The Risk of a Crash

The dramatic events in the world economy during the past two weeks may have lulled governments into a false sense of security.

On the surface they have succeeded in fixing two of the main destabilizing elements. They curbed soaring oil prices by coaxing Opec into production increases (aided by a controversial release of 30m barrels from the US strategic stockpile) and they intervened on the foreign exchange markets to stem what was beginning to look like the free fall of the euro. What they didn't do was address the biggest single economic problem of them all - the prospect of a hard landing for the US economy.

Some economists believe that the US has become a miracle economy. It is now in its (unprecedented) ninth year of sustained economic growth with low inflation. For the past three years it has expanded by over 4% and this year it could even hit 5%. The fashionable theory is that the growth of the US economy - which now accounts for over 35% of all economic output in the Organization for Economic Cooperation and Development area - is the result of a step change in productivity growth driven by the country's pioneering exploitation of technologies related to the internet. The less fashionable view is that the US expansion has been driven by an unsustainable consumer binge, financed by credit and shares, that has drained consumers of all their savings and led to a massive $400bn deficit on the current account of the balance of payments. The alarm bells are already starting to ring amid fears about what could happen if the US stock market boom - which has encouraged people to draw down their other savings - suddenly goes into reverse thrust. If US citizens stop spending more on consumer goods then factories will be hit and also economies abroad that have grown fat by exporting goods to feed the ravenous US appetite for things they can't produce at home. The 25% collapse of the euro is not the result of Eurosclerosis any more. Europe's economy is recovering quite nicely. It is the result of a tidal wave of money being invested from Europe in stocks and bonds on Wall Street and on acquiring companies. If the US economy slows down sharply, this money could do an about turn and flood back to Europe, eventually producing the opposite problem to the present one - an overvalued euro and a down-at-heel dollar.

On Friday the market value of Apple, the computer company, more than halved, from $17.4bn to $8.3bn, following a forecast of lower profits. Earlier in the month Intel, the world's biggest microchip manufacturer, had said something similar. In two weeks Intel's market value fell by more than 40% to $215bn. This week's Business Week, a long-time advocate of the wonders of the "new economy", ran a cover story warning that falling stock market prices - and a collapse of America's booming venture capital market - could lead to a "deep and pervasive" downturn. The case against the Cassandras is that they have been warning about an imminent US collapse for so long that they are being treated like the boy who cried wolf. But this doesn't alter the fact that, once confidence flags, the doomsday scenario could happen - and if it does there will be plenty of people pontificating about how inevitable it all was. The last thing that the Democratic government will admit in the closing weeks of a presidential campaign is that the almighty dollar ought to be devalued back to reality. That's why the US contribution to last week's currency intervention was so modest. But the incoming president may have to deal with a totally different scenario. He had better have a contingency plan in his brief case.