If The UK Economy Tanks, Don’t Blame Brexit
By Tyler Durden
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Submitted by Frank Shostak via The Mises Institute,
Last Thursday, the people of Britain voted in a referendum to leave the European Union (EU). Most commentators view Britain’s exit (“Brexit”) from the European Union as bad news for economic growth in the UK and the eurozone. As a result, it is argued, the growth rate in the rest of the world will be also badly affected.
It is more likely that, whether the pace of real economic growth over time will weaken or strengthen is going to be set by the pace of expansion in the pool of real wealth.
A strengthening in the pace of economic growth implies a strengthening in the rate of growth of the pool of real wealth. Conversely, a weakening in the pace of economic growth implies a weakening in the rate of growth of the pool of real wealth.
The ability of an economy to generate a rising rate of growth of the pool of real wealth is determined by the ongoing expansion and the enhancement of the infrastructure. This permits the increase in the rate of growth of the production of goods and services to support people’s life and well-being.
The key for this is an ongoing allocation of some portions of real wealth toward the formation of capital goods (i.e., the enhancement and the expansion of the infrastructure).
NB: The allocation of real wealth here means that a portion of real wealth is channeled toward the activities that are engaged in the expansion and the enhancement of the infrastructure.
Now, if real wealth were to be directed toward the production of final goods and services only — while an inadequate amount is allocated toward the expansion and the enhancement of the infrastructure — this will amount to a consumption of capital.
Over time this is going to undermine the economy’s ability to pursue rising economic growth. In fact a prolonged neglect to allocate a sufficient amount of wealth toward the enhancement and the expansion of the infrastructure is likely to result in a stagnant or even in a declining pool of real wealth over time. This means stagnant or declining real economic growth — a fall in people’s living standard.
How Will Brexit Affect the Wealth Generation Process?
If the process of wealth generation is currently in good shape then Britain’s exit from the EU shouldn’t have any negative effect on real economic growth. This, however, might not be the case.
It is likely that the reckless monetary policy of central banks in the UK and the eurozone has inflicted a severe damage to the process of real wealth formation.
Loose monetary policies (i.e., monetary pumping and the artificial lowering of interest rates) sets in motion the diversion of real wealth from wealth generators toward non-wealth generating activities. This in turn over time weakens wealth generators ability to expand the pool of real wealth.
Since the 2008 financial crisis, following the lead of the US central bank, the central banks in the UK and the eurozone have aggressively lowered interest rates and …read more
Source: If The UK Economy Tanks, Don’t Blame Brexit
