Edwardian Summer  

The "smells like 1914" meme continues to spread, most recently to the pages of the Guardian.

Finally, take a squint at the United States. Just like Britain a century ago, a period of unquestioned superiority is drawing to a close. China is still a long way from matching America's wealth, but it is growing at a stupendous rate and economic strength brings geo-political clout. Already, there is evidence of a new scramble for Africa as Washington and Beijing compete for oil stocks. Moreover, beneath the surface of the US economy, all is not well. Growth looks healthy enough, but the competition from China and elsewhere has meant the world's biggest economy now imports far, far more than it exports. The US is living beyond its means to the tune of $60bn a month, but in this time of studied complacency a current account deficit worth 6% of gross domestic product is seen as a sign of strength, not weakness.

And so it goes on. Iraq is not another Vietnam, the bombs in London on 7/7 had nothing to do with Tony Blair's support for George Bush, rocketing oil prices do not mean a return to the recessions of the mid-1970s and early 1980s. Relax. Don't worry. These guys know what they're doing. Here in the UK, the government boasts proudly about its stewardship of the economy, when all the evidence is that activity collapses like a punctured souffle as soon as action is taken to restrain property speculation. Britain's manufacturing sector is a hollowed-out shell, claimant-count unemployment has risen for six months in a row, the Bank of England is at war with itself over whether interest rates should be cut, and the only person who believes there is not a gaping black hole in the public finances is the chancellor of the exchequer, of whom very little has been seen or heard since the election.

In this new Edwardian summer, comfort is taken from the fact that dearer oil has not had the savage inflationary consequences of 1973-74, when a fourfold increase in the cost of crude brought an abrupt end to a postwar boom that had gone on uninterrupted for a quarter of a century. True, the cost of living has been affected by higher transport costs, but we are talking of inflation at 2.3% and not 27%. Yet the idea that higher oil prices are of little consequence is fanciful. If people are paying more to fill up their cars it leaves them with less to spend on everything else, but there is a reluctance to consume less. In the 1970s, unions were strong and able to negotiate large, compensatory pay deals that served to intensify inflationary pressure. In 2005, that avenue is pretty much closed off, but the abolition of all the controls on credit that existed in the 1970s means that households are invited to borrow more rather than consume less. The knock-on effects of higher oil prices are thus felt in different ways - through high levels of indebtedeness, in inflated asset prices and in balance of payments deficits.

Back in 1914, there was a good case for saying that peace and prosperity would go on indefinitely.