Understanding the past gives us the hope to power through Brexit
Ruth and I recently attended the Rightmove seminar about Brexit
with the obligatory break for hot chocolate and cookies
and left feeling pretty positive about what may happen to the economy and pound when the UK finally leaves the EU.
We had to go back in history to fully understand the possible economic impact: As Carl Sagan once famously put it “You have to know the past to understand the present” and it was with this premise that Dr Alex Solomon - Rightmove economist - took us back in time during his presentation. He pointed out that if we look back through significant episodes in history we can start to think positively about Brexit and the impact it will have on your hard earned cash, especially if you are thinking about purchasing a property abroad.
So, if you are sitting comfortably, let's begin.
October 1929 and the world woke up to the Wall Street crash:
On October 29th, 1929 the US stock market collapsed. A few days before on October 21st, the panic on Wall Street began when stockbrokers made large-scale “margin calls” demanding prompt repayment of loans from their clients. Within four days, almost 13,00, 000 shares were traded on the Wall Street Stock Market. In an attempt to stabilise the market, leading bankers and investors bought blocks of stocks. On October 28th, the stock market went into free fall losing $5 billion. On October 29th, the stock market completely collapsed after panic-selling of all stocks. In a single day, between $10 to $15 billion was lost and millions of Americans lost their savings.
The initial shock of the crash caused a massive crisis, however in the years that followed there was a period of consolidation, waiting for stability. In 1932 that stability began to emerge.
Moving forward to September 1992 - Britain left the exchange rate mechanism:
The European Exchange Rate Mechanism (ERM) was set up in March 1979 to reduce exchange rate variability and stabilise monetary policy across Europe. Britain initially declined to join the ERM, but in October 1990 decided to join with a policy that shadowed the Deutsche Mark. When Britain joined the rate was set to 2.95 Deutsche Marks per Pound Sterling with a 6 percent permissible move in either direction. The problem was that Britains inflation rate was three times that of Germany's - interest rates were at 15 percent. The country's economic boom was in a period of unsustainable growth, which set the stage for the bust.
Currency traders took note of these underlying problems and began short selling the Pound Sterling - George Soros being the best known of these. In an attempt to contain this practise the UK's prime minister and cabinet members authorised the spending of billions in Pounds Sterling and the British government announced that it would raise its interest rates from 10 percent to 15 percent to try and attract currency traders looking for greater yield on their currency holdings - can you imagine the outcry if they tried that today!
Unfortunately, currency speculators didn't believe the government would make good on these promises and continued shorting the Pound. After an emergency meeting the country was forced to withdraw from the ERM, to let the market revalue its currency. Throwing the country into recession.
Again in the years following the shock and crisis there is a period of consolidation by the public, waiting for stability and, in 1997, when Tony Blair comes to power, this stability starts to emerge.
September 2008 - the Global financial crisis:
The 2008 crash pushed the world’s banking system towards the edge of collapse.
Within a few weeks Lehman Brothers went bankrupt, £90 billion was wiped off the value of Britain’s biggest companies in a single day and there was even talk of cash machines running empty. The trigger was a combination of speculative activity in the financial markets, focusing particularly on property transactions – especially in the USA and western Europe – and the availability of cheap credit. There was borrowing on a huge scale to finance what appeared to be a one-way bet on rising property prices. But the boom was ultimately unsustainable as many of those who borrowed money were struggled to repay mortgages. Property prices now started to fall, leading to a collapse in the values of the assets held by many financial institutions. It took the US and Germany 3 yers to get back to pre crisis levels, the UK took 5 years.
Again, looking at past events we can see that there is an initial shock, which leads to crisis, leading to a period of consolidation and finally stability.
Now to Brexit:
If we look at this in the same way. In 2015 the risk became real when the Conservatives came to power and David Cameron announced there was to be an in out referendum. In 2016 ,the UK decided to leave the EU. At this point we did not know when or how this would take place - a lot of uncertainty has existed since 2015, you could say that this was a period of consolidation following on from the shock of the referendum announcement. Looking at history when the shock hits the clock starts, the shock came in 2016 when the result was announced. We already know that the Bank of England will take a different approach to interest rates and the UK has the ability to stimulate the economy with the help to buy system and now we have got used to it - speaking to some Brits we are now sick and tired of talking about it - but we have worked things through.
Alex finished his presentation saying once we decide how we are leaving EU the consolidation period will be coming to an end and we can expect stability to return sooner rather than later.
We know, speaking to clients in the UK that for the years following the decision of the referendum they have been waiting, putting things on hold and just preparing for the day the UK is no longer in the EU. That day is getting closer and these clients are now beginning to get back in touch with us to start working out what properties are available for them and arranging viewings with us for when they will be here to look at them.
Although Brexit has been a divisive issue we try to look on the positive side of things, shock, crisis, consolidation, stability.