So I see a lot of people out there right now, posting around pictures of the FTSE 100 rising higher than it was pre-Brexit vote after an initial sudden drop. These pictures tend to have a smiling Farage or sad Cameron in the background, as if to imply either victory or defeat. However, I kind of feel like people are hugely missing the point of what these graphs mean. A graph going upwards doesn’t necessarily mean it’s a really good thing. So I’ve been doing a little learning of the ol’ economics so I can attempt at clearing some of the rampant misinformation that’s out there right now.
First lets start with the FTSE 100, you’ve probably seen and heard of it on the television or news articles all the time. It’s kind of a big deal and its fairly important to our economy; but what is it? Simple! It’s an indicator of the top 100 companies in our country. It shows how well they’re performing on British soil. It shows their market value, which is about more than just profits. What it doesn’t do, its give you any clear kind of indication of the state of the UK economy, because a lot of the companies are international companies.
The FTSE 100 rising is great, it means business is happening and happening well. However this doesn’t actually prove our economy is on the rise at all. What it proves is that more people are buying from those specific 100 companies. Which again, is fairly good, we want people to buy and spend because that fuels our economy. Though these companies will fair well whatever the political or economical climate here in Blighty, and we absolutely can’t look at this and act like we’re doing great.
There are other FTSE variants, like the FTSE 250 which shows the next 250 companies on the list’s status (so 101th to 350th). These are the smaller companies, and will find it a lot harder to do business should the economic climate drop significantly.
None of the above will really affect you as an average Joe that much. What will affect you, is the rate of our currency. Our currency has taken a significant drop since the Brexit vote was announced. This is your power to buy things and it has been diminished significantly. As you can see from this handy little graph:
As you can see from the graph, moments before the Brexit vote was announced our currency had a slight optimistic rise, before dropping very significantly, and has fallen to lower levels since. Before the result our currency was £1 = about $1.49 and post brexit result we see that its £1 = $1.29. I can see you sitting there thinking “so what? it’s only 20c!” but that’s a big deal when you’re importing or exporting significant amounts of product. That’s 20c per every pound that we’re losing compared to before the result. Lets do some quick maths about this…
We’re a goods buyer. We buy goods from America and we sell them in the UK. Our yearly spend on the goods we buy is £1 billion. We take that money abroad and are able to buy $1.49 billion of goods from America. Which we can then sell in the UK and we make £1.5m back from it as profit. Now that the Brexit vote has sent our currency plummeting. We can take our £1bn abroad and buy only $1.29bn of goods. That’s a loss of $200 million, or $200,000,000,000. Which in turn means that to make that same £1.5m profit, we have to charge consumers more; who are our consumers? That’s right, average British people.
With our currency historically weak, we can easily see why the FTSE 100 would rise. People obviously want to buy from us more now that our goods are cheaper for them. The math above works in reverse too, where America buying £1bn of goods from us will actually be paying $200 million less than they were before the Brexit vote. That’s a hefty blow to our economy, because even though the FTSE 100 has seen more sales and business, it’s seeing less profit per sale than it was before.
In short, the currency dropping is a major issue for us as consumers, and the FTSE 100 doesn’t show you what you think it does. If anything, the FTSE 100 shows you that the rich will stay rich, and it’s the poor who will pay for the profits they are losing out on, keeping them poor.
(Economics is actually kind of fun to read about)