Good for shares, bad for houses, was my instant reaction to George W Bush’s re-election. As far as the economy goes, his second term looks as if it will be the opposite of his first.

An indication of this came on Tuesday night, before the polls had even closed. Wall Street was storming ahead, expecting Mr Bush to win.

Then a report on the Drudgereport website said John Kerry was ahead in the exit polls. Shares immediately retreated, led by pharmaceuticals: Kerry had a proposal to cap drug prices as part of his healthcare reforms.

Yesterday, traders had recovered their confidence and the Dow-Jones resumed its march upwards, while the FTSE-100 closed at its highest level for more than two years. Everybody knows business-friendly Republicans equals rising company profits, or so the reasoning goes.

Today, the economy is growing steadily, in contrast to the situation four years ago, when news of Mr Bush’s victory (Florida notwithstanding) was accompanied by the first-ever profit warning from Microsoft. The dotcom boom had turned to bust, the economy was teetering on recession and unemployment was rising. And that was before September 11.

The reversal-of-last-time theme will continue next Wednesday. In all probability, the American central bank will raise interest rates from their current 1·75 per cent. In 2000, interest rates were on the way down. Unlike his father, Mr Bush has much to thank Alan Greenspan for.

The immortal chairman of the Fed did not scupper Dubya by raising interest rates dramatically, as he did during Bush Snr’s re-election bid. Greenspan’s tenure expires in January 2006, when he will be close to 80. If he finally retires, he will do so with the blessings of the Republicans, but perhaps not of the Democrats.

The most serious economic problem facing Mr Bush is his overdraft, expanding by the minute thanks to his penchant for cutting taxes while simultaneously spending like a drunken Democrat on everything from social programmes to homeland defence.

This year, the budget deficit is forecast to hit $450 billion (£245 billion). In cash terms, that is a record, although, once adjusted for inflation, it is still half the size of Ronald Reagan’s effort in 1983. America also has a huge trade deficit, but that does not matter so much. A trade deficit is often a sign of a healthy economy where consumption is strong.

A prolonged deficit in the public finances is a different matter altogether. It can seriously undermine confidence in a country’s currency and its institutions. If the dollar comes under renewed pressure, inflation could take off on the back of more expensive imports and the Fed would be compelled to respond by raising interest rates again.

The markets are already alive to this risk. Two weeks ago, a leaked Pentagon paper suggested that the defence department needs another $80 billion for Iraq.

During the election campaign, Mr Bush also committed himself to making his tax cuts, which expire in 2008, permanent. He also said he would halve the government deficit by 2006. It is hard to see how he will meet all these mutually inconsistent pledges.

Last night, even as stocks rose, Treasury bonds dropped after the US Treasury said it would need to borrow another $51 billion as soon as next week. Treasury bonds are yielding 4·12 per cent, which is an indication of where the market expects interest rates to be in the medium term.

If interest rates do shoot up, the American housing boom will come to a shuddering halt and the economy will slow sharply. In Mr Bush’s first term, Asian central banks have in effect been funding his profligacy by buying most of the bonds he has issued. Without their help, the dollar - which has anyway declined by about a fifth - would have plunged. Will the Asians fund Mr Bush for another four years? I doubt it. Not if the dollar goes off a cliff, they won’t.

With a 10-gallon question mark hanging over the credibility of his finances, Mr Bush’s choice of Treasury Secretary is perhaps the most important decision he now has to take. Whoever it is must be a substantial figure, with credibility on Wall Street.

Both of his first-term appointments - Paul O’Neill and then John Snow - were disastrous. Mr O’Neill was sacked and ended up writing a comically bitter memoir in which he complained of being left out of White House meetings. And the only time I met Mr Snow, I thought he was a sort of bad-tempered golf club secretary, with even less authority than his predecessor.

One thing Mr Bush could do to hold down a potential surge in inflation is to tap into the strategic petroleum reserve (SRP). It is close to capacity and there is a theory that he has been quietly filling it up in case he needs to attack Iran.

A more sensible course would be to make some of it available now. The oil price is already drifting below $50 a barrel, and a good soaking from the SRP would make it droop further.

A reviving elixir of cheap crude would also help counter the greatest economic threat: China. Its economy is overheating, and if the Chinese currency’s peg to the dollar breaks, everyone - not just Mr Bush - could be in for a nasty inflationary shock.

 © Telegraph Group Limited;sessionid=ZWEEHFF5DCVGFQFIQMGCM5WAVCBQUJVC?xml =/opinion/2004/11/04/do0404.xml&site=15&secureRefresh=true&_requestid=12776 By George Trefgarne  (Filed: 04/11/2004) --   duck feed - duck web - duck list - feed the duck -

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