There is no escape from Boolean logic. True and False are represented in algebraic form by the values 1 and 0 respectively. The simple methodology offers great comfort for business, not necessarily so for politics and certainly not for EU negotiations.
Enter the world of Schrödinger's cat. Scrödinger's cat is a thought experiment developed in 1935 by the eponymous physicist Erwin Schrödinger. It is a world in which duality pertains to truth and falsehood simultaneously.
In the experiment, a cat, a flask of poison, and a radioactive source are placed in a sealed box. If an internal monitor detects radioactivity, as with a single atom decaying, the flask is shattered, releasing the poison, which kills the cat. The Copenhagen interpretation of quantum mechanics implies that after a while, the cat is simultaneously alive and dead. Without looking inside the box, the cat is alive and dead. Look inside the box and the cat is alive or dead. This poses the question for physicists, of when exactly quantum superposition ends and reality collapses into one possibility or the other. Confused ...?
The trick is, of course, to make sure no one looks inside the box. Impact assessments can exist and not exist according to David Davis. The agreement to move on to talks about trade is not an agreement but a statement of intent. A firm date has been set for "Exit Day", the day we will leave the EU on March 29th 2019 at 11:00pm. However, MPs will be given the “power to amend the definition of ‘exit day’” at a later date. The exit day exists and it does not exist. Get the idea?
Exit day will then be followed by a transition period in which nothing will change for a further period of at least two years. Brexit will therefore exist and not exist. We will be suspended in Scrödinger's cat box. Truly global Britain neither dead or alive. A vassal of the EU subject to ECJ mandate without any say or representation on changes in regulation.
The EU has now made things difficult by asking the rather tortuous question of what exactly we want as an outcome. Government has three months to come up with a proposal. Don't be confused by the pan world options. Finland Flash, Canada Dry or Swiss Horn will offer no solution to the schism on the Tory back benches. Our deal will be bespoke, tailored for the UK with off cuts for Northern Ireland and Scotland perhaps.
We want to leave the free market for goods without losing full access. We want to be outside of the customs union yet conforming to established tariff structures and rules of origin. The UK will be leaving the EU and the customs union. However, the UK will ensure full alignment with the rules of the customs union and the single market. We will of course continue to pay into the pot, subject to ECJ legislation, guaranteeing the rights of EU citizens in the process, allowing more into the country to meet the job needs of the UK economy in due course. We will conform to the wishes of the British people, if only we and they knew what they were.
To be or not to be is the Shakespearean solution in Boolean form. To be AND not to be is the ask in negotiation for EU engagement. In the many strands of negotiation, Schrödinger's cat logic offers nine lives to the Prime Minister. May the talks begin and they will ... don't ask to look inside the box just yet ...
Economics news this week ...
The Fed hiked rates again this week. It is the Janet Yellen swan song. The Chairman of the Governors will retire in February having completed a four year term. Three further Fed rate hikes are outlined in 2018 but probably not before March. The US economy is set to grow by 2.5% in 2018 with inflation averaging just over 2% this year and next. The $1.5 trillion tax cuts will add to inflationary pressure without much impact on growth or the Republican vote.
In the UK, the Bank of England voted to keep rates on hold. Two further 25 basis points rate hikes are outlined for 2018. Rates are expected to rise to 1% by the end of the year. Growth is expected to be around 1.5% with inflation slowing to 2.5% by the final quarter.
According to the ONS, headline CPI inflation increased to 3.1% in November, from 3% prior month. Governor Carney has written to the Chancellor to explain the drift from the 2% target. Airline fares fell but computer game prices increased! Goods inflation held steady at 3.3%. Service sector inflation increased to 2.8% from 2.7%. Food prices increased by 4.4%, transport services are up by over 7%. Producer prices edged up to 3% as input costs increased to over 7%.
So what can we make of it all? Inflation will not return to target any time soon. UK rates are set to rise. We are leaving Planet ZIRP as the Fed and the Bank of England will seek to normalize rates. Markets are soaring but this may well be the time to average out over the next three years.
The Vera Lynn School of Economics will begin to sing again "Recession again, don't know where, don't know when". Well it won't be here or in the US for a few years yet.
Interesting set of job stats for the UK this week. Unemployment fell slightly, vacancies increased to a further record level and wages increased to 2.5% on the latest three month average. Retail sales increased by almost 5% in value terms in the month of November. This is not an economy which is slowing ahead of Brexit uncertainty. Growth is expected to be just 1.6% this year but don't be too surprised if upward revisions follow for growth in the current year and forecasts for the year ahead.
Consumer spending is resilient. Investment will follow as businesses take comfort from the direction of travel in the EU deal. It is far too early for the Vera Lynn refrain …
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.