Is the end nigh for American capitalism?

Deconstructing the national psyche for a second, albeit crudely: American identity is largely based on a sense of dynamism, of creativity and of leadership. Since late 2007, these characteristics, indeed such raisons d’ être, have been brought under aggressive scrutiny on the world stage, not to mention thwarted in violent fashion. Or have they?

The answer to this question lies in whether you believe this crisis is similar to previous ones, such as those of the 1970s, 1980s and 1990s, those that the US came through relatively successfully. At this juncture, confidence in the market has again been smashed by a $30bn bailout of US insurance giant AIG following a record $62bn loss for the fourth-quarter, and by confirmation from HSBC that it plans to raise some £12bn from rights issues.

Quite obviously, the post-Christmas rally was little more than a 'dead-cat' bounce (a temporary recovery from a prolonged decline, after which the market continues to fall). The difference now is that the premise of this crisis; the dispersion of risk, and the rapidity at which fiscal and monetary stimuli have been injected into the system, have created a mountain of unknowns and thus fear.

Imbalances and excesses caused by years of short-term boom/bust cycles will take time to realign, and in the interim, markets will alternate between stasis and fear. The bottom line is that credit got us into this mess, and it will be credit that gets us out. However the banks, and other financial institutions, are waiting on the economy and productivity growth, and vice versa. We cannot recreate the first landing on the moon; more wars (thankfully) are unlikely to be used to reignite economies and general fervour. Quite simply, there is no, magic wand quick-fix this time, and the American consumer and his/her standard of living will just have to wait.

Meanwhile, what for markets? If anything, recent events have brought home the obvious, that these do not, and never did, exist in some alternative reality. However, to coin Warren Buffett’s wisdom, "the (US) economy will be in shambles throughout 2009, but that conclusion does not tell us whether the stock market will rise or fall."

Whether you believe Mr Buffett is losing his lustre or not, he is right to highlight that in such an emotive environment, risk can become grossly mis-priced. Investors would do well to digest this. Markets are, indeed, subject to the same laws of action and reaction and transformation that we all are. Gatsby’s dream might have evaded him; the American Dream (albeit a little battered) is simply suspended for now.

Julian Chillingworth is chief investment officer at Rathbone Unit Trust Managers. The views expressed here are his own.