Coggan: US is just putting off the evil day.

Byline: Philip Coggan

The North African crisis may have halted the stockmarket rally for a little while. But as March began, equities were recovering, with the FTSE 100 back at 6,000 and the Dow Jones Industrial Average at 12,000.

However much investors worry about expensive oil, they are more enthused about cheap money. Cash yields virtually zero as far as institutional investors are concerned. Government bonds yield 3-4 per cent at the 10-year maturity, offering little in the way of protection against inflation or the failure of politicians to solve their fiscal crises.

In the meantime, most mornings seem to bring news of good results from the corporate sector. With a third of European companies reporting results, annual profits growth, excluding the financial sector, was around 51 per cent.

The big question is how much of this growth is bought from the future. Most of us are familiar with the concept from Christmas shopping - a spending spree in November and December followed by belt-tightening in January and February. That is why the authorities go to so much trouble to seasonally adjust the retail sales data.

Something similar can be said about government stimulus measures. A huge budget deficit may add to total demand one year but at the expense of belt-tightening in subsequent years, as Britons are now discovering.

The policies of central banks have followed a similar process. For the past 25 years, they have cut interest rates when equity markets faltered. Speculation has been encouraged.

As more debt was taken on, it became even more imperative to cut rates. But easing the pain now means that even more pain will be suffered when rates eventually do have to rise, since those higher rates will be payable on a bigger debt total. Dylan Grice of Societe Generale points out the average rate on US government debt over the past 200 years has been 5.8 per cent.

Thanks to the low rates currently prevailing, the US government is only paying out 10 per cent of its revenues on interest payments - the figure would be 15 per cent if some jiggery-pokery with the Social Security fund were properly accounted for. If interest rates were to revert to the long-term average, that ratio would jump to 30 per cent.

An even more startling analysis comes from Mary Meeker, the former internet guru who is now at KPCB. She looked at the relationship between US GDP and entitlement spending (such as social security and medicare), plus interest payments.

At the moment, the latter make up roughly 11 per cent or so. But on unchanged policies, they will hit 20 per cent of GDP by 2025.

At that point, they will absorb all the US government's revenues. Don't even think about the situation in 2050 when they will hit 40 per cent of GDP.

Of course, policies will have to be changed, entitlements will have to be cut and taxes raised. But the political parties aren't even close to tackling the issue.

The last fiscal deal saw Obama agree to extend the Bush tax cuts in return for a fall in the payroll tax - in short, they added to the deficit, not subtracted from it.

There is much talk of eliminating "wasteful" spending and no agreement on entitlement reform, the only thing that will make a significant difference. That is because cutting entitlements is an invitation to electoral suicide.

So while the British economy is already starting to splutter in the face of austerity, the US government is still motoring. But that is just postponing the evil day when austerity will arrive on the other side of the pond. The stock market won't look so perky when that day arrives.

Philip Coggan is Buttonwood columnist for The Economist