Government and its supporters in the media are constantly claiming that the economy will benefit from leaving the EU and constantly point to economic indicators that seem to demonstrate the correctness of their beliefs. They have the evidence of continued economic growth and the rise in the value of the FTSE 100 index (a measure of the value of the top 100 companies registered on the Stock Exchange). Their  constant trumpeting of good economic news suggests a certain nervousness, as people don’t need to be told that things are good, they know it for themselves. What they ignore is evidence that suggests the contrary, such as a slow down in the construction industry. Members of the building trade are asking for government financial help with the aim of increasing the number of housing starts, hardly an example of the success.  This is a story which will only be found in the quality press, it will be ignored in the popular press which as backers of Brexit detest any news that would suggest that Brexit is a mistake.

Any reader of the popular press will realise that the one measure of economic prosperity that they value is ever rising house prices. House owners can use their houses as a cash machine, using the ever rising value of their property to secure loans to finance the purchase of such as cars and foreign holidays. In doing this they can avoid the painful reality of living with stagnant or slowing rising incomes. They are living in what can only be called an economic fantasy land, as the speculative bubble that is ever rising property prices cannot continue for ever. There will be a crash which brings to an end this bubble and it is quite likely that Brexit will be the object that punctures this speculative bubble.

One journalist wrote that the falling pound will be good for the London property market as it will attract lots of well off foreign buyers into the market. However this ignores one fact, it is ever rising prices that attract foreign residents to invest in this market. Even today there was a report of a fall of 56% in the demand for luxury homes in London. This is a trend that can only increase as foreign residents seem London as a less safe home for their money. What they want is a market in which prices are constantly increasing as means the money they have invested in London will be constantly increasing. Any risk that the value of their investment in London properties means that they will shy away from the London market. A depression in the London housing market will fed outwards into the country as a whole depressing prices there.

Even right wing economic think tanks such as ‘The Adam Smith Institute” have expressed concerns about the impact Brexit on economic growth. Outside Westminster there are few economists that don’t think the long term effects of Brexit will be damaging for the economy. House prices will not continue to rise in a declining economy, they are more likely to fall. British home owners are increasingly unlikely to be able to use their homes as a cash machine.

The property market is inherently unstable and liable to experience shocks such as a rapid decline in prices. It is a market built on the belief that property prices will constantly rise is liable to panic once it is realised that prices are not going to go on increasing and rather than prices rising month by month, they will fall month by month. Not a welcome prospect for house owners, particularly if the falls are as spectacular as recent increases.

The British economy is driven by debt, whether it is money borrowed to invest in the property market  or money borrowed to finance the purchase of consumer goods. Private sector indebtedness is rising rapidly towards 200% of GDP (national income) and this is made possible by borrowing at what are historically low interest rates. It is no exaggeration to say that the British economy is afloat on a huge debt bubble. A lot of the borrowing that makes this bubble possible is done on very low interest rates. If interest rates rose many would find that they were unable to repay their loans, and debt defaulting on a large scale with a consequent popping of the debt bubble and a horrendous economic crash. Mark Carney the Governor of the Bank of England is aware of this problem and has for that reason pledged to keep interest rates at their current low level, even if inflation rises to 2.5%.

However Mark Carney’s hand could well be forced, there is a possible situation in which this could occur. Ever since Brexit the pound has continued to fall in the foreign exchange markets and at present apart from the prospect of rising inflation due to rising import prices, the falling pound has caused no other concerns. However the governor cannot forever ignore the fall in the value of the pound forever. The pound could fall to such low levels that it would pose a serious threat to living standards, as would happen if the pound fell much below the rate of £1 to $1. Even before that the governor could be forced to act if the fall in the value of the pound threatened to fall so fast that it threatened to make foreign trade impossible, this occurs when foreign buyers are unwilling to accept sterling in payment for goods because they fear that the pounds they received today will be worth substantially less tomorrow. Any central bank governor would be derelict in their duty if they allowed this to happen. The only means of reversing this downward movement is to increase interest rates, as if foreign residents thought they could earn more on their deposits of money in London than elsewhere, money would flood into London, so pushing up the foreign exchange value of the pound. Unfortunately other financial centres would be forced to follow suit and rather than there being a modest increase it could be quite substantial.

This would present Europe with a substantial problem, as the countries of Europe also have substantial private sector debts. These debts can only be sustained if interest rates remain low which will not happen if the above scenario occurs. In the very worse of events, Brexit could cause a European wide crash. Hopefully it will not happen, but if I was a European central banker I would be suffering many sleepless nights.

The cause of what could be a horrendous economic crisis is a group of poorly educated politicians making decisions about an economy of whose workings they appear be in ignorance of. Michael Gove a prominent leave campaigner stated during the campaign that people were fed up of experts and wanted to hear nothing more from them. If political leaders such as him had listened to the experts (economists) the government would not be in its current mess. All the political leaders of the leave movement can do is to abuse their opponents who correctly point out that the emperor has no clothes and try to close down the debate on Brexit for fear that it will expose their own inadequacies.  If I said the new minister for external trade was the minister for trade with cloud cuckoo land, it would not be unfair as the ministers seem to have little idea of what is required to negotiate trade agreements with real countries and not those of their imagination.