The warning lights flashing along Main Street, USA

Inflation, rather than the next crash, could be the heffalump stalking the world economy

JEAN BAUDRILLARD, the French intellectual, does not leap to mind for his financial punditry. But lately, his claim that financial capital has entered the realm of "hyper-reality", that it whirls chaotically around the globe having next to no impact on our real-life economies, has gained some resonance.

This week, the latest victim of the crisis that started in Asia more than a year ago has been Brazil, which unexpectedly devalued its currency on Tuesday and thereby set off a day of panic in London and New York. Yet as each wave of the financial crisis crashes over the markets, it appears to wash harmlessly over the American and British economies. While ordinary Indonesians and Brazilians certainly suffer, unprotected by the Baudrillard effect, recession on Main Street, USA remains a strangely distant threat. Although growth in the UK is slowing, here too, if there is a recession at all, it looks like being short and shallow.

The Tweedledums of punditry say it will continue to be held at bay by the fundamental vigour of the US economy which, in turn, will shelter the UK and others from the worst of the global storm. Entrepreneurship, new technology and the skill of Alan Greenspan, head of the Federal Reserve and chief economic wizard, mean that financial meltdown in far-away countries will not harm the US.

The Tweedledees insist that the longer the US economy and stockmarket continue to thrive on nothing more than hot air, the harder will be the inevitable crash. Each wobble on Wall Street is like that of a tightrope walker progressively losing his balance before inevitably teetering to the ground.

So, either global financial capitalism is in its death throes, or it is demonstrating its ultimate success by safeguarding from all the turmoil the one economy to have embraced it properly. It's a hard one to call.

So far, the key facts are on the side of the optimists. Low unemployment, low inflation, mutual fund balances boosted by high share prices - the economic measures that people really care about - have convinced US consumers that all is well. Confidence is high, so they are shopping cheerfully, buying houses, starting up companies and hiring staff if they can get them. The virtuous circle that sustains a thriving economy is intact.

And certainly, there is no question that the US is out on the frontier of technological advance, with an impressive capacity to turn weightless knowledge into productivity, sales, profits, jobs and wages. There is, to some extent, a "new economy" that has not been fully measured by the old statistics. The longest expansion since the boom fuelled by the Vietnam war has also been the most stable, with seven years of steady growth and prices.

The reason why anybody is pessimistic about the future in these favourable circumstances - apart from a natural human inclination to think that the good times cannot possibly last - rests on a series of figures that fascinate economists but mean little to anybody else. These figures can be compared to the pressure gauge on a boiler: it may not have blown up yet, but with readings like these it is only a matter of time before something blows. And the bigger the build-up of pressure, the more violent the ultimate explosion is likely to be.

There are several warning lights flashing at present. Share prices have soared so high that companies cannot possibly, it seems, deliver the profits and dividends to justify them. Ratios of share prices to expected earnings or to yields on alternative investments are at all-time records. It is, after all, two years since the revered Mr Greenspan first warned about the possible adverse effects of the "irrational exuberance" in the stockmarket.

More ominously, the US is spending well beyond its means. Household spending is higher than household income. The private savings ratio has turned negative, with the gap financed by borrowing. This borrowing is underpinned by the stock market, so if the bubble bursts it will have a knock-on effect. Calculations by Phillips & Drew, the investment managers, suggest that to keep US growth at its long-term trend rate, household borrowing - and therefore stock-market wealth - would have to increase exponentially from now on.

The excess spending is also spotlighted by a huge balance of payments deficit. High spending by US consumers and businesses is sucking in imports to keep up with the demand. To pay for the imports and finance the trade gap, the country is borrowing huge amounts of foreign capital, making what was once the world's biggest owner of foreign assets its biggest debtor instead.

As long as Wall Street continues to rise, foreigners are happy to park their money in the US. But, once again, to anybody prone to looking on the gloomy side, a lot seems to rest on a fragile bubble of confidence. Can American shoppers, borrowing ultimately from foreign investors, sustain the whole planetary economy? Only as long as foreigners trust the Americans to carry on shopping.

This all sounds a very convincing case for getting worried. The trouble is that the pessimists have cried wolf not twice, not three times, but repeatedly for the past two years. Not surprisingly, they have stopped winning new converts the more the US has thrived and the deeper they have sunk into their depression.

With the financial world dividing into Tiggers and Eeyores, it is perhaps hardly surprising that stockmarkets have been so volatile. No sooner does a shock wave from Brazil or Asia give the Eeyores a chance to say "We told you so", than the Tiggers bounce in because they see a good opportunity to buy shares at a lower price, sending the market straight back up again.

They are probably both partly right. When financial bubbles burst, it is always pretty spectacular. A Wall Street "correction" will mean a dramatic fall in share prices. But adjustments in the real economy occur much more slowly, and often in unexpected ways. The bit that gives way under the pressure could turn out to be a surprise.

Indeed, conventional economics predicts that the result of a debt-financed spending boom and a yawning balance of payments deficit is higher inflation. This is the last thing anybody is worrying about at the moment. Yet there are early signals of it in earnings growth and the prices charged for services. After all, America has run out of workers, so wages are bound to be bid up. Inflation, rather than the next great crash and a serious depression, could turn out to be the heffalump stalking the world economy.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
Arts and Entertainment
Mark, Katie and Sanjay in The Apprentice boardroom
TV
Arts and Entertainment

Film The critics but sneer but these unfashionable festive films are our favourites

Arts and Entertainment
Frances O'Connor and James Nesbitt in 'The Missing'

TV We're so close to knowing what happened to Oliver Hughes, but a last-minute bluff crushes expectations

Arts and Entertainment
Joey Essex will be hitting the slopes for series two of The Jump

TV

Who is taking the plunge?
Arts and Entertainment
Katy Perry as an Ancient Egyptian princess in her latest music video for 'Dark Horse'

music
Arts and Entertainment
Dame Judi Dench, as M in Skyfall

film
Arts and Entertainment
Morrissey, 1988

TV
Arts and Entertainment
William Pooley from Suffolk is flying out to Free Town, Sierra Leone, to continue working in health centres to fight Ebola after surviving the disease himself

music
Arts and Entertainment
The Newsroom creator Aaron Sorkin

TV
Arts and Entertainment
Matt Berry (centre), the star of Channel 4 sitcom 'Toast of London'

TVA disappointingly dull denouement
Arts and Entertainment
Tales from the cryptanalyst: Benedict Cumberbatch in 'The Imitation Game'

film
Arts and Entertainment
Pixie Lott has been voted off Strictly Come Dancing 2014

Strictly
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum