Last updated: January 19, 2009 9:02 pm

The Obama economy

The largest economy on the planet has a new leader. One thing that can be said for certain is the US will comfortably retain this top spot throughout President Obama’s first term in office (runner up Japan is only a third as big). But in what other ways might the US economy change over the next four years?

As ever, it is all about perspective. For those in work, things will feel gloomy, but life might not be too unbearable. On an output per capita basis, the average Main Street resident is still almost 40 per cent richer than when George W. Bush took office. House prices are also worth more than in 2000. Sure, debt servicing levels as a proportion of disposable incomes are high at 17 per cent, but this measure is falling, now that interest rates sit at zero.

For many, then, Barack Obama’s first term will just be a grind: work, paying down debts and driving the same car. The growing ranks of the unemployed, however, will find vacancies increasingly scarce, in spite of the new administration’s questionable wish to create 4m jobs. If the unemployment rate is lower in four years’ time than the current level of 7.2 per cent, President Obama can deservedly take a bow.

More important to the welfare of the American people over the medium term, however, is the movement in prices. The recession has dragged the consumer price index to less than 1 per cent year-on-year in December. But with the monetary taps gushing and with seemingly no limit to Democratic spending plans, prices could well turn skyward again within Mr Obama’s first term. Kept in check, this would be welcome, but, if inflation were to run rampant, more wealth would be destroyed than any government could hope to create. Forget the first 100 days. Focus on medium-term inflation expectations

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