The waning of consumer confidence does not, however, tell the full story behind the recession fear. Other factors are at work as well. To begin with, over-investment during the boom years and dampening demand are leading to higher levels of unutilised capacity in American manufacturing industry located both at home and abroad. At the same time, rising costs (driven among other factors by the increase in oil prices) are squeezing profits further.
 
American companies are responding to this situation by downsizing massively. According to media reports, the Chicago-based international outplacement firm Challenger, Gray & Christmas has estimated that monthly layoffs among top US corporations tripled from 44,152 in November to 133,713 in December, with the bulk of the rise coming from retailers and auto companies. The US Labor Department has also reported that initial weekly claims on unemployment insurance rose to 375,000 in the week ending December 30, which is their highest level since July 1998.
 
With jobs under threat, the fall in consumer confidence induced by the decline in the NASDAQ has been aggravated by consumer fears that incomes earned today may disappear tomorrow. The question then is whether the reduction in interest rates and further such reductions expected by analysts, would be adequate to stall the deceleration in the growth of consumption and output. It is widely accepted that if at all a decline in the cost of credit would directly spur consumption and investment, this would occur only with a considerable time lag.
 
Indeed, it may be the case that such a step, by further fuelling expectations of a coming recession and associated job loss, would actually have the contrary effect of reducing consumption rather than increasing it. Thus, a similar measure in Japan in the recent past, when interest rates were slashed to near zero in the effort to revive consumer spending, actually led to increased personal savings and further reduced consumption, as consumers identified this as an attempt to ward off recession and reacted by trying to safeguard future incomes. Retail sales in Japan have been declining for 45 months in succession. Since consumer spending there accounts for 55 per cent of GDP, the impact on the Japanese economy has been obviously adverse.
 
This “liquidity trap” element in interest rates would have been easily understood several decades ago; the recent obsession with finance as somehow independent of the real economy has meant that this insight is now less obvious to monetary policy makers.
 
Hopes of any indirect positive consequences of the interest rate cut - through a revival in stock markets - were quickly dashed when, after a rise in the NASDAQ immediately after the Fed’s announcement, the index resumed its decline the very next day. The Fed therefore has little to bet on other than the so-called “headline” effects of its decision. It is now argued that consumers convinced that the Fed would not allow a slide into recession would resume their shopping spree. In reality, few are convinced that the Fed can do very much to revive either the stock markets or the economy, paving the way for expectations of a recession to become self-fulfilling.
 
In the circumstances, the only hope for the US economy today stems from the possibility that its new President would quickly implement promises of massive tax cuts and opt to reflate the economy with higher expenditures. Democratic opposition to tax cuts is waning in the face of the threat of recession. And Republicans have been known in the past to flout their own opposition to larger government expenditures once they are in government.
 
It is expected that the independent Congressional Budget Office would place the estimated budget surplus over the next 10 years at $6,000 billion. This does provide President Bush with some leeway to push ahead with tax cuts and larger expenditures without generating a budget deficit that the American media and its people have been taught to dislike.
 
But there are dangers inherent in such a move as well. Though unemployment is rising now, it still is placed at just 4 per cent. Given the current context of high and rising fuel prices, strong reflationary initiatives could stoke inflationary pressures forcing the Fed to revert to its obsession with controlling inflation above all else. Making the American miracle of the 1990s last is unlikely to be easy, if at all possible.
 
Predictions of the likely future aside, recent events have clearly put paid to two myths that have dominated discussions on American growth in recent times. First, they have damaged if not demolished the argument that the productivity benefits flowing from the information and communication technology revolution have changed the nature of capitalism, rendering a combination of high growth, low unemployment and low inflation the rule than the exception.
 
Second, they have forced votaries of the idea that capitalism works best when markets are left alone, to make the case for or actually initiate drastic State action. Everybody looks now to Alan Greenspan, at the Fed, and President Bush, at the White House - both free market ideologues - for concerted action aimed not at sustaining the heady boom of the late 1990s, but at preventing a crash by paving the way for a soft landing. But as is characteristic of markets, such expectations can easily be belied.