The Bush boom will end soon - and how it ends will define his second term in office

The President's speech tomorrow will be full of big themes - but one will be missing: the world of economics

Four more years of what? President Bush formally starts his second term tomorrow, a moment he will celebrate with his inauguration speech. The speech will be one of big themes: America's place in the world, its values, its efforts for peace in the Middle East and so on. But there will be one big theme missing: the world of economics, and in particular the unprecedented relationship between the US as the world's great consumer and the other nations that lend it the money to carry on in this role. There may be a bit about prosperity, but there won't be anything about who is paying for it.

Four more years of what? President Bush formally starts his second term tomorrow, a moment he will celebrate with his inauguration speech. The speech will be one of big themes: America's place in the world, its values, its efforts for peace in the Middle East and so on. But there will be one big theme missing: the world of economics, and in particular the unprecedented relationship between the US as the world's great consumer and the other nations that lend it the money to carry on in this role. There may be a bit about prosperity, but there won't be anything about who is paying for it.

Yet when the history of these next four years comes to be written, the economic story - whether the US boom ends in global tears - will loom larger than the war on terrorism and the other aspects of US policy highlighted in tomorrow's speech.

The story can be captured in three statistics. One is the size of the current account deficit: each year the US is borrowing the equivalent of 6 per cent of GDP to cover its import bill. Two is the level of US domestic savings: that is down to 0.3 per cent of GDP - American families are not really saving at all. And three is the growth of retail sales: in December they were running up nearly 9 per cent year on year. That is in dollar terms, not real terms, but allowing for inflation they would still be up around 6 per cent.

So Americans are on a huge, wild consumer boom, the greatest boom the world has ever known. They have been encouraged to do so by US economic policy. Interest rates have been below the rate of inflation and demand has been pumped up by tax cuts financed by borrowed money. And they have been permitted to by foreign economic policy: Japan, China and to some extent continental Europe have one way or another lent Americans the money to do so.

All this is well known. It is not what a president puts in his brochure, because even in a society where the consumer is king there is a clear unease about the unsustainable nature of this boom. Everyone knows that it will end sometime, somehow, and because of something. But no one knows the "what?", "when?" and "how?" The only things we can say with confidence is that the answers to those questions will come clear during President Bush's second term, and that the historical judgement of this president will be largely determined by those answers.

There is lots of analysis, sure, but no answers. I suppose, however, that you could divide the analysis into two broad groups, which you could dub the "big bang" and the "steady state".

Big bang would be for there to be some sudden fall of the flow of money into the US. This could happen were the authorities in either Japan or China to stop their policy of buying US dollars to hold down their own currencies. The dollar would collapse and US long-term interest rates would soar. That would force the US to import less and encourage Americans to save more. Eventually US exports would increase too.

This adjustment would, inevitably, be at great cost. Already there has been some fall in the dollar, but this would be much, much greater. Japanese and Chinese exports to the US would have to fall far further, and that the value of the assets they had built up would accordingly plunge. Other countries relying on the US market would also be hurt, in particular the members of the eurozone. And it would be miserable for US consumers and workers alike, for big bang would surely involve rising unemployment, another US recession and in all probability a global one too.

So no one should wish for big bang, and everyone is aware of the dangers, not least the authorities in Japan and China. Just yesterday the Japanese government made a statement that it would defend the yen, checking its rise against the dollar, and the head of the European Central Bank described the rise of the euro against the dollar as "brutal".

So the steady state outcome is on the face of it much more attractive. Here the adjustment would occur, but would be very gradual. Americans would gradually start to save again - but they would still go on buying their imported BMWs. The dollar might fall a little more - but not by so much as to disrupt the other countries. China and Japan would carry on lending to the US - but gradually shade down their flows.

Finally and importantly, people in the rest of the world would start to increase their own spending so that the world would not be so dependent on the US. We in Britain are doing our bit, increasing consumption by around 4 per cent a year. In fact the UK is now a larger market for the eurozone than the US. The Chinese are doing fine too, with consumption rising by between 6 and 8 per cent a year. But Japan and the big economies of the continent are failing to contribute much to world consumer demand. German domestic consumption is actually falling.

The trouble is that steady state might mean just that: things staying the same with no adjustment, leading eventually to an even bigger bang. Engineering gradual global adjustments is terribly difficult. It requires economic policies not just to be co-ordinated but to be right - or at least not seriously wrong. It requires people to behave as they are expected to behave, responding sensibly and rationally to changes in interest rates, house prices and the like. It requires financial markets to be calm and measured, a characteristic they have never demonstrated to date.

So there is a danger, arguably an odds-on probability, that this year American consumers will carry on spending, maybe not just having zero savings but actually dis-saving for a while. There have been periods in the past in other countries where household savings have gone negative for a couple of years before being rebuilt. There is a danger that the rest of the world will be so frightened of an excessive fall in the dollar that they will pump yet more money into the place and so fail to force any change.

In economics, things often take longer to happen than people think. The internet boom raced to absurd heights because people believed that the new technologies would have a revolutionary impact on productivity. They have made possible big advances - think how we book airline flights on the web - but not quite as revolutionary as people thought.

And so it is with the US economy now. It is growing extremely fast - by more than 4 per cent last year - and productivity is shooting up. By contrast, continental Europe and Japan are stuck. The siren voices say: "Sure there are these imbalances, sure the US is attracting a lot of money from abroad, but that is where the action is."

So will the ultimate outcome - the thing that shapes the Bush presidency - turn out to be big bang or steady state? My guess is that steady state will prevail through much of this year. Everything will take longer. But next year, maybe the year after, there will be, if not a big bang, a series of mini-bangs. And by the end of this presidential term the world will be looking at the next global slow-down, maybe even the next world recession.