It's been a swell party, but it may be drawing to a close

IT HAS been quite a party. The United States has just ended one of the most prosperous, happiest years in its history, its enjoyment entirely untarnished by the bizarre circus that is playing out in Washington. Most of the nation has simply been enjoying itself, riding a tide of optimism that has been powered by a booming economy.

Six months ago, I wrote about the remarkably positive mood of the US, the slightly unnerving sense of living in a country that was experiencing a time as good as any in its history. Despite everything, that persists - for the most part. But it is coming to an end. The party is starting to wind down, and the guests are beginning to check their watches.

The sense of good times is still there. Successive opinion polls show the country as content as it has been for decades. Consumer confidence, though down from its historic highs of earlier last year, is still very high. Unemployment is still at thirty-year lows. The Dow Jones index has just recorded a fourth straight year of double-digit gains. A table-load of facts and figures confirms an enormous drop in crime.

Last month, the economic expansion became the second longest in history - at seven years and eight months - outpaced only by the long boom of the 1960s. There was a counterpoint to this by a spreading sense of anger as a war in South-East Asia spun out of control. However ill-considered and dangerous American policy in Iraq may be, it has so far caused no body-bags to be brought home.

A decade or so ago, crime was rising rapidly, along with unemployment, while growth and jobs were ebbing away. After the long Reagan boom, with all of its promises of Morning Again in America, the country was waking up with a hangover. And it was fashionable to speak about decline - not just a cyclical downturn, but a long term, secular decline that would see the American century end with the millennium.

The most literate, coherent and intellectually credible version of this came from Paul Kennedy, of Yale University. In The Rise and Fall of the Great Powers, published in 1988, he laid out a history of all the world's hegemonies, and the arc of their destiny. America, he said, could not escape a similar fate. As America grew more powerful and its interests abroad proliferated, it had to spend more and more money on sustaining its international position, Kennedy argued. That debilitated the domestic economy.

At the end of the 1980s, it was a common view: America was running vast budget and trade deficits, and the nation's debt was mounting. Yet it was still pursuing global domination, with the bills for the Pentagon's weaponry sky-rocketing every year. It was losing ground in some key export markets, especially high technology, and industry had been hollowed out by a decade of mega-mergers, leveraged buyouts and asset stripping.

It was a brilliant analysis, but it doesn't look so good as the next millennium looms. Since the Kennedy book, the Cold War has ended and defence spending has come down by 40 per cent. That, along with seven years of healthy growth, has turned the federal deficit into a surplus. Despite its concerns about Iraq, North Korea and so on, there is no nation on earth that threatens the US militarily. And the economic rival that was being lined up as the new nemesis - Japan - has plunged into economic turmoil.

Domestically, the economy has apparently found new sources of growth, which have been capitalised by its theorists as the New Economy. The combination of technology and globalism has become a new religion: through software, America believes it has found salvation.

Technology is the deity, the key to entertainment, finance, the economic recovery, and hence the feelgood factor. The Dow Jones may have soared, but the Nasdaq index - which concentrates on technology stocks - has exploded, rising 40 per cent last year.

And it is the rising stock market that kept the economy growing. At the end of last year, the savings rate - the amount of cash people spend divided by the amount they earn - became negative for the first time since the Great Depression.

The conventional economic analysis is that a rising stock market increases consumer wealth, which keeps spending up, which in turn boosts stock market prices. Another, more cynical way to describe it is that a small group of people go out to buy natty new computers and software, which they use to trade the stocks of software and Internet companies, which pushes up the prices of those companies, which generates wealth for the small group of people, which they spend on even nattier software.

For all sorts of reasons, this cannot continue. For a start, it amounts to a high-tech version of taking in each others' washing. The valuation of stocks is far too high, about 20 per cent overall. Some of the internet companies have yet to show they can make any money at all. Consumers cannot keep spending more money than they have, and companies, too, are borrowing faster than at any time in a decade. Furthermore, the trade deficit is rising once again to unsustainable levels. At some point in the next few months, the party is going to end - badly.

The country is still phenomenally strong, its economy still dominant, its hold on key technologies almost unchallenged in some areas. But most of the points made by Mr Kennedy 10 years ago still hold good. The trade deficit is vast and accelerating, and America's taste for imports is unsustainable. Take those computers, for instance. America runs a trade surplus on capital goods overall, but on computer accessories it runs a deficit of some $20bn. Every time one of those smart people buys another nice box, the software may fly the stars and stripes, but the rest of it is sure to be foreign.

Of course, it has not mattered very much for the last year that the US was running up a massive trade deficit again. It was the consumer of last resort, propping up a very sick world economy. And global investors have been more than happy to finance the deficit by buying US securities: after all, America seemed the only safe haven, its stock market kept running ahead while others collapsed, and low inflation kept the dollar attractive.

Most Americans have been no more interested in the rest of the world for the last few years than they have in their own (increasingly bizarre) domestic politics. They had better things to do, like making money, and spending it. But the US has been reminded in the last six months, by Iraq, by Russia and by the Asian economic crisis, that the world can easily impinge on its domestic bliss.

America believes in its heart that its happy days have been its own creation, through hard work, technology and ingenuity. But in many ways, the Golden Nineties had as much to do with a benign international environment that left America unchallenged and made its stock markets look more attractive than anyone else's. In the next year, all of that could change.