THE ECONOMIC IMPERATIVE FOR A NO-DEAL BREXIT Any sort of trade deal with the EU is bound to result in economic meltdown. Here’s how and why. BoP Current Account with EU and Rotw | This graph shows our Balance of Payments Current Account —in effect our national profit and loss account, comprising mainly but not exclusively of trade — split into two separate components; our trade with the EU (the red line) and our trade with the Rest of the World (‘RotW/ - blue line). At the millennium our deficit with the EU was £4bn, whereas at by the time of the referendum it had plummeted to £109bn, whereas our trade with the Rest of the World has moved from a loss of £17bn to a profit last year of £20bn. | have downloaded the series from the ONS website, subtracting the EU from the total to get the RotW. Atleast four questions immediately arise: 1. Why the divergence? 2. How come our experience without free trade’ is so much more successful than that within the free trade Single Market? 3. Does it matter? and 4, Ifitdoes matter, what can we do about it? The Divergence Ttclearly isn’t anything to do with exchange rates as they affect both lines. Indeed our success with the RotW would indicate that ‘our exchange rate is correctly valued. If you are minded not to believe it has anything to do with free trade — the absence of import tariffs — then by elimination it can only be due to non-tariff regulations. That must mean that, over the past twenty years Brussels has, either surreptitiously or unwittingly, been stacking up 2 great mountain of such barriers which somehow anc mysteriously, presumably due to the way they have been chosen, adversely affect our exports while not impeding theirs. ! have ro evidence for this other than by judging by results. So does Free Trade within the Single Market have anything to do The first thing to observe is that THERE IS NO SUCH THING AS FREE TRADE! Import tariffs are @ form of taxation so, other things being equal, if you reduce them you have to increase something else, such as income tax or VAT. All you are doing is passing the buck sideways. There is nothing ‘free’ about it. Furthermore if you spend more of your money on imports because free trade makes them relatively cheaper, you spend less on British stuff, thereby putting workers out of ajob. ‘Champions of Free Trade will quote the classical economists Adam Smith and David Riccardo, both of whom waxed lyrical about specialisation and division of labour, and point to modern research showing a continued global correlation between free trade and economic grawth. In those days Britain was the manufacturing centre of the world, and the rest provided us with the natural resources the industrial revolution required; specialisation indeed, all protected by the Royal Navy and the Gold Standard. Everyone benefited. The role of the Gold Standard should not be overlooked. It meant that there was just one international currency, precious metals; so, if one nation developed a trade deficit its money supply would be reduced. That meant that prices and wages would also go down until its exports became competitive once more, thereby redressing the balance. It was an inherently stable system. Today we no longer have such a system. We have multiple currencies and instability, as witnessed by the massive trade imbalances that have developed since the start of globalisation — and our joining the Single Market. Nor is there any discernible evidence of economic growth in this country as @ result —witness the growing productivity gap. These imbalances produce a massive transfer of wealth from deficit countries to surplus countries, so even if deficit country does experience some ‘economic growth the benefit is outweighed by the loss, which makes us poorer. No wonder we are now 21" in the list by standard of living. By contrast countries such as China and Singapore, who are often held up as examples of the benefits of Free ‘Trade, are surplus countries with a high propensity to save, OF course they now want to cash in their chips and spend them on lower import tariffs. By contrast we have record levels of personal and national debt, have accumulated losses, and thus have no chips to cash int| think the conclusion to be drawn from all this s that Free Trade deals are fine between countries whose trade isin balance. If trade is notin balance then a Free Trade deal will only magnify that imbalance. This is just simple mathematics. If you increase volumes of trade by equal percentages on top of a deficit then the deficit will increase in proportion, and vice versa. So what is my conclusion about the Divergence? Its probably due to 2 bit of both factors ~an underlying and continuing imposition of regulations, magnified by the destabilising effect of Free Trade within the Single Market. So.does a trade deficit with the EU matter? Well of course it matters, for the simple reason it has to be financed somehow. This must be addressed at two levels - foreign currency and domestic consumer demand, Fortunately we have a strong Capital Account surplus, so there is plenty of foreign currency around to pay for our excess imports. But hang on a sec. That money is not ours. It can be withdrawn again at any moment by those who sent it here. We are robbing Peter to pay Paul, and if Peter cottons on he is likely to panic and withdraw his funds. Then we really would be buggered, But fortunately all seems well in the short term, which Is all our politicians are concerned about. No, itis the effect on domestic demand that is the immediate problem, Other things being equal you would expect unemployment to be shooting through the roof at this point, so how come it has not? Norah sath pap Haha crcl ‘Accumnmulted Quantitative Easing Quantitve Easing over the past ten years since the 500 -— = banking crisis. Popularly known as printing money itin 0 fact involves the Bank buying iliquid assets such as gilts = and corporate bonds in exchange foriquid cash. These yg 350 assets aecumulate in its balance sheet, and also! hope 200 provide a good return! ButiF QE were used other than to 250 offset afallin the money supply, such asall the debts ig 200 written off by the banks, then it would be highly - inflationary. Thus, as the graph shows, it was stoppedin 100 2012 after the banks had been fed. 30 ° — 2008 2008 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‘But what's this? tt has been restarted again n 2016, when 2 further £60bn was authorised, The only possible explanation is that the Government were forced to do this to fund the losses incurred on current account. QE is not good news. It works by reducing interest rates, thereby reducing savings, which in turn reduces investment and economic growth — hence the productivity gap Which, yes, started in 2008 when QE started. But more immediately it encourages people to borrow, thereby increasing consumer demand to offset the loss from the trade deficit. But as Mervyn King put itso succinctly in his recent book, The End of Alchemy, when people borrow money they are spending tomorrow's income today. The problems that, sooner or later, tomorrow becomes today, and when that happens they not only cannot borraw any more but also have to start repaying what they borrowed yesterday. Even at very ow interest rates there Is limit to how much people can borrow. And when that happens the whole edifice wll come crashing down. Not only will unemployment go through the roof, but also ‘thousands upon thousands of Brits will go bankrupt. ‘So what can we do about it? Well obviously we have to take back our trade; to reduce and eliminate our deficit with the EU. That isthe first domino in the line. No deal can achieve that. It would have to be a one-sided deal, and that is as likely asa free lunch. Only a No-Deal Breit will sive us the opportunity to change course and avoid the massive iceberg dead ahead. Even then itis only an opportunity, and several years of hard graft will be required forensicaly to identify all the non-tariff barriers that have been constructed against Us and find ways of neutralising them. We shall have to give as good as we have received. Ths is about survival. We are in a trade war. It as been going on for twenty years and our dozy Treasury mandarins, away with the falries In thelr Remainian dreamworld, have not lifted a finger to advise ministers to take action. Pacifists do not win wars. {At least a No-Deal Brext will give us an initial boost. 8y raising tariffs on both sides of the Channel, volumes will be reduced. This in tum will make a startin reducing the deficit, since everything will reduce in proportion. Furthermore more jobs will be created from import substitution than will be lost to export substitution - Labour Party please note! Last but not least there will be another £22.n for the Brexit Dividend from import tariff revenues, Funny how the BBC never ‘mentions this! 60% of our trade is with the RotW on which EU tariffs are paid right now, amounting to approx. £15bn a year. 80% of that, £12bn, is paid across to Brussels, but after 2 No-Deal Brexitit will stay in London. At no inflationary cost ‘whatsoever! The remaining 40% with the EU will attract the same tariffs, assuming we put in place a mirror image of the EU tariffs, giving us a further £10bn. Inflationary? Well not very. Average tariffs are just under 5%, and our total foreign trade is, about a third of our economy, so multiplied out that gives inflation of 0.667% -on a once off basis. Its peanuts. We do not want or need anything from the EU. So why are we negotiating at all? ‘WE MUST TAKE BACK CONTROL OF OUR TRADE. ONLY A NO-DEAL BREXIT CAN ACHIEVE THAT. Published and promoted by John Pynton FCA, epoynton.om,jspoynton@esicomThe Prime Minister, 10 Downing Street, Westminster London, SW1A 2AA, 2 September 2019 Dear Mr. Johneon, (Cross-fuunding tariffs to profect and promote exports in a No Deal Brexit, ‘The problem: BoP Current Account with EU and Rotw é SSCs REESE Pees esa e ee | | | | | Ey rest ofthe World | What this graph shows is our Balance of Payments (‘BoP’), ie our trading account (mainly) oF ‘vurrent account’, split between the other EL! countries and the Rest of the World over the past twenty years Although there is ‘five’ trade within the EU the result has been an absolute disaster producing 1 deficit of £109bn, 6% of GDP, at the time of the referendhim, having etarted at £4bn twenty years ago, Since then devaluation (not a government policy) has provided some relief, but itis not going to be nearly enough. By contrast our trade with the rest of the world, which is not ‘free’, has moved from a deficit of 1% to a surplus now abo of abont 1%, So mnch for ‘free’ trade and for our membership of the EU. ‘The problem with a defivit of this sort is two-fold. Firstly, becanse it means people are buying more forcign stuff and kss British stuff, other things being equal it wonld increase unemployment. The only reason unemployment has not gone through the roof is because government policy has involved borrowing to replace the lost demand. That is why we have both record levels of national debt and now record levels of personal debt as well. The deficit is like a pump and the debt a balloon, and we all know ‘what will happen if'you go on and on blowing up a balloon. Sooner or late it will burst and we will have the mother of all erashes and disasters. In practical terms the banks will stop lending money because their non-performing loan book will be increasing to dangerous levels, at which point we will not be able to stop unemployment from rising and thousands of Brits going bankrupt. No need to take my‘DRUERSGEEIEOVERENSG vo Beitich workers have an incentive to step up to the plate and tok on the cheap and dirty jobe currently given to iinmigrants. An increase in the earnings disregard to £50 pw per camer (curently £5pw for a single person and £10pw for a vouple) together with a reduction in the rate of claw-back to 50% should do ths trick. It will alzo give a mneh-needed income boost to people in the gig economy or on zero-honrs contracts, The cost of this would easily be covered by the Brexit dividend. 12, For Keavens sake start a Sovereign Wealth Fund now! To hedye our massive national debt and even more massive pension lisbilitics ax well as the increasing cost of earing for the eklerly. In my opinion it is a matter of the greatest incompetence and negligence that this was not started ten years ago when interest rotes first hit the floor. Thirty-year money has becn available to goverment consistently at 3% simpk: interest or less, and any half-clecent find manager will have achieved on average 7% compound return over the past twenty years. You don’t even need to the maths! It’s obvious. QE can bs used to underwrite it as the money will largely be spent on overteas investments and is unlikely therefore to cause inflation in the domestic economy. It will also help keep our exchange rate competitive, The monthly bond issues could be increased automatically if less than say 25% underwriting is required and vice-versa, and the funds allovnted to n wide range of asset managers in the City and elsewhere with the more stevexsful reinforeed and vice-versa. Yours sineerely, John Poynton FCA