THE BLOOM has suddenly gone off the British and US economies. Until a few weeks ago the business media were stridently celebrating the ease with which they had shaken off the slowdown that hit both stockmarkets and the real economy in 2000-1.
When the stockmarkets bounced back remarkably quickly after the shock of 11 September, there was much establishment boasting about how the US had weathered the weakest recession in decades. Now things don't look so good, however. Share prices fell all over the world last week. US manufacturing output was more or less flat in May.
Meanwhile the US dollar has dropped to its lowest level against the euro for 17 months. The strength of the dollar against the euro has been one of the chief symbols of the dynamism of US capitalism. New Labour under Tony Blair and Gordon Brown has, like the Tories before it, sought to tie Britain's economic fortunes to those of the free market US. And indeed the boom in the US did keep the world economy afloat in the late 1990s, while Japan and continental Europe stagnated.
Between 1996 and 2000 the US economy generated 40 percent of the growth of the global markets. The trouble is that this boom had weak foundations. At the height of the euphoria over the high-tech 'new economy', firms sunk gigantic amounts of money into investments they couldn't hope to make a decent profit on.
Wealthy households, seeing their share prices apparently endlessly rise, borrowed heavily so they could shop till they dropped. The surge in investment and consumption sucked in huge quantities of imports. The US's balance of payments deficit rose to 4.5 percent of national income. Massive inflows of capital from the rest of the world allowed US corporations and their middle class allies to live beyond their means. The recession that developed during the year 2000 represented economic realities beginning to reassert themselves.
Corporate America could no longer afford to ignore the fact that the rate of profit had actually been falling since late 1997. But now the more intelligent ruling class commentators are beginning to argue that the 2000-1 slump was much too mild to remove the underlying problems. Writing in the Financial Times on Wednesday last week, Martin Wolf said 'the conventional wisdom' that economic recovery is under way 'may turn out to be no more than a fairy story for frightened children'.
Wolf argued in effect that a much more brutal slump than has actually taken place is necessary to remove the damage caused by the boom of the late 1990s. Investment has fallen, but nowhere near enough to make up for the vast amount of extra capacity ordered at the height of the boom that cannot now be profitably used.
Moreover, consumer spending has been continuing to rise at what Wolf calls 'astounding' levels. This reflects the strategy being pursued by the Federal Reserve Board (the US central bank) and followed by the Bank of England. Interest rates have been slashed to the lowest levels for a generation. Since unemployment is still comparatively low, particularly in Britain, better-off consumers are being encouraged to carry on borrowing and spending. One consequence is the house-price boom.
According to the Halifax, house prices rose by 4.2 percent in May, a rate not seen even during the notorious boom of the late 1980s, when Tory chancellor Nigel Lawson slashed income tax and drove down interest rates.
Exactly the same process is tacking place on the other side of the Atlantic, as well as in southern Ireland and much of continental Europe. 'In the US house prices have been nothing short of spectacular,' one economist told the Financial Times.
The Bank of England said last week that the current rate of growth of house prices is 'unsustainable', and warned that it may have to increase interest rates to prevent a general rise in inflation. But the Bank of England and the Federal Reserve face a dilemma. A significant rise in interest rates might kill off the rise in consumer spending that is now the main force keeping the Anglo-American economies afloat. There are already signs that the consumer boom is tailing off.
The University of Michigan consumer sentiment index fell to a four-month low in June. 'Having been brimming with confidence just a few weeks ago, consumers seem to have rapidly re-evaluated conditions,' one analyst commented. All of this is grim news for Tony Blair.
Amid the crisis of public services, and the morass of scandals and brawls with the media, he has had just two things going for him-popular hatred of the Tories and the strength of the economy. One of these props may soon be removed.
Alex Callinicos is the author of The Revolutionary Ideas of Karl Marx and a contributor to Marxism and the New Imperialism. Both are available from Bookmarks-phone 020 7637 1848 or go to www.bookmarks.uk.com