Global equities rose by about 4 per cent last week as the markets breathed a massive sigh of relief about US fiscal policy. Yet merely avoiding the worst of the fiscal cliff is not enough to ensure a satisfactory outcome for the American economy. The fiscal and monetary strategy which has now emerged in the US bears a very close resemblance to the strategy which has been in place in the UK for the past three years. In the case of Britain, the combination of fiscal tightening along with aggressive quantitative easing by the central bank has so far led to economic stagnation.
At first blush, recent events in the UK therefore do not inspire much confidence that the US is now headed in the right direction. But the two economies are not identical, and there are solid grounds for expecting the US to perform better under its newly adopted economic approach than the UK has done. In particular, the US private sector seems to be in much better shape to absorb the effects of fiscal tightening than the UK private sector was in 2010. Read more