In this prediction, I noted,
“The Pound has moved in line with statements by the government over Brexit. Whenever the potential for a No Deal Brexit seems to have been reduced, or removed, the Pound rises, and vice versa. When Johnson reinforced his commitment to not extending the Transition Period, the Pound fell hard. For now, Johnson needs to try to hold his potentially fractious coalition together, and to sustain his honeymoon period with Brexit voters, by continuing to push this hard line. Whether he really believes that, by doing so, it will have any real impact on his EU interlocutors, in persuading them to give him a good deal – it won't – isn't clear. I'm sure neither he nor Cummings are that naïve. The Trumpian line that its necessary to threaten No Deal to get a good deal is fine red meat to throw out to the rubes, but no serious negotiator believes its a credible tactic, when its your opponent that holds all the cards, as is the case with the UK and the EU.”
So, it turned out to be, as markets themselves realised that there was no way that Johnson was going to agree to anything that amounted to more than Brexit In Name Only. That put a floor under the falls in the Pound, which continued to move in these relatively limited bands, moving down whenever Johnson was forced to ramp up the No Deal rhetoric, and back up, when he was forced to accept reality, and capitulate once more on his red lines.
The other element of the prediction was that, as Johnson prepared this capitulation to the EU on Brexit, he would continue to isolate the Miseans/Libertarians of the ERG. He has done that effectively, with them also being forced to go along with all of his authoritarian/statist policies in relation to lock downs, and on massive state spending in response to the economic crisis caused by those lock downs. I noted that many of the older Tory members in the local associations were dying off, and some of those that had joined only in respect of Brexit, some being only UKIP/BP entryists, would fall away, on the basis that Johnson had “Got Brexit Done”, even if, in reality, he had capitulated to BRINO.
The further element in that regard was what happens to the Liberals. The Liberals again destroyed themselves at the end of 2019. They showed their true affinity of being closer to the Tories than to any kind of progressive social-democracy, as they made their central focus attacking Corbyn, and their insistence that they would not support even a transitional government headed by Corbyn, to prevent Brexit, and enable a second referendum. Their leader was a sectarian fantasist, who believed that Labour was going to collapse, and its right-wing MP's align with them, and that, on this basis, they could win a parliamentary majority.
Instead, it simply created conditions in which the forces backing Remain were totally fragmented, whilst Johnson could unite the forces of Leave behind him. Labour was shattered because the vast majority of its members and voters were militant Remainers, whilst its Leader was a long-time Brexiter whose conversion to Remain was unconvincing, and his rapid reversion to a policy based on respecting the referendum simply confirmed that belief. Liberals had the clearest policy of saying they would scrap Brexit if they won a parliamentary majority – a position that the majority of Labour voters also backed – but the Liberals had no chance of ever securing any such majority.
As predicted, the Liberals have superficially accepted the reality of Brexit. Liberals are likely to shift their activity to inside local Conservative Associations, where they will increasingly replace the old dying Tories, shifting the balance of forces within them towards positions that seek to minimise the effects of Brexit, and ensure the potential for Britain to re-join the EU, at an early opportunity. The Liberals are likely to oppose Johnson's deal, but wait until elections before returning to a more overt pro-EU position. That will allow them to demarcate themselves from Starmer's Labour Party, which looks likely to have demeaned and destroyed itself with its own promotion of Brexit, and willing support for Johnson.
Former Labour leader in the European Parliament, Richard Corbett, has written, correctly, in Labour List that it would be a huge mistake for Labour to back Johnson's deal.
He says,
“Most importantly, in the longer run, it would mean that we also “own” the deal and its numerous consequences, making it more difficult to criticise the government for its shortcomings. The next months and years are likely to see many negative consequences of the deal beginning to hit the public. We don’t want the words “you voted for it” being thrown back at us.”
And,
“It would put us on the wrong side of public opinion. Recent polls have shown a record majority saying Brexit itself was a mistake. Even more will be critical of Johnson’s incompetent deal. Those criticisms are likely to grow as the consequences bite. This is true across the country, even in the ‘Red Wall’, but perhaps especially so in Scotland where Labour risks being outflanked by the SNP.”
As well as pointing out a number of other important reasons for not supporting Johnson's Brexit deal, including its demoralising effect on Labour activists. Starmer is unlikely to be swayed by concerns about demoralising Labour activists, as he seeks to achieve that anyway, by his attacks on them, and his leadership's commitment in the words of Angela Rayner to “expel thousands and thousands” of those members, in order to consolidate its hold on the party. But, Starmer faces opposition to his support for Johnson, from even his front bench, including apparently from Shadow Chancellor Anneliese Dodds. This shows the basis for a progressive alternative to be built to Starmer's collapse into jingoism and populism, that must start from the assertion of internationalism, free movement, and a commitment to reconnect UK workers with EU workers in the struggle for a Workers' Europe.
With the Labour Party having disgraced itself in this headlong populist scramble into jingoism, the stage would be set for the Liberals to play their normal role as scavengers feeding off the carrion left on the road. In their normal manner, they would adjust the balance of their message in each area depending on whether they were looking for disgruntled Tory or Labour voters, but with an overall message that highlighted the disaster that would by then be apparent as resulting from Brexit, and blaming, correctly, both Labour and the Tories for having inflicted it upon the population.
The general principle outlined in the prediction that every time the Tories emphasised No Deal the Pound would fall, and every time they had to row back form it, it would rise, was borne out. The clearest example of it has been the rise in the Pound following Johnson's final capitulation to the EU, and his agreement to the BRINO deal. But, the prediction was necessarily affected by the other large issue that played out during the year, which was the economic effects of government imposed lock downs in large parts of the world.
In the Spring that led to huge falls in financial markets, which began to drop by 5-7% per day. The Pound, suffering a combination of those effects, and the more pronounced impact on its economy from being an island dependent on trade, and now also imposing the damage of Brexit upon it, saw a savage drop. But, as markets saw that, in reality, lock downs were only a lock down of social activity, not of most production, and as central banks again resorted to seeing every problem as a nail so as to use their only tool, the hammer of money printing, financial markets not only recovered, but soared to even higher levels. One reason for that was that the reduction in economic activity again reduced the demand for capital, whilst money printed and paid out in furlough payments meant that for many consumers their disposable income rose, leaving them to pay down some household debts. That caused interest rates to fall, and asset prices to rise. Already, that condition is reversing, in the US, as furlough payments cease, and consumers find their incomes falling – particularly those that have lost jobs – whilst the opening up of economies leads to bouts of “revenge spending”, with COVID adjusted inflation rising rapidly.
As financial markets recovered, in the Summer, the Pound also recovered, as the likelihood of a No Deal declined. It continued to go through the same ups and downs on that basis, falling hard when Johnson announced his plans to renege on the Withdrawal Agreement's Northern Ireland Protocol, and so on. But, the effects of government imposed lock downs affected the movement of the Pound too. The US Central Bank was led to resume money printing, and purchase of financial assets on a large scale again, which led to a fall in the Dollar's trade weighted Index against all other currencies. It fell against the Pound and the Euro. The ECB was also led to engage in further money printing in response to the need of EU governments to spend money for relief from the effects of lock downs. But, the Euro continued to rise against the Dollar and the Pound.
The Euro started the year at $1.11, and ended it at $1.22, a rise of 10%. It started the year at £0.86, and ended it at £0.904, a rise of around 5%. The Pound's trade weighted Index against all other currencies did not move, reflecting its significant rise against a weak Dollar, and fall against a steadily strengthening Euro.
The BRINO deal means that the UK will face steadily rising costs relative to the EU, and other economies. In other words, its productivity will be relatively falling. The relative valuation of currencies is ultimately a measure of such variations in productivity between economies. So, the Pound is set to fall against these other currencies, as a result of Brexit imposed falling productivity and rising costs. That means that UK inflation rises relatively faster, and UK profits fall relatively faster. The latter means that capital will accumulate relatively more slowly in the UK, which itself results in lower levels of productivity.
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