I think the UK's balance of payments crisis falls into the second category. In a healthy economy sometimes you sell more goods and services abroad than you buy and sometimes it is the other way around but broadly things should even out. The UK has been in deficit for nearly 20 years. In the second quarter of 2016 we bought £28,604,000,000 more than we generated. We have a massive deficit and it has been getting erratically worse for over 20 years.
The gap has been plugged by investment from abroad. Which sounds fine until you ask yourself the simple question of investment in what. Desperately little of this investment has gone into productive capacity in either the service industry or manufacturing. The money that has flowed into the country to cover up the deficit has gone into buying property in London and making investments in the complicated and inadequately regulated asset markets in the City of London. Money like this can flow out almost as easily as it flowed in. If it does so slowly and steadily that will be difficult to handle because the UK will have to face up to the realities of finding much more challenging ways to finance a deficit. If it does so quickly and in any kind of panic the consequences are much more scary.
Since Brexit the pound has gone down sharply. The Bank of England staved off any risk of immediate panic by printing more quantitative easing money and dropping interest rates. Both were helpful things to do for the overall economy even if the vast majority of the billions of potential productive investment money from QE was once again frittered away. But if you start printing money and cutting interest rates at a time when people abroad become more worried about the stability of your country then you can pretty much guarantee that your currency will go down.
Many economists and most Brexit folk are quite hopeful about a declining pound. It makes your holiday more expensive. It increases the cost of food and fuel for ordinary people. But it is supposed to give industry and commerce a boost.
In our dreams. Those industries that are left certainly do gain from having a lower pound when they sell goods made in the UK. But they lose out when they buy their components and their raw materials so it isn't all gain. They also lose out if their customers worry over the reliability of supply. Price matters for exports. Quality, design and reliability matter every bit as much.
The UK has just become a much more unreliable place to do business. No business in the UK can tell its customers what the tariffs will be on what it is selling a few years down the line. Their significant competitors can. Most large exporters have branches in several different countries. No international business operating in the UK knows what the relationship between its UK branch and its European branches will be in two and a half year's time. If they invest in other parts of Europe they can be more confident. Several of our major companies such as Rolls Royce sell most of their products to other companies that are the product of major EU collaborative ventures such as Airbus. No one knows what the future UK involvement in such projects will be.
So the CBI is quite rightly warning about the dangerous of economic uncertainty. Nissan is telling the UK that it isn't confident to invest in Sunderland until all this is sorted out. And the City of London is seriously worrying about what the impact will be on its business of EU regulations being made without any input whatsoever from the City of London. Dealers in Frankfurt are feeling rather more chipper.
In these circumstances it is not great policy to simply shrug our shoulders and say that if we lose tariff free access to 40% of our current markets it will be fine and dandy because we can trade with the rest of the world. We have to offer better products and services that the rest of the world wants and reliability of supply not optimistic press statements. It is quite possible for the uncertainty we now face to expose us to the worst of both worlds. The pound can continue to fall and our balance of payments can continue to get worse. Indeed the two crises are quite capable of re-enforcing and exaggerating each other if confidence in the security of the business environment of the UK goes.
To give Theresa May her due she has played a very skilful hand at calming things down and trying to portray herself as being fully in control of a well ordered and well planned Brexit. There is just one tiny problem. She doesn't have a plan and as soon as she creates one she is going to have a massive political crisis on her hands as her party falls to squabbling.
If she plays it right then it may still not be too late to get out of the problem. If the money the Bank of England has been printing was channelled into the real economy and invested in secure and sustainable future technology then it would indeed be possible to use the current crisis to lay the foundations of a successful future British economy. We are already replacing some lost industrial jobs in Hull with offshore wind technology jobs. We could do a lot more. There are plans to build a huge tidal energy project in Swansea bay. They are being held up by lack of government will and lack of government investment. There is every prospect of earning large amounts of foreign currency from enrolling foreign university students to pay fees and pay rents and living costs for three years. Instead we are telling them people who are each bring in more foreign exchange than the sale of three cars that they are unwelcome because they are temporary immigrants.
If she continues to play it wrong and her party falls into the kind of horrible faction fights that characterised it throughout the run up to the Brexit vote then a very different future is also entirely possible. Picture the scene. You are a foreign investor. You look at the 20 year UK balance of payments deficit and how it is worsening. You see the value of your assets in the UK going down as the pound collapses. Ever since 2008 you have steadily lost confidence in the honesty and the stability of the UK financial system and you realise how heavily dependent the whole country has become on it. You don't know what is going to happen over the EU. Now the government is falling apart and squabbling. Why wouldn't you sell up and move what you could out of the country whilst you still could? And if enough people think like that then what degree of market instability results? Controlled well ordered withdrawal? Or another 2008 style crisis that may or may not be limited to the UK.
Project fear doesn't begin to cover it. Project reality is already proving all too clear as the decline of the pound guarantees that we have already ceased to be the fifth largest economy in the world. And as for project promise. Anyone now think we are going to get an extra £370 billion for the NHS? Anyone now think we can have tariff free access to the single market and control over our borders?
One of the worst features of the Brexit campaign on all sides is that we have replaced rational thought by aggressive assertion. So I do not assert that any of the problems I have identified will inevitable occur. I simply ask the question. Which is more likely? That we are about to face some very serious difficulties or that the UK is facing a rosy future because someone is telling us that we are a proud independent nation once again?