Brexit, the Federal Reserve, and Donald Trump Louis Woodhill | On June 27, 2016
Friday’s scary
611.21-point plunge in the Dow Jones Industrial Average was not what it seems.
Although it was a political earthquake, the British electorate’s vote to leave
the European Union (EU) had only a minor impact on the real value of U.S.
equities. Here’s why.
The Dow is a price, and
every price is the ratio between the real market value of the item in question
and the real market value of the dollar. Looked at from this point of view, at
least 78% of Friday’s decline in the Dow was caused by the failure of the
Federal Reserve to do its basic job, which is to keep the dollar stable in
value. At most, only 22% of the Dow’s fall can be attributed to Brexit.
Of course, Janet Yellen
and her merry band on the FOMC* believe that their job is to centrally plan and
manage the entire U.S. economy, and not merely to provide the markets with a
dollar with a constant value, so that producers, consumers, savers, and
investors can just get on with it.
There is a huge element of
self-interest in the Fed’s relentless accretion of power. Chair Yellen is well
aware that if the Fed were to confine its role to delivering a stable dollar,
she would not be a celebrity. The media would not hang on her every word.
OK. Regarding Brexit and
the Dow, here is the calculation.
The best indicator of the
real value of the dollar is the CRB Index. At 2:30 PM EDT on Friday, the CRB
Index closed at 188.69, down 2.50% from Thursday’s close. At that time, the Dow
was at 17,441.26, down 561.89 points, or 3.16%. This means that, at the close
of trading in the CRB Index on Friday, the “CRB Dow,” which is the Dow divided
by the CRB Index, was lower by 0.68%.
So, what we can
conclude from Friday’s trading is that Brexit, momentous as it was politically,
accounted for at most 21.65% of the drop in the Dow, and the Fed’s failure to
keep the value of the dollar stable caused the other 78.35%. In reality, given
how damaging an unstable currency is to an economy, it is likely that if the
Fed had been keeping the dollar stable in terms of the CRB Index, Brexit would
have had little or no impact on the value of U.S. equities.
However, let’s assume
for the moment that Brexit accounted for all of the 0.68% fall in the “real”
value of the Dow (i.e., the CRB Dow) that had occurred by 2:30 PM EDT on
Friday, or even the 0.92% decline that existed as of 4:00 PM EDT. These are not
large daily moves. There have already been days during 2016 when the CRB Dow
was up by as much as 2.97% and down by as much as 2.86%.
So, in the market’s
judgment, Brexit was not a big deal for the U.S. economy. On Friday, as they
have been for decades now, investors were much more concerned about what our
flailing, failing Federal Reserve will do (or will not do) next regarding the
real value of the dollar.
Brexit did have a huge
impact upon the value of U.K equities, however. While the FTSE 100 was down by
only 3.15% on Friday (the Dow declined by 3.39%), the “real” FTSE 100 (i.e.,
the FTSE 100 divided by the CRB Index expressed in U.K. pounds) plunged by a
massive 7.80% (vs. less than 1% for the “real” Dow).
So why would the British
people vote for something that would instantly make them 7.80% poorer? The late
Jude Wanniski, the author of The Way the World Works (1978)
would not have been surprised by the outcome of last Thursday’s referendum.
Wanniski, were he still with us, would also not be surprised if Donald Trump
becomes the next president of the United States.
Free markets are
inherently self-correcting. Money talks, and economic actors have to listen to
the voice of the people or go bankrupt. In Wanniski’s “political model,”
societies get into trouble when their political elites—the people that wield
the power of the state—lose touch with the wisdom of ordinary people.
Unfortunately, a
disconnect between ordinary citizens and the elites that govern them is
occurring all over the world right now. This has led to the rise of right-wing
political parties in continental Europe, Donald Trump in the U.S., and, most
recently, Brexit.
As Wanniski notes in The
Way the World Works, economics are important to ordinary people, but they
are not the most important things in life. In 1987, an 18-month-old baby,
Jessica McClure, fell down a well in her aunt’s back yard in Texas. Until she
was rescued 58 hours later, the plight of this one little person drove all
economic news out of the American public’s consciousness. More recently,
terrorist attacks have had the same effect. The electorate prizes life far more
than money.
Worldwide, the
political classes have been coalescing into a transnational elite, with some of
them starting to consider themselves “citizens of the world.” These people hold
themselves to be refined, sophisticated, and far superior to the unwashed
masses, who are, in any case, just a bunch of racist, sexist, homophobic,
Islamophobic morons, desperately clinging to their Bibles and their guns. In
response, the electorates of the world have been starting to push back, by
whatever means happens to be available to them.
In England, the
leadership of both major political parties, the Conservatives and Labor,
favored remaining in the European Union. The ordinary citizens of the U.K. just
gave them a stinging rebuke. In response, David Cameron has done the honorable
thing, and has announced that he will resign as prime minister.
For at least the past
fifteen years, Americans have been forced to subsist on a diet of progressivism
(from Obama, the Democrats, and the Federal Reserve) and “progressivism light”
(from Bush 43 and the Republicans). In response, the electorate has made Donald
Trump the Republican nominee for president. Trump is far from the ideal
solution to the problem of America’s out-of-touch elites, but he is what was
available in the political marketplace.
Can Trump win? Of
course he can. However, if he wants to win, he has to curb his “loose cannon”
rhetoric, and put forward a strong “pro-growth” economic plan.
Trump must also
realize that, while the American electorate wants an end to illegal
immigration, we don’t need a wall between the U.S. and Mexico to accomplish
this. The same national identity verification system that we need to defeat
identity theft will stop illegal immigration. This is because illegal
immigration is a form of identity theft.
In addition, Trump
must get that many of the contentious issues facing the nation right now would
be best handled via national referendum votes.
Jude Wanniski was a
strong supporter of referendums, as a way of forcing political elites to heed
the will of the people. On Sunday, June 5, Swiss voters crushed (by nearly 77%
to 23%) a proposal, favored by elites on both the political right and the
political left, to provide every citizen with a “Universal Basic Income” (UBI).
Then, on June 23, the British electorate defied their “betters” and voted for
Brexit.
Donald Trump has been
campaigning as a spokesman for ordinary people. There is no better way to give
voice to ordinary citizens than to allow them to vote in national referendums.
And, high on Trump’s list of issues to be put before the people should be a
proposal to impose a monetary rule upon our arrogant, out-of-control Federal
Reserve.
The Federal Open
Market Committee, which is the 12-member body that determines the Federal
Reserve’s monetary policy.
The CRB Index is a
commodity price index comprising: Aluminum, Cocoa, Coffee, Copper, Corn,
Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas,
Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gasoline, and Wheat.
Comments
Stocks
have been overpriced for months and the Brexit vote was a good time for
globalists to run up stocks to encourage a “Remain” vote and then dump the
stocks to punish the “Leave” vote. Their
big pay-off was at the hedge fund betting tables. We don’t have a “free market”; we have a
rigged market that goes up and down based on coordinated selling and buying by
“elite” insiders.
Norb
Leahy, Dunwoody GA Tea Party Leader
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