The Telegraph
Since 1st March, 1999
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The economy of the United States of America shows signs of revival, although questions have been raised about gross domestic product deflators used in the US to convert nominal growth into real growth. It is therefore possible that real growth in the US is over-stated. But the more important point is what has driven growth in the US, because that determines whether growth is sustainable. High consumer-spending has been driven partly by a wealth effect, since share prices have increased. The moot point is whether this increase in share prices is more than warranted. If that is true, as some economists argue, prices will drop to more reasonable levels later and adversely affect consumer spending. Consumer expenditure has also been driven by increased debt.

Sooner or later, debt-driven expenditure is bound to shrink. More important, this combination of artificially low interest rates and high fiscal deficits is clearly unsustainable. High US trade and current account deficits are not due to unfair competition from the rest of the world. Instead, they are due to low US domestic savings and high private and government expenditure. This could continue as long as foreigners were willing to plough in their savings into US bonds and shares. There are signs, especially from September, that this is no longer the case. Compared to the $ 50 billion inflow in August, September produced only $ 4 billion. Rather perversely for a Republican administration, reducing the fiscal deficit is not an option. Instead, other than protectionism, the US government has pegged its hopes on reducing the dollarís value. Since 2001, the dollar has already depreciated against the euro by more than 40 per cent. Rapid depreciation can of course increase bond yields in the US and thereby constrain the incipient recovery. However, depreciation helps eliminate or reduce trade and current account deficits. The moot point is whether the 7 per cent plus real growth registered in the third quarter is likely to continue in the fourth quarter and in 2004. That depends on the three drivers of third quarter growth ó personal consumption, business fixed investment and federal defence expenditure. That apart, growth does not necessarily translate into employment increases. In the Nineties also, productivity increases in the US led to fewer jobs being created. But that growth was sustained over a longer duration and loss of blue-collar jobs was somewhat different from loss of white-collar ones. As Mr George W. Bush is learning and as Bush senior will vouch, managing the economy is not easier than managing Iraq.

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