Expert View: Is the US magic touch an illusion?

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The Independent Online

There was only one sensible response to George Bush's visit to London last week: I went to Scotland. However, the President's presence reminded us of two points. First, the 24-hour vigil of a handful of demonstrators outside Buckingham Palace testified to the level of anti- American sentiment. Second, that they were outnumbered by the President's personal entourage (some 500 people in two planes, two motorcades and a helicopter) testified to the extraordinary wealth and power of modern America.

Anti-Americanism is present in the City, too, though it's not quite so obvious. I believe it is hidden in our assessment of the economic prosperity underpinning US power. Time and again, forecasters have underestimated the strength of the US economy. Many, including myself, have overestimated the macro- economic impact of numerous Wall Street scandals and corporate skulduggery. Can we honestly say this has not had something to do with our underlying anti-Americanism?

The evidence piling up against us has become overwhelming. While European stock markets have reacted enthusiastically to the merest flicker of growth in the euroland economy, the US has gone from strength to strength. Excitement that Germany may just scrape into positive economic territory contrasts with our grudging acceptance of revised US growth forecasts from 3, to 4, to 5 per cent and beyond.

This recovery has not just been on the macro front; the autumn results season on Wall Street has been remarkable. Some reports suggest up to 60 per cent of companies have beaten optimistic earnings targets. There has been plenty of evidence at the micro level to support the "great productivity turn-around". The year-on-year earnings growth of the companies that have reported so far averages 21.1 per cent.

I'm sorry, but the US has done it again. It went into recession last, was the first to come out, and it is now recovering the fastest.

Sadly, for those of us who find fault with the American model of capitalism, red in tooth and claw, it is that very ruthlessness that has made its recovery so swift. US companies have readjusted, downsized, regrouped and moved on. "Glass is half empty" economists may scoff and point to a jobless recovery, but they are missing the whole point: the US has done it again.

Or has it? The question remains as to whether or not this recovery has been helped by "artificial" factors. Mr Bush's tax-cutting agenda led to a summer mass-mailing of pre- payment cheques of several hundred dollars to every single taxpayer - a one-off windfall equivalent to the entire US nation simultaneously winning the lottery.

The money to pay for this is not actually in US government coffers. In a move that smacks of the Reaganomics of the early 1980s, the President has basically just borrowed it.

The US current account deficit is now running at 5 per cent of GDP and rising, and this is being paid for by overseas savers (reminiscent of the way in which the Reagan experiment in the early 1980s was financed by Japanese thrift).

Which is why Tuesday's economic data from the US Treasury should have given Mr Bush as much dyspepsia as the crowds in London. The net inflow of capital to the US fell from $50bn (£30bn) in August to just $4.2bn in September. Basically, the world's savers have had enough, and this is a big factor behind the falling dollar. You can buy 50 per cent more for your euro now than you could a year ago.

Of course, we could once more be underestimating the US's ability to readjust its balance sheet. But in the meantime, the anti-Americans are leaving town.