Ever since the outcome of the Second World War, the Special Relationship, a term coined by Winston Churchill used to describe ongoing relations between the U.K and the U.S, has been essential to both countries’ success on the world stage. The political and cultural significance has left a meaningful impact on capitalism worldwide.
Right now, in the fifth-largest capitalist country, the United Kingdom, most Brits are fearing the potential problems caused by Brexit: a popular moniker for the U.K leaving the European Union.
Britain may exit the E.U’s Customs Union as part of the agreement, meaning any country inside the bloc will forfeit free trade, paying tariffs on British imports and exports. There are also reports of potential food shortages as checks on the French border could cause delivery delays, new immigration policy causing anxiety for E.U citizens, and trade uncertainty knocking several points off U.K GDP.
But these are only minor issues facing the U.K in a post-Brexit world. No one is talking about the biggest threat to Britain’s future: the economics behind the Special Relationship.
A significant blunder in modern economics is failing to recognize how globalization affects our world. Trying to predict a country’s economic prospects by analyzing domestic issues is not a viable strategy — in a way, domestic economies died a long time ago.
It takes only one chart to show how America is the main force driving the British economy. By comparing the two countries’ GDP growth it’s a perfect correlation. It reveals the U.K is subservient to the United States, the Bank of England is a mere reflection of the Federal Reserve, and the lag time between British and American economic data means you’ll be the last to react — Uncle Sam knew way in advance.
Using intuition, you would assume the main driver behind the U.K is the European economy as exports make up 56% compared to America’s 11%. But this is a red herring, a distraction from the bigger picture. Europe may be the U.K’s biggest import and export client, but they also make up 27% of U.S exports, so when the U.S slows, there’s a domino effect: Europe slows, and the U.K slows along with it.
With every economy lagging America, the phenomenon of globally synchronized markets persists. Stocks, bond yields, and currencies trend in the same direction regardless of the difference in communities, cultures, and climates. The interconnectedness of the global economy is remarkable yet frightening at the same time.
So when you think about the scale of the global economy versus Brexit there’s no contest. The U.K leaving the European Union may result in negative economic impacts, positive economic impacts, or no change whatsoever. No one knows for sure. But what we do know is the outcome will be inconsequential compared to the economic bust we’ll see in America sooner rather than later.
It’s time for Brits to know the reason why their economy is facing a crisis, ignoring the noise from Brexit, and, instead, keeping a watchful eye on the U.S, the bedrock of the global economy. The U.K’s economic health is now in their hands, and whether they can continue to inflate the biggest credit bubble of all time. The bubble manifesting itself in every speculative asset class you can think of.
All the U.K can do is hope and pray that when America’s bubble bursts, the collapse that comes with it isn’t as extreme as the doom and gloomers are predicting.