The UK Doesn’t Rely on Anyone’s Kindness

The latest YouGov UK referendum poll shows a very close race. The interesting splits are Tory+UKIP (Out) and Labour+LibDem+Green (In); Old (Out) and Young (In); London (In) and North (Out) and Scotland (In). Lots of undecideds.

BoE Governor Carney made a ridiculous and biased speech that referenced the “kindness of strangers” as. This was repeated by many pundits and is given as a reason why leaving the EU would hurt the UK economy, especially as the current account deficit continues to grow (alongside the UK economy’s good performance, and after a few years of sterling strength).

Bloomberg’s Therese Raphael’s analysis (and Carney’s assertion) that foreigners or strangers are putting their money into the UK out of kindness is ridiculous. They are doing it because the UK is a grown-up country with good laws and low corruption. The world is uncertain, and the EU itself is hardly stable; indeed, some of the largest and fastest capital outflows went out of EU members in 2011-12. The argument that Brexit will increase uncertainty strikes me as superficial; it merely changes the uncertainties and risks; the government’s Project Fear is mostly on target on the risks of leaving, albeit with a pessimistic spin, but largely silent on the costs and risks of staying in, touting mainly the benefits.

Moreover, a current account deficit doesn’t mean that “more money is going out than in” as Raphael erroneously writes. That is true of the sum of goods and services imports and exports, but portfolio flows and FDI are positive. Thus, as always, the sum of the trade account and capital account is zero. Carney should know that in Britain, with its floating FX and fiat currency, it is the exchange rate and other asset prices that react to supply and demand for these goods, services, investments, and speculative flows TO MAKE THEM BALANCE OUT. Would a weaker currency or lower property prices be bad for the UK? If so, why?

I’m not saying a large imbalance –deficit or surplus — should be ignored; it sometimes is driven by unsustainable dynamics and it’s worth assessing how those trends will normalize. The worries about the London-area housing bubble are well founded, in my opinion. The GBP will likely need to weaken at some point, yet we should also remember that the UK domestic asset base, financial and nonfinancial, is probably around £10 trillion or 500% of GDP, as well as the fact that UK international liabilities are primarily denominated in its own currency, just like the US’s and China’s for that matter. Today, it is the regions with the world’s biggest CA surpluses — China and the Eurozone — that should worry the most about the “unkindness of locals” who are spiriting away their funds at record rates. Often to the UK! The BBC yesterday had a nice piece on how China’s rich are smuggling their cash abroad, and it is worth considering if, when they manage to buy that flat in Brighton, they are really doing it out of kindness rather than a mix of desperation, fear, greed, and/or good sense.


Letter to Bloomberg on Deepak Chopra’sQuote of the Day

Quote of the Day on Apr 5, 2016: Deepak Chopra
“Always go with your passions. Never ask yourself if it’s realistic or not.”
— Deepak Chopra
To Bloomberg Editorial Staff:
I have long been a fan of the Quote of the Day, which is read by thousands as they log in to their accounts every morning. From ancient philosophers to witty celebrities, your staff usually choose inspiring, thoughtful, and clever quotations that can be usefully recycled in cocktail conversations. Today’s selection is an exception: not only have you chosen a pseudo-scientific con artist, but the quote itself is stupid, if not dangerous. The only defence for this selection is that it accurately captures the idiotic Chopra’s ideas as being nonsense and diametrically opposed to the use of one’s brain. However, I doubt that it was selected with a sense of irony. If at all possible, please replace the quote with something sensible rather than promoting notions that I would hope are diametrically opposed to what Bloomberg, as a company, stands for.
Yours faithfully,
David Nowakowski
PS: please enjoy a free babble from the Random Deepak Chopra Quote Generator. I just got: “The secret of the universe is the wisdom of nonlocal excellence”