CITY AND BUSINESS: The walls are closing in on Blair

We know Tony Blair has a wide range of personal interests. Remember, he played guitar in a rock band and is a keen supporter of Newcastle United. I wonder if he ever read Eldridge Cleaver's Sixties classic, Soul on Ice. If he hasn't, maybe now's the time.

In the jailhouse memoir, the late American Black Panther compared life in his cell with life outside and found little difference. Describing his methods for asserting himself in the face of American racism, he declared: "I am attempting to perform a series of extremely intricate manoeuvres in a very tight space."

In the two years since the May 1997 general election, Blair has had no need of the activist's wisdom. Now that's changing. The slanging match between Blair and John Prescott is even more serious than is generally perceived. It's not only about the value of public services. It's a debate about the validity of the Third Way.

"John," says the Prime Minister to his deputy, "I need your constituency to support me if Third Way policies are going to come good. I bear scars on my back from allies of yours withholding that support."

"Tony," the Deputy Prime Minister replies, "you believe the Third Way will deliver social justice while making us more competitive in global markets. Not everyone is so sure. Unlike your constituency, my constituency will suffer if Third Way policies fail."

Last week, in the face of this debate, the Third Way rolled on. The Prime Minister announced a public/private plan to build six new hospitals for pounds 650m. The Government announced the Post Office would become a publicly owned PLC - protecting jobs for the workers and posties in the Outer Hebrides while positioning it to compete in the online world.

There are political reasons for Blair and Prescott to fight. We shall almost certainly have a Cabinet reshuffle later this month. The new Cabinet will oversee Phase Two of the Third Way - and middles are always tougher than beginnings.

There are, however, no obvious economic reasons for Blair and Prescott to fight. The first great blow to the post-Cold War global economy - the pricking of the Japanese asset bubble - happened before he came to power. Since then, Japan has suffered something approaching a 1930s-style deflation. But the rest of the world has been insulated because Japan is a nation of savers, and its citizens have been living on savings stuffed in the mattress.

Last year the Asian asset bubble collapsed. For a moment it looked as if the whole world was going to follow the region into deflation. But Alan Greenspan and other Group of Seven central bankers opened the money taps. G7 economic policy makers have acted skilfully to mop up after the emergency.

Consumer confidence is rebounding. Investors - at least, US retail investors - barely remember that the New York Stock Exchange actually closed at the height of the panic.

And yet, despite the good economic news, there is an underlying economic logic to the Blair-Prescott fight last week. The London and New York stock exchanges may have hit record highs last week. Gordon Brown and Eddie George may have engineered a soft landing for the economy. We may be in for a modest but not unhealthy expansion of the the economy this year.

But virtually everyone, from the shrewdest City fund manager to the most lowly wage slave, shares a sense of foreboding. Maybe the best is behind us. Maybe there really is something unreal about the good times we're enjoying.

The financial world runs these feelings through the prism of its disciplines and comes out with a more sophisticated sense of foreboding.

"All the US fund managers I talk to have their clients' money fully invested," says investment adviser Andrew Smithers. "But these same fund managers have their own money in cash."

In parts of the financial world there is now something approaching mute panic about Japan. Two weeks ago, the country's long-time Deputy Minister for International Finance, Eisuke Sakakibara - "Mr Yen" - stepped down. He was replaced by Haruhiko Kuroda.

Mr Sakakibara kept the Japanese financial system from haemorrhaging money - despite the fact that interest rates are zero - by allowing the yen to rise. The gradual appreciation of the yen gave global investors a reason to stick with their yen-denominated assets despite zero interest rates.

But Mr Kuroda is thought to be opposed to a strong yen. A weak yen, he thinks, will help Japan by helping Japanese exporters. But if Mr Kuroda plumps for weak yen, the floodgates may open and a selloff of Japanese financial assets could destabilise a still-recovering global financial system.

In every nook and cranny of high finance, meanwhile, a debate rages about the US economy. The New Paradigmers hold that the internet and other new technologies have set the stage for a long-term boost in productivity. This prospect, they hold, means the record stock market makes sense.

High share prices, in turn, bolster the confidence of American consumers - thereby completing the virtuous economic circle. The sceptics say the New Paradigm is an illusion. They focus on the steady rise of debt in the US.

"The short-term outlook for the US is rosy," economists at HSBC write in an analysis of prospects for the three months ahead published last week. "But the medium-term risk is that the bubble could burst."

So far the bears have been wrong. The bulls taunt them by asking them what will trigger an end to the American economic boom. The bears reply that any trigger they can describe is by definition not a trigger because it has been foreseen and discounted. The US asset bubble will burst, they say, when an unforeseen event comes along.

One place to look for a trigger is US electoral politics. For eight years outgoing US Treasury Secretary Robert Rubin and incoming Treasury Secretary Lawrence Summers have orchestrated a consensus on US economic policy. So the US has presented a unified front in pressing globalisation upon the world.

But as the fight for the White House picks up steam, the Rubin/Summers consensus may crack. Democrats want Washington to use the fruits of globalisation on government spending programmes. Republicans want them distributed as tax cuts.

Here, in the meantime, Blair must press his case for signing on to America's globalisation project as that project ages - runs into disagreement at home, falters perhaps as a generator of wealth worldwide.

Tony Blair's way so far has been The Third Way. It may soon become Eldridge Cleaver's way. The Prime Minister is increasingly likely to find himself attempting to perform a series of intricate manoeuvres in a very tight space.

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