It has been great. For eight and a half years, the UK economy has expanded steadily, and without causing much of a rise in the general level of prices.
If the British are morose about the railways and the hospitals and the rain, it is only because they have come to expect better of the world. An average UK economic growth rate of less than 3 per cent sounds less than spectacular but, over eight years, it compounds to a marked increase in material prosperity.
British unemployment has fallen to the same proportion of the workforce it was a quarter of a century ago. Employers rather complain of a shortage of staff. The economic bungling of Heath and Callaghan and the freakish experiments of Thatcher and Major are mere memories. The country has so gained in economic self-confidence that it can contemplate a second term of office for a Labour government, more money for the worst public services, immigration to the UK and the continued independence of sterling. None of those was even remotely on the cards in the dark days of 1992.
Yet the new year has brought portents of gloom from across the Atlantic. Is the United States, which has led the world economic expansion, about to tip into recession? Or is it already in recession, and soon to drag down Europe and Asia behind it?
On 3 January, while Wall Street traders were eating their frugal lunches, the United States Federal Reserve cut interest rates by half a percentage point. The so-called fed funds rate, the overnight lending rate that is most susceptible to Federal Reserve manipulation, was lowered from 6.5 per cent to 6 per cent.
The action came out of the blue. The full Federal Open Market Committee was not due to hold its meeting on interest rates until the end of this month. And it was only on 19 December that Alan Green-span, the chairman of the Fed, signalled that he was more anxious about recession than inflation. (Recession is defined in the economic dictionaries as two successive quarters in which business activity contracts.)
Wall Street at first couldn’t believe its good fortune. A fall in interest rates, because it makes money cheaper and more freely available, is a stimulus to business activity and to financial speculation. The Nasdaq Composite index of technology stocks rose by more than 14 per cent, the largest daily increase in its 30-year history. But, by Thursday 4 January, the United States was having second thoughts. In the bizarre psychology of the stock market, the half-point cut had become bearish, for it showed just how anxious Greenspan had become.
Greenspan, who is pushing 75 and looks like Methuselah beside the puppyish president-elect, George W Bush, has an aura of infallibility that even popes do not generally enjoy. Since being appointed chairman of the Federal Reserve by President Reagan in 1987, Greenspan, it is commonly agreed, has saved Wall Street from the October crash of that year, recapitalised a thoroughly insolvent banking system, steered the US economy through crises of confidence in 1997 and 1998, and presided over the longest business expansion in the history of the western hemisphere.
Cherished as much for his love of gritty economic facts as for his impenetrably Delphic utterances, Greenspan long ago reduced his fellow Fed governors to yes-men and -women. Nominally Republican, Greenspan was twice reappointed chairman by the Democrat President Bill Clinton. If anybody can understand and steer the immense engine of the US economy, it is Alan Greenspan. If he says the US economy is weak, it is.
As befits a psychological phenomenon, recessions often have mysterious origins. The last general recession began in the summer of 1990, while the world was distracted by the Iraqi invasion of Kuwait. It may be that we were too busy scrutinising ballots in West Palm Beach County in November and December to appreciate the warning signals. By 19 December, when Greenspan altered his stance on interest rates, the US economy may have stopped growing.
What seems to have happened is that US corporations have invested in technologies that will not deliver a positive return. In effect, the internet revolution will not provide extravagant gains in productivity. With little hope of turning a profit on such a super- surplus of invested capital, US companies must also pay higher oil and wage bills.
The result is a squeeze on profits. That might explain why the Nasdaq Composite has fallen 50 per cent from its peak, a capital loss that itself undermines confidence and increases recessionary caution.
Yet a recession, like a visit to the dentist, need not be so very malign. The United Kingdom does less than one-twentieth of its export business with the US, so a slowdown across the Atlantic would hardly cripple business activity here. In the UK, there has not been such obvious over-investment. That is why we are still fascinated by the Millennium Dome, a misallocation of only £1bn of our money.
Gordon Brown, the Chancellor of the Exchequer, has promised a fiscal expansion this year to finance improvements in the National Health Service. In a slowing UK economy, that might turn out to be rather well timed. Finally, sterling is weakening against the euro, the currency of our main export market, and that should help manufacturing and agriculture.
In reality, a severe US recession, after so many years of economic expansion, is likely to put the wind up almost everybody. The danger is that even a modest business downturn will cause some over-supported US bank to fail, and suck money out of the system faster than Greenspan can pump it in. That is what happened in the early 1930s when, one by one, the banks ceased to lend to their customers. Rumours flew up and down Wall Street on 5 January that Bank of America had lost its capital through bad loans. Bank of America went so far as to issue a statement that it knew of no reason for the rumours; but, by that time, the markets were thoroughly rattled.
Up until the Depression, recession had a moral character: it was supposed to purge the body economic of the greed and excess that attends a business expansion. Recession gradually lost its moral tincture, but it was thought at least to winnow out the bad loans and doubtful business practices as part of some quasi-natural process of decay and regeneration on the economic forest floor. The Greenspan bull market of the Nineties changed all that.
For his devotees on Capitol Hill and in the financial markets, Greenspan has not only made the business cycle redundant in the “real” world of manufacturing, agriculture and retailing, but also – and this is quite unprecedented – somehow guaranteed Wall Street against loss. As Christine Callies, a US investment strategist at Merrill Lynch, was quoted as saying in the Financial Times of 6 January, the Fed has shown that it is “committed to maintaining relatively stable and liquid capital markets”.
A central banker who is human is worshipped like a demigod. Now, that’s what I call bearish.