A good time to cool down

The decision of the US Federal Reserve to end the era of low interest rates was well timed, both internationally and domestically.

In the US, expectations were nurtured so carefully that not only did the 0.25% rise came as a surprise to nobody, but the ground was also prepared for future increases of as much as 0.5% should inflation prospects worsen.

Internationally, it is a good moment for the US economy - which is currently expanding at around 5% a year - to cool down. It is no longer the only locomotive in town.

The rest of the world is on a roll, with India's economy expanding by 10%, China's by 9.8%, Japan's by 5.5%, Russia's by 7.4% and Poland's by 7%. Most Asian countries are expanding strongly, and Latin America - led by a freak 10.7% expansion in Argentina - is also doing passably well.

Even countries in the growth-challenged eurozone (particularly France and Germany) are showing signs of tentative recovery. However, this could all be snuffed out if the European Central Bank decided to put control of inflation above economic growth in order to play the dangerous game of following the Fed upwards.

The longer-term growth prospects for the global economy would be boosted if - as now seems more likely than it did a few weeks ago - the fractious participants in the World Trade Organisation talks decided to cut agricultural export subsidies in order to kick-start the stalled Doha trade negotiations.

Lower trade barriers almost always lead to increases in trade. However, this still leaves the US economy in an exposed position.

On the face of it, it looks as though Alan Greenspan, the Fed chairman, has done a deft job in using low interest rates to nurse the economy from the bubble of the dotcom era to a position in which productivity-led growth has led to higher profits, more employment and - at last - higher earnings. It is an impressive performance.

The trouble is that the underlying weaknesses of the US economy have not gone away, they have merely gone into hibernation. Look at the figures: there is still a record trade deficit, a huge budget deficit, and a stock market (and, to a lesser extent, housing market) at very high historic levels.

And, as various commentators have noted, most US recoveries occur when the current account deficit is small, not huge - as it is now - because recovery usually sucks in extra imports.

If there is eventually a crash or severe correction in the US, there will be plenty of currently silent commentators coming out of the woodwork to point these things out and claim that they knew it was an accident waiting to happen all along.

But that does not mean it will happen. The US economy has been defying economic gravity - and the predictions of the doomsters - for years, and it has so far survived. This is because economic theories ultimately depend not on deterministic equations but on the choices of individuals.

If people and institutions decide not to sell their shares, however overpriced they look, the bubble won't so easily burst. If the US economy continues to defy gravity, we will just have to rewrite the law of gravity.