Oct 11th 2016, 13:29 by R.A. | WASHINGTON
THESE are exciting times for Britain s currency, and not in a good way. On the
eve of the vote on whether to leave the European Union, back in June, a pound
bought you $1.48. Sterling has since declined by more than 16% against the
dollar, to $1.22. Nearly half of the drop has occurred in the last week or so,
as the Conservative government has outlined plans for a hard Brexit: one
which shoves Britain right out of the single market in exchange for the ability
to do more harm to itself by reducing migration.
In a piece for the Wall Street Journal, Greg Ip (a friend and former colleague
of this blogger) does a nice job explaining the links between Brexit and a
tumbling pound. Markets anticipate that it will become more costly for British
firms to sell goods and services to Europe. Europeans will consequently buy
fewer of them, and therefore fewer pounds, leading to a weaker currency. That
is, cheap sterling is part of the adjustment to a loss in British
competitiveness: the mechanism by which Britons come to spend less on foreign
goodies (now increasingly dear) as the price of its choice to leave the EU.
As Mr Ip notes, that s not all that s going on. Britain is also in a fortunate
position, able to produce valuable stores of wealth: British government bonds,
London property, and sterling itself. The ability to make such things, which
foreigners like to hold, is a bit like owning a gold mine or rich oil deposits.
Foreigners buy lots of those valuable things, pushing up sterling and making
Britons richer. The downside is a touch of Dutch disease; exports are more
expensive than they would otherwise be, and many industries therefore struggle
to compete. Brexit threatens the value of those magical assets, however, and
undoes the Dutch-disease effect. Brexit is a little like Saudi Arabia swearing
off the oil business, declaring it would rather work for an honest living even
if that makes its people poorer. That might sound noble, though it does make
one reflect on the lack of policy imagination that led voters to make
themselves poorer so that they could work harder for what they get.
Mr Ip closes with a very interesting set of thoughts:
Brexit is thus turning out to be a useful test case for deglobalization.
Raising barriers to the free flow of goods, services, capital and people need
not entail recession or panic. It may even redress some of the grievances
behind the anti-globalization backlash. If Britain exports fewer financial
services and more manufactured goods and tourism, the income gap between London
and the rest of the country should narrow.
In the end, Britons may be a bit poorer than if they d stayed, but more
self-reliant and more in control of their own borders. That s the tradeoff.
Two remarks on this. First, it is not obvious to me that manufacturing
industries will definitely be the big winners (such as it is) from Brexit.
Financial services are bound to be harmed, it is true. Yet British industry
might find it more difficult to pivot to new foreign markets than British
services. In the trade of goods, distance matters; gravity models of trade,
which reckon that trade intensity is negatively associated with distance, do a
surprisingly good job explaining actual trade patterns. Ironically, the digital
revolution has reinforced the importance of distance by enabling the growth of
supply-chain trade: the co-ordination of production across suppliers in lots of
different countries. If leaving the EU costs British firms their positions
within the supply chains of Factory Europe, those firms will find it difficult
to turn and embed themselves in the production chains of Asia or North America;
such places are simply too far away. This was always one of the great inanities
of Brexit. Leaving the EU does not change the fact that Britain is right next
door to a bunch of rich European countries and not especially close to anyone
else.
And second, let me draw your attention to one very important word in that
ultimate sentence: self-reliant. What is this self ? The typical Briton will
not become more self-reliant as a result of Brexit. The chap behind the bar at
the pub will not suddenly find himself cobbling his own shoes and milling his
own flour because of the vote to leave the EU. Mr Ip seems to intend the self,
in this case, to be Britain. That may have been what voters intended; the
assertion of the nation as the most important civic body is a disheartening
development if so. And that might be the outcome, in part, of Brexit; trade
volumes will probably fall a bit, and as Mr Ip notes Britons will spend less
holiday time in Provence and more in Blackpool. Yet it s also not quite right.
Whether Britain is selling gilts to foreigners or turnips, it is still reliant
on them.
The self at issue here is actually something different. It is a conservative
sort of Englishness, which entails the rejection of London as well as of
Brussels. And what is being purchased, it should be clear, is the ability to
shut particular people out of Britain: those that are not enough like the
community of selves on which the English intend to become more reliant. It is a
vote against cosmopolitanism and multiculturalism. Nothing in the decline in
sterling is going to make that adjustment less painful to those being shut out
of the circle of British life. Neither should it make us optimistic that
deglobalisation can occur without a great deal of accompanying ugliness.