World Economic Forum: Good reasons for US to be cheerful

IN RECENT YEARS there has been a consistent theme running like a thread through the annual meetings of the World Economic Forum. Amid the analysis of European Monetary Union, globalisation, the advance of the Internet into all areas of business and the emerging markets crisis, there has also been a growing air of American triumphalism.

And with good reason. After seven years of uninterrupted low inflation, the US economy is still booming. Its technology leads the world, its entrepreneurs have galvanised business across the globe with their invention and energy, unemployment is at a record low and Americans as a whole are now more wealthy than ever.

However, this time round there is a quite tangible change of mood. Plainly, the Americans themselves are as gung ho as ever. But virtually everyone else I have talked to here this year, with few exceptions, thinks the American economy stands at an exceptionally difficult and dangerous crossroads. Few are prepared to defend US stock price valuations at their present levels, and many believe Wall Street has become a financial bubble comparable in size and scope to that which engulfed Japan in the late 1980s. Even among the most optimistic, there is anxiety. Among the pessimistic, there is real fear.

It is hard to argue against these concerns. They are well founded. The US has a huge and growing trade deficit. In a world becalmed by recession and sluggish growth, the US economy has become the only dynamo of any significance. To achieve this, American consumers have been spending like there is no tomorrow. In so doing, they have been supporting the rest of the world. Without the US, the position in Japan, the rest of Asia and Brazil - already bad enough - would be even worse.

This spending binge has been supported by a buoyant stock market, which has made Americans feel much wealthier than they perhaps really are. However, the money to support such spending has to come from somewhere. The truth of the matter is that it is being financed by ever higher borrowing, much of it from the rest of the world.

For how much longer can this merry-go-round be sustained? Not much longer, seems to be the general view here, although naturally you don't hear it from American policy makers. Were it not for the deflationary recession in parts of the rest of the world, US interest rates would already be rising steeply to choke off the inflationary effects of the boom, many believe. As it is, Alan Greenspan is risking his reputation as he works out his remaining years as chairman of the Federal Reserve by keeping an ultimately doomed boom alive. The longer it goes on, the more severe and damaging will be the fallout when it ends, it is argued.

So far, however, nothing has managed to puncture the bubble. The Russian meltdown tried its damnedest, and for a while it looked as if the near collapse of Long-Term Capital Management might deliver the goods. Even Brazil has so far failed to shake confidence on Wall Street fundamentally. Stock prices have defied the doomsters. By rights, the dollar too ought to be falling by an order of magnitude to compensate for the trade deficit. It has not.

So is this going to be the year when things go pear-shaped? That's what many are saying here. What puzzles me, however, is that if so many professional pundits and economists think Wall Street is heading for a serious fall, why has it not already done so?

One possible reason is that private investors in the US have been taught by experience that it pays to buy on the dips. Every time there is a setback they wade back in, believing that bargains like these won't be on offer for long. But it is also because the Federal Reserve has acted to buoy their confidence by cutting interest rates, and when LTCM threatened general systemic damage to financial markets, organising a rescue.

According to the bears - and many supposed experts here seem to be of that persuasion - this is only delaying the final reckoning. I'm not convinced by any of this, plausible though it seems. Just think back to the way the world looked from Davos this time last year. Who then would have predicted that industrial production in South Korea would within 12 months be virtually back to pre-crisis levels? How many people then would have expected monetary union in Europe to get off to an entirely glitch-free start? Who would have predicted that the American boom would continue unabated into the final quarter of the year? And finally, how many forecasters outside the US would have had the Dow still riding high at 9,300?

On the other side of the coin, of course, hardly anyone would have thought the scale of the disintegration in Russia possible. Most of us would have expected Japan to be in slightly better shape by now than it is. Although many predicted a crash, few could have foreseen the degree of strain the world financial system was subjected to, or the volatility we now accept as a way of life.

Even so, I think many of those who observe events from outside the US are missing something here. There is no rule of economics that says business cycles must have only a certain finite length. In recent history, business cycles have not so much died of old age as been murdered by the anti-inflationary policies of the Federal Reserve. Outside stock prices, there is very little sign of inflationary pressure, either in the US or elsewhere in the world. Meanwhile, the Federal government has during the good years recharged its fiscal cannon in a way that gives unprecedented scope for reflationary policy if and when the time demands it.

There is something else that tends to be forgotten in constantly comparing Wall Street now to the Tokyo market of a decade ago. The US government has no target for the stock market, and other than the general prosperity of its people, it has no interest in maintaining it at inflated levels. On the whole, it doesn't engage in market manipulation, as the government did in Japan, and there is no systemic reason why the market needs to be kept high. By contrast with Japan, American business and markets are highly transparent, and the US government rightly attempts to promote private sector enterprise by simply not getting in the way.

The upshot is that there has rarely been a better time to be in business in the US, nor has the opportunity for new business development ever been as great. Whole industries and markets are being radically reordered by the electronic revolution. For the first time companies and individuals can, through the Internet, have a global presence without the need for a global footprint: without the huge paraphernalia of worldwide distribution and marketing which has traditionally maintained global organisations.

American entrepreneurs and wealth creators have seized the opportunity presented by these changes as no others. This is why Wall Street is high. Is it too high? Almost certainly. Will it burst any time soon? Probably not. Even if it does, will the US economy keep up the high-growth momentum of recent years? Yes, of course it will.

Sport
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth gamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Sport
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
PROMOTED VIDEO
Life and Style
fashion Designs are part of feminist art project by a British student
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
News
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
books
News
i100
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game