Correction: this could become a crash after all

As traders brace for fresh turmoil, soothing words may simply be hiding reality

The most interesting part of the article is the end -

As Stephen Lewis of Insinger de Beaufort puts it, the real surprise, given what has been happening in the US housing market, is that consumer spending has held up so well. But there is a sense that the consumer is starting to run out of road, with spending propped up by the one-off impact of lower energy prices.

Charles Dumas at Lombard Street Research agrees, and says the increase in borrowing on credit cards rather than the rising value of real estate, is a sign that US consumers are drinking in the last-chance saloon. The vast majority of Americans don't have a yacht and a summer home in the Hamptons; they don't have stock options and they have not seen their salaries rise at 10, 50 or 100 times the current inflation rate.

Given Asia's export-dominated growth is heavily weighted towards the US, investors should be prepared for the 9% fall in Shanghai last Tuesday to be the first of many bad days.

"Household borrowing is the centre of the storm," says Dumas. "When economies fluctuate, services fluctuate gently, construction and manufacturing more violently. Construction we know about: the housing slump is now beginning to be reinforced by a business construction collapse. The US manufacturing sector is now called China, or Pacific-developing Asia more generally. The current US downswing must take the gloss off growth in that region, where asset markets are priced for perfection." A different perspective comes from Stephen King at HSBC. His view is that the global economy is now more than the United States and its satellites. Even if America does slide into recession, there is no reason to assume the rest of the world will follow.

This requires a radical re-think, since we have become accustomed, particularly since the collapse of the Soviet Union to assume the world is unipolar with the US the hegemonic power. King says the weaker domestic demand growth in the US last year did not seem to have knock-on effects elsewhere. Far from catching a cold when the US sneezed, the rest of the world went shopping. "Relative to our own forecasts, the big surprise last year was the strength of domestic demand growth, notably in Canada, Mexico, China, the Middle East, Germany and the UK."

On the face of it, this is a relatively reassuring interpretation of events. If there really has been a de-coupling going on under our noses, it is possible that a US recession could be isolated. Scratch beneath the surface, though, and King's thesis has some potentially serious long-term geo-political - and hence economic - consequences. What could be happening is that we are seeing the very gradual waning of US economic supremacy, with years of budget and trade deficits and two decades of excessive consumption chipping away at what is still a phenomenally powerful economy. Britain suffered from just this process in the final quarter of the 19th century; other nations were growing in strength and Britain was in the early stages of relative decline.

Paul Kennedy argued in the late 1980s that political power derives from economic power. The first doubts crept in for Britain when winning the Boer War in the face of determined resistance and guerrilla attacks proved a lot more difficult than London had blithely imagined. History may show that South Africa between 1899 and 1902 is a better parallel for America under Bush than is Vietnam.