Monday, June 6, 2016

Trump is a much worse threat than Brexit

The writer is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Obama from 2009 through 2010.

On June 23, Britain will vote on whether to remain in the European Union. On Nov. 8, the United States will vote on whether to elect Donald Trump as president. These elections have much in common. Both could yield outcomes that would have seemed inconceivable not long ago. Both pit angry populists and nationalists against the traditional establishment. And in both cases, polling indicates that the outcome is in doubt, with prediction markets suggesting a probability of between 1 in 4 and 1 in 3 of the radical outcome occurring.

It is interesting to contrast the ways that financial markets are reacting to the uncertainties associated with these two elections. The markets are highly sensitive to Brexit news: The pound and the British stock market move with every new poll. Analysis of option pricing and conversations with market participants suggest that if Britain votes to leave the union, the pound sterling could easily fall by more than 10 percent and the British stock market could fall by as much as 10 percent, with even greater declines for companies that conduct all of their business in Britain. It is widely believed that the uncertainties associated with Brexit are consequential enough to affect the policies of the Federal Reserve and other major central banks.

Click here to see the entire article in The Washington Post

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