AS THE shadows gather around Tony Blair, the sun seems to be shining on chancellor Gordon Brown. The government announced last week that the number of people seeking work fell in January to 1.46 million, 4.9 percent of those of working age.
The Bank of England predicts that the economy will grow at an annual rate of 3.4 percent in the first half of 2004. This is in line with Treasury projections that had been widely dismissed as too optimistic. But this apparent success story is merely a small detail in a much larger tapestry.
The weekend before last the finance ministers and central bank governors of the G7 leading industrial countries met in Florida. The big story there was the decline of the US dollar. After riding high in the foreign exchanges since the mid-1990s, the dollar started to fall in January 2002.
As Robert Brenner shows in a major article in the latest issue of New Left Review, the American state has adopted a weak dollar policy as part of a more concerted strategy for overcoming the recession that gripped the US economy after the collapse of the last boom in 2000. Particularly since 11 September 2001, tax cuts and vastly increased federal government spending on defence and 'homeland security' have served to boost the economy.
Meanwhile, Alan Greenspan, chairman of the US Federal Reserve Board, slashed interest rates in an effort to encourage consumers to borrow and spend. In the past three years a new speculative bubble has developed on the American housing market with Greenspan's encouragement.
Low interest rates have pushed house prices up dramatically. Better off households have reacted by borrowing more and have boosted their spending.
Brenner estimates that personal consumer spending more than accounted for the entire growth in economic output in the US in 2001-3. Meanwhile manufacturing industry, where firms massively over-invested during the boom of the late 1990s, remains deep in the doldrums. This is very dangerous for George W Bush in a presidential election year. Some 2.8 million jobs disappeared in manufacturing between July 2000 and October 2003.
These job losses have been heavily concentrated in mid-Western states that will be key battlegrounds in what looks set to be a fiercely contested election in November. Despite all the money the federal government has thrown at the US economy, unemployment stubbornly refuses to fall. Hence the importance of the weak dollar, which makes American exports cheaper and thus more competitive in foreign markets.
The problem is that the dollar's fall has been uneven. The euro, for example, has risen more than 40 percent against the dollar in the past two years. This has pushed up the export prices of eurozone goods and services compared to those of its American rivals. As a result, the eurozone economy, which had already stagnated throughout the 1990s, grew by only 0.5 percent last year. The picture in East Asia is very different.
The Japanese authorities have striven to prevent the yen rising too far against the dollar. The Chinese renminbi is pegged to the US currency, so the exchange rate hasn't changed at all.
The state capitalisms of East Asia have been pursuing a strategy of maintaining their exchange rates against the dollar and thereby keeping their exports cheap and their economies growing.
The price has been a huge inflow of foreign currency reserves into East Asia-$611 billion between January 2002 and October 2003-much of which has been lent back to the US. Martin Wolf of the Financial Times calls this 'the biggest 'aid' programme of all time... It has allowed the US to enjoy both guns and butter, without needing to choose between the two.'
Naturally the Europeans aren't too keen on this set-up, which leaves them bearing the main burden of the weak dollar policy. They secured a statement at the G7 meeting that effectively called on the East Asians to let their currencies rise against the dollar, but no one imagines for a moment that they will take any notice. As usual, Britain is piggy in the middle in this Euro-American standoff. Brown has relied on a US-style housing bubble and consumer boom to keep the economy going.
But he can't use the pound to take the strain off manufacturing industry. Sterling has fallen against the euro and risen against the dollar. This is the wrong way round, since the US is growing much more quickly than the stagnant eurozone. Britain could easily fall victim to a very fragile world economy.
Alex Callinicos is the author of The New Mandarins of American Power (£13.99) and The Revolutionary Ideas of Karl Marx (£5.99). Both are available from Bookmarks, the socialist bookshop. Phone 020 7637 1848.