Was the great boom just a myth?

The oldest joke in the auditing handbook has an auditor attending a beauty parade to see if he can land a company as a new client. "What is two plus two?" asks his interviewer, the company's finance director. What would you like it to be?" replies the accountant.

Except it is not a joke any more. The latest revelation from America, where the fastcollapsing telecom giant WorldCom has admitted that it faked its profit figures to the tune of billions, could well be the biggest-ever accounting scandal - bigger even than Enron, and making the shenanigans of our own Robert Maxwell 10 years ago very small beer indeed.

Just as Maxwell moved from being an arcane dispute about boring numbers to the hottest topic on the political agenda when it was discovered that he had rifled the pension funds to cover his losses, so too does WorldCom pose a threat to us all.

It and the others at Enron, Lucent, Cendant and even the mighty IBM have totally destroyed investors' faith in the numbers. That has sent share prices reeling. Each downward twist in the stock market makes us all potentially poorer through our pension funds.

It cuts deeper than that, though. Ultimately, people buy shares because the economy is doing well, profits are rising and they want their slice of it. What is dawning, with agonising slowness, on the American public, and indeed the rest of the world, is that the great American boom of the past few years, the longest expansion in world history, a time when published profits went through the roof, could turn out to be the world's biggest con trick. The great American boom is, in fact, the great American myth.

Now Americans are beginning to realise what Henry Kauffman, perhaps the greatest Wall Street guru of the 1980s, meant when he said a few months back that in the five years to 2001 the American corporate sector destroyed value, it did not create it.

There are two strands to this. The first is the one now so much in the public eye - that published profits were not what they seemed, because companies hyped up the figures. Much of this was legal, but most of it was immoral. And it was not as if no one knew what was happening, it was just that they preferred not to listen.

Jim Clark, the founder of Netscape, was feted as a hero, not a villain when he said: "I don't understand why business journalists expect to be told the truth. The share price is too important for that."

Others who did sound warnings were dismissed as old fuddy-duddies who did not understand the brave new world. Warren Buffett, the legendary American investor, was quoted in this paper in April 1999 when he said: "A significant and growing number of otherwise high-grade managers have come to the view that it is OK to manipulate earnings to satisfy what they believe are Wall Street's desires. Indeed, many CEOs think this kind of manipulation is not only OK but actually-their duty." Still, people took no notice even when he said the fakery inflated profits by $70 billion.

But the second strand is yet more fundamental. The fakery is not confined to company accounts. All the American government's figures for national economic growth are suspect too. If this is true, there was no American boom, no productivity miracle and no brave new world.

The greatest authority for this is Alan Greenspan himself, the chief of the Federal Reserve. He said in January last year - though again no one paid any attention - that as much as 18 per cent of claimed American economic growth did not exist. He did not put it quite like that - he never does - but he drew attention to the distortion caused by what is known as hedonics - the habit of counting improvement as a boost to income.

In layman's terms, if you buy a computer for £1,000 which is twice as powerful as the one you paid £1,000 for three years ago, the Americans put a value on this extra power and add £1,000 to the national income figures.

Given that every new product, almost without exception, is better than what went before, the distortion is huge. Arguably, it is harmless fun as long as only economists look at the figures - but it quickly becomes disastrous if, like the Americans, you start to believe it is real money and think you can spend it.

Europeans don't do this, which is why respected City analysts, like our columnist Andrew Smithers, have reworked the American numbers and found they paint a much less happy picture. Increasingly, it is argued that, far from having a productivity miracle in the crucial late 1990s, US output per head measured the European way was the lowest for decades, profits instead of soaring were falling, and the trillions poured into technology were wasted.

This is chilling stuff. because even if it is only half true it means that the stock markets, even after their falls of the past two years, are still massively over-valued, and should by rights fall by a further 40 per cent, or adjust in a more gentle long-term way by moving sideways for 10 years while the rest of the economy catches up. But the problem is that it is not just private investors' pockets which would feel the pinch; it would also have a profound effect on the financial institutions.

Nowhere is this more true than in the City. The Square Mile has grown fat on the back of a 20-year stock market boom, and its prosperity has made the London area the most prosperous region in Europe. But all its great engines, the investment banks, the fund managers, the insurance companies and the pension funds, have become used to rising markets. If share prices continue to fall, let alone fall as much as they might, for any prolonged period, the giant City bubble itself could burst - leading to wholesale closures and job losses on a scale which makes even the current blood- letting seem minor.

It is an apocalyptic vision, and everyone hopes earnestly that it will not come true. But the idea that it will is real enough and as long as that fear persists, then things will get worse.

Far from having had our economic slowdown and preparing to pull out of it, it could so easily be that the worst is still to come.