Back in the 1930s, the French government constructed what it thought was an impregnable defence system to prevent a repeat of the German invasion at the start of the first world war. The Maginot Line might have looked impressive but proved to be a white elephant because when the attack came in 1940 it was in a different place altogether.
In the past week the financial markets have displayed something of a Maginot Line mentality. They are right to think there is a threat lurking out there but they are wrong to think the biggest danger is a recession in the US. The real threat comes from elsewhere.
To be sure, the US economy is slowing down, but it is not remotely close to recession. Unemployment is rising but from historically low levels. The US central bank, the Federal Reserve, has left it a bit late to cut interest rates but it can make up for lost time over the coming months. The US economy has staying power and – as in the past – is likely to confound the pessimists. After an extreme bout of the jitters, by the end of last week Wall Street seemed to have come round to the idea that the US is on course for a soft landing. That looks by far the most plausible outcome.
There are two other sources of potential trouble: the Middle East and China. Far too little attention is being paid to the risks that the war in Gaza escalates into a full-scale conflict between Israel and Iran. In the past, this kind of ratcheting up of tension would have led to a sharp increase in the…
