‘Brexit’ Vote Might Finally Invoke Much Needed Global Fiscal Stimulus

 

June 24, 2016, 4:15pm EST

The world was stirring today over the UK decision to leave the European Union.  Here are a few things to keep in mind.  As we discussed earlier in the week, the repercussions of the Brexit are very different than those that were feared over the potential “Grexit.”  Greece was threatening to leave the euro. It would have had major and immediate financial complications, which could have quickly paralyzed the financial system.

The Brexit is more political than economic (not financial).  And any retrenchment in the banking system because of uncertainty can be immediately quelled by central bank intervention.  Not only were the central banks out in front of the potential exit outcome, promising to provide liquidity to the banking system, but they were also in last night stabilizing currencies, and likely bond yields as well.

As we said, there are also huge differences between now and 2008.  When Lehman failed and global credit froze, we had no idea how policy makers might respond and how far they might go.  Now we know, they will “do whatever it takes.”

The market volatility surrounding the Brexit may actually be a positive for the global economy.  Seven years into the global economic recovery, global central banks have thrown the kitchen sink at the crisis, and they’ve proven to be able to stabilize the financial system and the global economy, and restore confidence.  And that has all indirectly created an economic recovery, albeit a slow and sluggish one.  But they haven’t been able to directly stimulate meaningful economic growth (the kind you typically see coming out of recession) because of the nature of the crisis.

Fiscal stimulus has been the missing piece of the puzzle.

Governments have been reluctant to spend, given the scars of the debt crisis.  This may give policy makers an excuse to green light fiscal stimulus.  After all, growth (or the lack thereof) is the primary driver of the public discontent – not just in the UK, but globally. Growth has a way of solving a lot of problems.

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