The greatest show on earth

On Wall Street, the young and inexperienced have been right, the old and experienced wrong
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The Independent Culture
THAT MAGIC 10,000 on the Dow - it means nothing and it means everything. It means nothing in the sense that the number itself is arbitrary and the Dow Jones index is a narrow measure of the price of a small selection of big US companies. But it means everything in the sense that it symbolises the extraordinary, even raucous, self-confidence of the American financial and business communities.

Reach the magic figure of 10,000, as on Tuesday, and it is as if America had rocketed into the stratosphere, where growth could be endless. Go below that figure, as the Dow did yesterday and the doomsters come out to say how overvalued American stocks are and how near to ending is the boom.

I spent a couple of days in Los Angeles last week at a financial conference. California in general and LA in particular are on an up at the moment, having seemingly put the problems of riots and earthquakes behind them. But any visitor to the States will pick up the same feeling of commercial self-confidence. The President may be, depending on your point of view, a wounded hero or a sad joke, but the success of the economy is unquestioned; it is the greatest show on earth.

It is not hard to see why. The US has enjoyed the longest boom it has ever had in peacetime: eight years of uninterrupted growth. Unemployment is the lowest in the developed world, lower even on official figures than Japan and vastly lower than continental Europe. The living standards of the majority (though not of the poorest) have risen steadily. Crime is plunging (though at the cost of high prison rolls). Investment, particularly in information technology, is soaring.

New Internet-related and other high-technology businesses are bursting out. Thanks to the boom, the US government's accounts are at last back in surplus, while state and local governments suddenly have surpluses too. State governors and city mayors are announcing new spending programmes.

The most wonderful thing about this great burst of prosperity, shout the market enthusiasts, is that while all Americans who want to work can participate directly in it by getting a job, the 40 per cent of Americans who own shares get a cut of the pickings without stirring from their bunks.

By contrast, to these masters of the universe, the rest of the world appears drab and second-rate. Japan remains flat on its back. The rest of East Asia is struggling, with even China slowing down. Europe appears preoccupied with its petty squabbles and its bloated welfare systems. As for Russia and Brazil - well, they're bust, aren't they? No wonder everyone wants to pile into the dollar and Wall Street, and dump the euro and the yen.

At a visible level, this euphoria translates into a "shop till you drop" culture. On Rodeo Drive in Beverly Hills, it is canary-coloured Bentleys and valet parking, but the mass spending is on the goods that are being loaded into the pick-up trucks outside the discount shopping centres. Rich America is spending on things to put in its new monster houses. But the booming consumption numbers come not from the few but from the many. Middle America is living well - even if it is having to work very hard for the dream.

For, yes, there is a darker side to the boom. For the talented, the skilled and the qualified, the last eight years have been wonderful. For the people lower down the ladder, it has been tough. For someone without any qualifications beyond the age of 18 real wages are some 30 per cent lower than they were 20 years ago. For many families, maintaining the standard of living means having two wage-earners instead of one.

Beyond this, there is the serious concern that the boom must soon approach its end. Experience suggests that a recession will come. The household savings rate is negative; people spend more than they earn to keep the economy and their own standard of living up. The country's current account deficit has also soared, as exports to the troubled economies of East Asia and Latin America have plunged and imports have flooded in.

Meanwhile Wall Street and the economy are seemingly dancing a dangerous tango: soaring Wall Street prices underpin consumer demand, while strong consumer demand underpins Wall Street prices. The dividend yield on US shares, which between 1960 and 1970 was 3-4 per cent and which reached 6 per cent in 1981, is now down to 1.5 per cent. By historical standards this seems dangerously low - or, put the other way round, share prices are dangerously high.

The trouble is, no one can remember bad times. The last sustained downturn in US securities was in 1982. No professional under the age of 39 has gone through a prolonged bear market, and most of the people on the trading floors in New York are under the age of 40. Alan Greenspan, chairman of the Federal Reserve Board, famously referred to the markets' "irrational exuberance" a couple of years ago, when Wall Street was some 30 per cent lower than it was yesterday. Exuberance yes, but irrational? The exuberance is rational to someone to whom each dip in the market has been swiftly reversed and therefore has turned out to be a great buying opportunity. On Wall Street, the young and inexperienced have been right, while the old and experienced - those who stay in their jobs - have been wrong.

How should the rational outsider react to all this? There seem to me to be two propositions, which are apparently in conflict but are equally right. The first is that Wall Street reflects American exceptionalism. US companies great and small, particularly small, have lifted their game in an astonishing way over the last 15 or so years. The system is delivering an extraordinary boom in productivity and innovation, and Wall Street is right to celebrate.

The second is that Wall Street has been over-celebrating this triumph: it has been partying too hard and too long. There has, over the centuries, been a long history of market manias, from the South Sea Bubble in London and the tulip mania in the Netherlands, to the Roaring Twenties in America. The American economic performance has been terrific, but the price Wall Street has been putting on its players is too high.

So there will be a reckoning. At some stage - and I am more worried about next year than this one - the US economy will come off the boil and face a period of much slower growth. There may be a recession, but even if there isn't, Wall Street will be shaken.

It is impossible to predict the timing or the exact circumstances of the end of the boom, still less the pattern of the subsequent recovery. My instinct is that the present economic momentum in the US is so strong that it will carry on for some months yet. When the break comes, it will be a shock, simply because so few people have any experience of bad times. But once the shock has reverberated around the nation, America Inc will pick itself up, dust itself down and resume its growth.

And the rest of us? It used to be said that if America sneezed, the rest of the world caught a cold. At the moment the rest of the world has the cold - in Europe it has been little more than a snuffle, but parts of East Asia are recovering from pneumonia. I would worry if neither Japan nor Europe had managed a stronger recovery by the time American growth turned down, for someone else will have to take the baton of the world economy.

Britain is in a most interesting position. We are not important in the world economy: we are only 4 per cent of world GDP. But we have for seven of the last eight years been the fastest-growing economy among the large European nations and we have something of the fizz of the US. We are, for example, second only to the States in terms of venture capital investment. Yet we haven't experienced the same mania. When Wall Street does eventually turn down, everyone will be hurt. But the issue then will be who jumps up first, who is most resilient? Fingers crossed.