The bull market is back. America's top two economic officials expressed unbridled confidence in the strength of the US upswing on Tuesday. Alan Greenspan, the Chairman of the Federal Reserve Board, told Congress that the US economy could grow by up to 4.75 per cent next year. This would make 2004 the strongest year for the US economy since the early 1980s, outdoing even the boom-time conditions at the end of the past decade.
John Snow, the US Treasury Secretary, stuck his neck out even further. A powerful recovery was already under way, he declared in an interview with The Times. "The US economy is coiled like a spring and ready to go," he told me, with a pent-up enthusiasm that had to be released by stabbing the air with his index finger.
Is this wishful thinking by lifelong Republicans who want to see President Bush re-elected? Is it Babbitt-style boosterism from naive patriots who want to believe that their country will always dominate the world, despite the setbacks it has suffered in Iraq, the scandals on Wall Street and the bursting of the internet bubble? Or is it just honest American optimism, which may be sincere but is all too often misplaced?
I have heard all three explanations repeatedly from European businessmen, politicians and investors whose opinions I canvassed after a recent trip to New York and Boston, where I was struck by the palpable resurgence of economic confidence. Very few Europeans are willing even to consider a fourth explanation for the sudden optimism in Washington and Wall Street.
Isn't it possible that Greenspan and Snow may simply be expressing a rational, considered opinion, which may happen to be right?
The idea that America may genuinely be in the midst of a powerful economic recovery is something that European politicians, businessmen and investors find difficult to accept for a variety of reasons - investors, because they are embarrassingly short of shares on Wall Street; businessmen, because they see only weakness at home in Europe; politicians, because a powerful US recovery would contrast painfully with continuing stagnation in the eurozone. This, I suspect, is why America's boosters rarely get a fair hearing in Europe. I will therefore present here the key points Mr Snow made on Tuesday and offer guidance on whether they made sense.
The sceptics have two major reasons for disputing the evidence of economic recovery that is emerging in US statistics. First, they claim that the vast amounts of overcapacity created during the internet boom will crush investment in the US economy for years. Secondly, they point to America's enormous trade deficit, now running at more than $500 billion, and suggest it will lead to a financial crisis. Mr Snow offered interesting rebuttals for both points. Starting with capacity and investment, the Treasury Secretary conceded that business confidence was the one "missing ingredient" for a strong US rebound. But this situation was now changing. "My contacts with chief executives suggest that the mood is lifting. They are coming out of their funk." This view should not be lightly dismissed since Mr Snow was a chief executive until recently and has a far better sense of US business psychology than the sceptics who deride such comments as wishful thinking.
As Mr Snow rightly notes, US businesses cut costs dramatically during the slowdown and now have very lean cost structures. Many companies now have "very high leverage to any improvement in economic conditions and are poised for a return to strong profitability once demand picks up". With "inventories now tight as a drum", companies will have to start investing and hiring workers quite aggressively as soon as they see order books filling up. It seems, therefore, that the low levels of hiring and investment in the early stages of this recovery could fuel the rebound in the year ahead, rather than pointing to permanent economic weakness. This is a pattern seen in most economic cycles and sceptics ignore it at their peril.
Turning to America's "unsustainable" trade deficit, Mr Snow was equally unperturbed. The $500 billion deficit had less to do with conditions in America or with currency valuations than with weak demand in Europe and Japan. This is a view endorsed by many economists (myself included). Where Mr Snow went further than most was in saying that the US deficit could continue expanding without causing serious financial strains or economic problems. But even on this point he may well turn out to be right.
Asked whether the deficit could expand from $500 billion to $600 billion or $700 billion, he seemed remarkably relaxed: "The deficit probably will get bigger unless Europe and Japan get higher growth. But right now the deficit is 5 per cent of GDP or less and the US has a very productive economy with probably the best risk-adjusted returns in the world. So the US will continue to attract capital to finance the deficit. I don't see this as something to lose sleep over and I don't see it disrupting the world trading system, as long as the capital needed to finance our deficit flows freely to the US."
But surely, I observed, the world was not willing to put up with America's excess spending, since $200 billion of its deficit in the past year has been financed by the Japanese and Chinese central banks buying dollars. At this point he made a crucial point that may well justify America's insouciance about its huge trade deficits and which most Europeans totally miss.
America's currency relations with Asia are based on different principles from its relations with Europe. While US and European authorities have a mutual understanding that they will stay out of currency markets and let the euro-dollar exchange rate find its own level, the Japanese and Chinese governments buy vast quantities of dollars to hold down the yen and renminbi (RMB)and maintain the competitiveness of their export industries. In the past, Washington has attacked such "manipulation", but Mr Snow seemed willing to accept these Asian policies, provided they were matched by measures in those countries to accelerate growth.
Japan, he said, was "now moving forward with the right sort of domestic policies and starting to show some progress". Given the overriding priority to stimulate Japanese growth, Tokyo's reluctance to accept a stronger yen was understandable, he said.
Mr Snow said he welcomed indications that China's Government was "looking at a broadening of its currency band", which now pegs the renminbi strictly to the dollar. But European exporters, who have been devastated as the renminbi followed the dollar down against the euro, should not hold their breath. The US sees a possible loosening of the RMB-dollar link as part of a long-term market reform programme, not a quick fix for today's imbalances: "We recognise that a change in China's policy would need to be done with a broader array of things - for example, banking reforms, stronger financial markets, transparency in corporate governance. I don't think you will see this happening tomorrow or next week."
Why is Washington so patient with Asia? I didn't have the chance to ask Mr Snow, but let me speculate on a possible answer. Maybe US patience with Japan and China reflects the fact that inflows of Asian capital are the key to financing the US trade deficit. The growth of the US deficit has been entirely a function of trade with Asia and has had nothing to do with transatlantic trade, which is almost exactly the same today as it was in 1997.
As long as the Asians are willing to keep buying dollars, Americans can keep on consuming cheap Chinese and Japanese goods. And as long as Americans are willing to consume Asian goods, the Chinese and Japanese will be happy to continue buying dollars. In their currency and trade links, America and Asia are now ideal partners - indeed they seem to be moving towards something like a single currency zone on a far grander scale than the one in Europe. As long as America can maintain its symbiotic relationship with Japan and China, there is every reason to believe that America can enjoy a powerful recovery, regardless of trade deficits, excessive consumption and all the other supposed "imbalances" in the US economy.
Meanwhile, Europeans will be left sulking on the sidelines - sanctimoniously insisting that American prosperity is all built on sand, while the Americans get ever richer.