"This is not the end, this is not even the beginning of the end, this is just perhaps the end of the beginning."
— Winston Churchill, 1942
Winston Churchill's famous quote, at what appeared to be a turning point in World War II, may be just as an apt a description for this moment in Britain, as it was in what seemed to be a turning point in World War II. While that turning point had significant military consequences, the battle cry for the so-called "Brexit," may carry with it unintended economic, political, and, ultimately, geo-political consequences, as well — and may even force the U.S. Federal Reserve to reverse course.
The U.K.'s decision to cleave itself from an economic union with Europe may well extend beyond its newly re-defined borders.
Certainly, the global financial markets, after having mistakenly bet on the Brits remaining within the European Union, are flashing monumental warning signals that this breach may lead to the dissolution of the entire experiment we know as the EU.
The British pound, as has been widely reported, has suffered its biggest single-session decline in history, while its value against the U.S. dollar has dropped to levels not seen since the fall of 1985.
The fear, of course, is that a dissolution of the EU as a single, unified economic entity, with its own currency, could collapse, leading to the reintroduction of single-nation currencies; the revival of national central banks; competitive currency devaluations across the Continent; and, quite possibly, the re-awakening of ancient enmities that dominated the European political landscape for decades, if not centuries.
While that may be taking this moment to an illogical extreme, the sentiment that drove the Britons, led by Nigel Farage, to exit the EU, is quite visible across Europe, whether it's the far-right movement led by Le Pen in France, the AfD in Germany, or even the nativist movement led by Donald Trump in the U.S.
It seems to me that the markets, maybe rightly, are now discounting the possibility of the end of an era … the era of globalization and mobilization, to one of isolation and tribalization.
In the nearer term, the violent moves in global markets present a clear and present danger to an emerging recovery in the European economy while leading to deepening economic weakness in places already in recession.
As Fed Chair, Janet Yellen, rightly pointed out in her semi-annual economic report to Congress,
Hence, while overseas central banks scramble to insulate their economies from this latest crisis, the Fed may very well be forced to take back its lone rate hike of this cycle and, quite possibly, follow the rest of the world into a policy regime that requires negative nominal interest rates.
If the global market response spirals out of control, and deeply affects the global economy, can "helicopter money" be far behind?
Yellen has said that helicopter money, Milton Friedman's concept of dropping money into the economy that would go out as tax rebates, is something the Fed might "legitimately consider" — but only in "a very abnormal, extreme situation." The question is: Will the U.K. vote roil markets so badly that it puts the Fed — and the economy — in an extreme situation?