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.

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