percent? There could be many reasons. As the behavioral school of finance never fails to remind us, people can be irrational in the short run. Markets hate uncertainty, the most commonly printed explanation. But if we put the markets in historical context it makes more sense. The US market was sitting just below its all-time record high. It’s easy for investors to suffer from dizziness at such heights. Everyone is naturally nervous. For the market to remain at that height, the world must turn perfectly smoothly.

At the same time, industrial production is in a recession. Profit rates are in a nose dive. Global trade has stalled. China is deflated. Abenomics has failed. Europe as a whole is in decline. Yet, stock markets whistled past those storm clouds and remained aloft on sheer will power and dreams of updrafts from the Fed printing more money. Anyone who has watched the market for very long knows that in such a climate a sneeze from a major political figure will cause a market drop.

But what does a market drop that vaporized $3 trillion in stock market wealth mean? Nothing. Literally. Stock markets are a zero-sum game, meaning that for every loser there is a winner of an equal amount. So while some people lost $3 trillion in their portfolios, the early sellers and speculators who sold shares short earned that $3 trillion.

Did anyone mention that gold was up 5% after the vote? Why don’t the media report on the enormous increase in the wealth of those who hold gold? They didn’t because 1) it doesn’t fit there reason for existing - to conjure hysteria - and 2) all of the beautiful people in the media and government consider gold to be a barbarous relic and those who hold it are troglodytes. But far more people own gold than own stocks.

But won’t the beauty divorcing the beast destroy the UK’s economy, as most in the media and politics hope? It’s more likely that staying married would do more harm. The tsunami of regulations, taxes and bailouts for poorer Big EZ members coming from Brussels are poisoning European economies.

The fact of leaving the EU does not threaten the UK economy at all. Do I really need to remind people that the US and China are not part of the EU and have done quite well. So has Switzerland. The EU is the biggest trading partner of the US.

By leaving, the UK may have saved itself, but not necessarily. Brits have been given a gift. They can use it to create prosperity if they reduce their own regulatory burdens and taxes, or they can make the same mistakes as Europe and commit econocide.

How did the polls get the outcome so wrong? Public relations experts have known for decades that people lie in polls. But the most common reason is they want to tell the pollster what they think he wants to hear. In the case of Brexit, the media portrayed proponents of an exit as old knuckle dragging Neanderthals. No one wants to see themselves in that light. So people said they wanted to stay with the EU in order to appear to be part of the beautiful people then voted to exit when they got in the booth.

Expect more hysteria to come from the media. But the truth is that economic woes have been piling up like snow on a Colorado mountain. Brexit may have been merely the last snowflake that caused the avalanche.

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