As we enter 2004, the world's stock markets are booming. They rose on average 25% during 2003, reversing the previous three years which saw stock market prices fall over 50%, the biggest decline since 1929-32.

The big financial institutions and investors have become hugely optimistic about the revival of economic growth and employment. They reckon that the weapons of mass growth (WMG) will be found. Everything is looking better, according to the latest intelligence sources, Messrs Bush, Blair, Schroeder and Greenspan tell us.

Indeed, when the US government statisticians announced that in third quarter of 2003, the US economy expanded at an 8% pace, it seems difficult to deny that things are much better than they were this time last year. This is a fake figure in itself. It represents the increase in one quarter of the year annualised, which is multiplied by 4! The underlying growth figure is closer to 3%.

But now the expert pundits are predicting 4.5% growth in 2004 for the US, 2.5% in Japan and Europe. This time last year, they said the US would grow 3%, and Europe and the UK 2.5%. Well, they were right about the US, but completely wrong about Europe, the UK and Japan. Indeed, Germany virtually stagnated in 2003, while the UK slowed down to under 2% and Japan's growth stayed under 1%.

So why did the US prediction come right? And does that mean we can trust the spin doctors that there really are WMGs in the world economy?

The reality is that US growth in 2003 was artificially created and will prove to be ephemeral in 2004. It was bumped up by a massive injection of paper money into the economy by the Federal Reserve Bank. With interest rates at an all-time low of 1%, it actually paid everybody to borrow as much money as they could. In turn, most of this was invested in buying houses, not in real production. As house prices continued to skyrocket, American families remortgaged their homes at lower interest rates, while borrowing more on their more valuable houses. They used the extra money to spend more on DVDs, cars, eating out etc.

But all this spending was not backed up by any real increases in the production of factories in the US or in the income of workers in them. Indeed, manufacturing wages hardly increased during 2003 for the average worker. Companies went on sacking more employees (at least until the last few months of 2003) and clamped down on any wage increases. They also reduced the pension and health benefits for their workers. Sure, the likes of real estate agents and financial consultants had a great year. But the average punter saw nothing of this supposed prosperity.

All this increased spending that kept the economy moving was borrowed by households who have never been more indebted. And it ended up mainly in the hands of the big corporations in profits. During 2003, profits rose 30%!

Even so, profit levels are still below their peak of 1997. So the companies want more. Consequently, they are keeping their production costs down, especially as they have to compete with the likes of China and the rest of Asia who continue to flood US markets with their cheap goods. That means corporations are not going to rehire sacked workers or boost investment in machinery and plants much this year.

And here is the problem for Bush and his mates in his re-election year. The economic recovery of 2003 was based on cheap money and tax cuts. But interest rates cannot be cut any more and the effect of the tax cuts is waning. In 2003, Bush cut the taxes for the 185,000 millionaire earners by over $70,000! But for the bottom 85% of American income earners, the tax gain averaged just $209. There will be some more handouts this year, but by the middle of the year they will be over. And Bush cannot contemplate another round of cuts because the combination of his handouts to the rich, plus the huge spending on invading Afghanistan and Iraq, plus the occupation of those countries and the cost of protecting American citizens from the terrorist consequences is immense.

The budget deficit that the US government is running is now over 5% of annual output and going higher – that's a record. And there is no sign that Bush, Cheney and Rumsfeld can extricate themselves from the mess in these countries. As I said in this column this time last year, before the war in Iraq was launched:

"Sure, US firepower may triumph in Iraq. But will Saddam be captured? Even if he is, will the clever, educated Iraqi people accept an American-imposed dictatorship? And will the Arab and Palestinian masses stand by while America and Israel impose a dictated peace? And won't Bush's victory deliver the exact opposite to what he claims the war is all about? Far from terrorism being defeated, the suicide bombers and attacks on American tourists and civilians will almost certainly increase. " (World economy 2003: hope and reality - December 29, 2002).

All this spending by households and the government is mainly on cheaper foreign goods. That has led to another huge deficit, this time on trade with the rest of the world – again at 5% of GDP and again another record.

These twin deficits have to be paid for. So far, they have been financed by foreigners recycling the dollars they have earned on exports to buy US stocks or corporations – or most of all to buy US government bonds. Thus, the US has financed its spending by getting ever more into debt with foreigners. The US owes the equivalent of 25% of its GDP to foreigners in debt and unless something happens, that will reach 60% of GDP by end of this decade.

But something is happening. The US is paying for its borrowing and buying in dollars. But increasingly, foreigners are getting fed up with receiving paper money for their goods. They are looking to switch their earnings into other less plentiful currencies like the yen and or the euro.

The result is that the US dollar has dived. It is down nearly 30% against the Euro in 2003! That means in a year's time if you hold dollars you will be 25-30% worse off. No wonder there is an increasing reluctance to hold them.

And there's worse. As the Euro and the yen strengthen, that makes all their exports rise in dollar prices and so more difficult to sell. That's why growth in Europe and Japan has been so weak in the last year. The US has financed its growth by printing dollars and lowering the value of the greenback- all at the expense of European and Japanese exporting companies.

So far, these countries have bit their tongues and taken their punishment like men, because they believe that the US has the right intelligence on WMG. But after a battery of protectionist measures such as putting tariffs on steel and quotas of Chinese clothes, and by devaluing their currency, the US is trying the patience of its trading rivals to the limit.

Interest rates cannot fall any more and tax cuts cannot be lowered again much and the dollar is already plunging, putting a limit on how far the US can screw other countries to get out of trouble.

So in 2004, the WMG must be found in order to ensure genuine economic growth. That means companies must invest more and they must start employing more workers to boost real production.

Is there any sign of it? Well, as I write, the US has just announced that employment grew in December 2003 by just 1,000 people. That's after a fall of over 2m since 9/11. It is estimated that for the growth forecasts of Bush, Greenspan and Co to be met in 2004, there must be at least an increase of 250,000 jobs every month for the next year. Well it was 1,000 in December.

So with Europe and Japan being screwed – Germany's employment levels are falling and the decline is accelerating – and with the US not growing enough to keep the world up, the prospects are not nearly as rosy. The WMG still look unlikely to be found.