What does Brexit mean for the economy? Should we sell our stocks? Buy gold? Dig a shelter in the backyard? Pretty much, yes, according to Alan Greenspan. In an interview with CNBC on 6/24/16, Greenspan said Brexit has ushered in the worst period he has ever seen since he started working in public service. The current economic crisis, he said, will be even worse than the big stock market crash of 1987, when stocks lost 23% of their value overnight. Of course stocks haven’t lost that much – yet. In fact, after the Brexit decision was announced to the world on June 24th, the DJIA lost only about 3.9%. That’s a far cry from the 23% lost back in 1987. So what is Greenspan talking about? He’s talking about the future effect of Great Britain’s exit from the EU. He sees Brexit as the popping of the stitch that will unavoidably unravel the entire world economy to an extent never before seen in history.
What the Heck is Brexit?
Brexit is Great Britain’s exit from the European Union. Many analysts had been confident that the vote would keep the union whole. The vote to leave shocked England, Great Britain, the EU and the world. Stock markets reacted by slipping nearly 4%. While that’s a lot, it may be just the beginning of a long and slippery slope toward a much bigger problem.
EXCLUSIVE » Fmr. Fed Chair Greenspan to CNBC: "This is the worst period I recall since I've been in public service." pic.twitter.com/mu0p471fAm
— CNBC Now (@CNBCnow) June 24, 2016
Related: 4 Things to Know When Stock Investments Crash
Greenspan Thinks Brexit is the Beginning of the End
Alan Greenspan presided over the U.S. Federal Reserve Bank from 1987 to 2006. He claims that many people think of Brexit as a single event that will have an effect on the world economy and then go away. Greenspan claims that view is dead wrong. Instead, it’s more like the first shock of an earthquake that has been building tension for a long, long time and is about to wreak destruction for a long time into the future. The tension in this case has been entitlements. By that, Greenspan means public programs like education, public healthcare, social security and other government spending. So is Greenspan against government spending all together? Not really. In the video tweet above, he explains that the only thing that could fix our current economic problems is a slowing of the rate of the growth of government spending to match what we as a nation can afford. That, he says, won’t happen because real incomes of people all over the first world have stopped growing. That in turn has caused unrest in the voting public – a sort of “throw the bums out” mentality around the globe that leads to votes like Brexit and the nomination of Donald Trump to the Republican Party presidential candidacy. That political climate, he says, will only hasten the increase in the rate of government entitlement spending, which will in turn worsen the economy.
Should I sell my stocks?
We have no way to answer that question. We’re not selling ours, at least not yet. Most financial advisors urge caution in a crisis as the only way to keep from losing large percentages of savings. Holding onto stocks almost always sees them come back to their original value over time. That said, when Alan Greenspan speaks, people listen.