Why A Brexit Crisis Is Not A Bust
A recent survey of UK firms conducted by Deloitte has revealed that the referendum decision to leave the EU has battered business confidence, as “82 percent of chief financial officers from FTSE 350 and large private companies expect to cut capital spending in the next year, the biggest proportion on record.” The accountancy firm’s warnings of the expected economic downturn have reignited the push for further interest rate cuts. The Bank of England—although its own monthly report rather contradicts the findings of the Deloitte survey—is now nevertheless preparing for a “material easing of policy… [in August] to help cushion the expected slowdown.” It is not surprising that central banks would jump on any opportunity to further extend their mandate and play the role of market maker of first resort, intervening into the market at the slightest sign of trouble. But in this particular case, the BoE would be responding to an event that, in itself, could never bring about a business cycle.
Brexit is a political crisis for the establishment, which reverberates into the business environment affecting entrepreneurial expectations and perceptions of risk. Industrial fluctuations are to be expected in various sectors of the economy (especially housing or exporting industries) in anticipation of changes in consumer preferences, and in the framework of international agreements and UK legislation. But the subsequent shift in resources—including the cuts in capital spending mentioned by Deloitte—will not occur in all industries at the same time, nor will affect them to the same extent. Furthermore, if the material effects of Brexit translate into a sharp economic slowdown, this will nevertheless be a phenomenon different in its manifestation and causal roots from a financial crisis. As Rothbard explained, “the problem of the business cycle is one of general boom and depression; it is not a problem of exploring specific industries and wondering what factors make each one of them relatively prosperous or depressed” (Rothbard 1963). The UK’s exit from the EU cannot and will not, in itself, trigger malinvestments and their subsequent inevitable liquidation through a bust.
The general boom and depression, as we know, is caused by monetary expansion, which first produces a squandering of scarce resources through malinvestment and overconsumption, then revealed by clusters of entrepreneurial errors and bankruptcies. These bankruptcies, as Rothbard pointed out, will occur sooner or later “regardless of the emotional state of particular entrepreneurs” (Rothbard 2009, 854). In other words, what the ‘depressed’ emotional state in which UK entrepreneurs find themselves after Brexit can produce is a contraction of business activity, and a certain unresponsiveness of businesses to the low interest rates maintained by the BoE. But as Mises has shown, this has much more benign inherent effects:
“… contraction produces neither malinvestment nor overconsumption. The temporary restriction in business activities… may by and large be offset by the drop in consumption on the part of the discharged wage earners and the owners of the material factors of production the sales of which drop. No protracted scars are left. When the contraction comes to an end, the process of readjustment does not need to make good for losses caused by capital consumption” (Mises 2009, 565).
That being said, it is certainly possible that a Brexit-driven contraction will in turn trigger an actual bust. But the two events remain causally distinct, with the first one becoming only a catalyst for the second. And in this case, precipitating the inevitable can in fact be considered a boon, as it prevents more malinvestments from taking place. A material easing of central bank policy, on the other hand, will have precisely the opposite effect, that of prolonging capital consumption and postponing the inevitable process of readjustment.