World Economic Forum: Good reasons for US to be cheerful
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.
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