A bubble or lack of it in the United States is one of the key variables when looking at the economic prosperity of this state or indeed much of the rest of the world.

The outlook may have recovered a good deal from last year when the world seemed to be staring deflation in the face but as the Economist pointed out recently, there is still a potential nightmare abroad and arguably Wall Street is the biggest threat to the world's economy. A crash in US equity prices is also one of the potential shocks referred to this week in the medium-term review published by the Economic and Social Research Institute and it would certainly have an impact on growth and employment here.

But how realistic are fears of a bubble? Certainly The Economist and many other British experts look at Wall Street and the booming US economy and see a bubble. But interestingly that view is not often shared by observes in the US or here or in many parts of continental Europe.

At issue is whether we are seeing a substantial and sustained rise in productivity brought about by the information revolution and deregulation in key markets such as telecommunications. As Dr Dan McLaughlin, chief economist at ABN Amro says, it depends on whether you believe that the changes currently being wrought are on a par to the coming of the steam engine and railways. If so then the implication is that the economy has moved to a higher growth path and because it is supply driven it is not generating inflation.

So far the US appears to have been doing just that. Over the past three years it has grown by around 4 per cent a year and still inflation is only 1.9 per cent. That level of growth may not seem extravagant to many here but in a very large developed economy it is remarkable.

The chairman of the Federal Reserve, Mr Alan Greenspan, is a convert to this thesis and his fellow Fed member, Mr Robert McAteer of Dallas, is even more hardline in his attitudes. He has even voted against the last two small interest rate hikes in April and June of this year.

This apart, as Dr McLaughlin points out, it is very hard to caution about overvalued stock markets when many equity prices are lower this year than last.

The Dow Jones is up 16 per cent so far this year while the S & P is only up 8 per cent and, if technology stocks are stripped out, it has fallen 3 per cent. The Russell 2000 which is made up of largely smaller stocks is only up 1 per cent. But the technology-dominated Nasdaq is up 33 per cent. And that is probably the key. The issue would seem to be that there is a new sector in the economy and there are probably valid questions about how you value that sector.

The Economist and others also point to the private sector's financial deficit which shows many people are saving less and spending more. But there are questions about how the savings ratio is measured as it may not pick up asset prices correctly. And according to ABN Amro research there is evidence that if you put the wealth effect into disposable income, then consumption is in line with forecasts rather than racing ahead.

The current account deficit is a different story and could be the key if any crash were to occur. For much of last year, as growth around the world fell back or even stagnated, it was the US consumer who spent his way out of the problem. If this had not happened it is very questionable whether the Asian economies would now be recovering or indeed possibly even the Germans and French. That deficit is likely to start coming back somewhat as those economies pick up. But if the rest of the world and indeed Japanese investors stop financing the US deficit, then bigger problems could emerge. So far the deficit is heading for a record 4 per cent of GDP.

For many, there are other problems with an overall bearish analysis. The Bank of England recently reacted to higher property prices by hiking interest rates. There was no sign of inflation in the British economy but with the experience of the late 1980s in mind the Monetary Policy Committee nonetheless voted to raise rates and may even do so again later this month or next.

But the problem with this is that it is probably simply not appropriate to react to a housing supply shortage with interest rates - measures to boost supply would be more appropriate. Indeed if our own Central Bank had had control of monetary policy over the last number of years interest rates would be a good deal higher. Whether that would have simply slowed the economy down or whether it could have resulted in a crash is a moot point. But raising rates in response to higher asset prices is not necessarily valid.

Jane Suiter is at jsuiter@irish-times.ie