As we've noted before it's all feeling a little 1999 out there. Lombard Street "s Dario Perkins agrees. He's just released research entitled "Party like it's 1999″, in he notes: The world today is reminiscent of 1998, when the Asian and Russian crises and Japanese recession combined with good US growth and a booming stock market to generate the tech-bubble. The US looks like the only major "game in town," having adjusted from its 2007-08 ills and resultant budget deficits. We expect US growth at a healthy 3-4% pace. Other buoyant parts of the world in 2014 include Britain, Mexico and industrial, if not commodity-orientated, Canada. As in the "90s, the emerging markets (EMs) will remain under pressure. A modest upswing in US Treasury yields has already exposed the vulnerabilities of "deficit" EMs, while the "surplus" EMs - notably China - have overvalued exchange rates and/or are vulnerable to further declines in commodity prices. Unfortunately, Europe will not fare as well as it did in the 1990s. Lacking domestic sources of strength, the euro area will continue to stagnate, with the risk that deflationary pressures in the periphery spread to the core. Meanwhile, Japan will continue to scoop demand out of the rest of the world, with its Abenomics-led competitive devaluation also stealing growth from the future. Really interesting is the following chart showing real effective exchange rates based on the OECD's measure of relative unit labour costs relative to the 1973-2012 post-Bretton Woods average: As Lombard notes (our emphasis): The global recovery from the financial crisis has been uneven. The US is the only major economy that has adjusted fully. Private-sector deleveraging is now complete and the housing market is recovering. The real exchange rate has also fallen sharply and the government has made substantial progress reducing its budget deficit - in fact, it could soon be in surplus. The export-led growth model has always relied on the US as the "consumer of first resort." But this no longer works because the US real exchange rate is at its lowest since WWII and its private and public borrowing are now constrained. As a result, the export-led EMs" high investment has to earn its return from seriously inadequate consumer spending. We think this is an important observation that has until now been overlooked by most market analysts. Notably, it carries significant implications for China by turning the market liberalisation story on its head. Indeed, rather than being a show of force it suggests the move could be a product of necessity. A desperate endeavour to export the now deflationary forces stalking the country's capital sector. Here, in any case, is how Lombard's Perkins interprets it: In response, China's options over the next few years range from business as usual to full financial reform. In the reform scenario, which Beijing has now committed to, China could have a very rocky couple of years. Capital could flow out and the yuan fall. Voluminous bad loans would need recapitalisation: the exit of capital would undermine the deposit base of the banks and drive up nominal (though not real) interest rates. "Metal-bashing" would be discouraged. The falling yuan might sustain exports, benefiting the Pacific Rim and other suppliers, but it would sharpen the global competition for a low real exchange rate in a deflationary world. If Beijing gets cold feet and abandons reform,China will only grow fitfully as it applies repeated bouts of artificial stimulus. Capital will continue to try to escape, but with only modest success. In this scenario, China would hurt global growth, with the potential for sharp falls in investment and only modest export/import growth. Those countries that are hoping to export to China - Germany, Japan and the Asian "tigers" would face significant disappointment. Either way, Perkins notes, growth is increasingly likely to be driven by US re-shoring, domestic ingenuity and competitiveness: Renewed US competitiveness in a rebalanced economy is likely to spur an investment-led recovery in 2014. More of what America consumes will be produced at home. The US is best placed to outperform, with GDP growth accelerating to 3-4%. But it won't be the global locomotive of the past. The US dollar is now competitive, crucially against the Chinese yuan and the other Asian currencies. Relatively cheaper labour and energy place the US - the second largest manufacturer in the world - in a great position in a world of deficient consumer demand. The US is likely to see a much lesser rate of off-shoring production and a rising wave of re-shoring. This trend has only just begun. The fortuitous development of cheaper shale energy in the US is not to be underestimated either. Natural gas from shale is much cheaper in terms of oil equivalent and the incentives to develop it are huge. This major US energy transformation should ensure not only cheaper energy but also a strong flow of capital spending into improving the distribution infrastructure. Another notable echo with the 1999s, according to Perkins, is that the growth will come without inflationary consequences: Growth should also prove durable, as inflation will not be a concern for some time. The economy still has significant spare capacity, while an acceleration in GDP could also pull up the economy's potential growth rate. Energy prices and the US dollar will exert downward pressure on inflation, thanks to shale fracking and America's relative growth outperformance. Subdued inflation is likely to keep policy rates ultra low for some time. Though, there is one important difference: Importantly, even when the Fed decides to raise interest rates in response to a sustained revival in growth, this will not derail the economy because it is no longer plagued by excessive levels of debt. When it comes to Japan, meanwhile, Perkins is sceptical that Abenomics will be a success in the long run because of its failure to tackle structural issues. They offer some interesting perspectives on Japan's deflation problem as a consequence, among them the point that Abenomics is tantamount to stealing spending from the future: For sure, the economy has perked up since the start of Abenomics - for two reasons. First, the yen is 25% lower than it was last year. Second, the country is making a serious effort to shake off deflation. But a lower yen is not enough to give Japan sustainable growth, while the threat of inflation - if accompanied by falling real incomes - means the economy just steals spending from the future. Abenomics has had a noticeable effect in lifting inflation expectations, but deflation is just a symptom of Japan's malaise. The key structural impediment to growth is the fact that too much of the income flows to firms and not enough flows to households. The business sector saves too much, leading to an excessive investment rate and firms hoarding cash. Japan's investment rate is 4% points higher than the US despite a falling population and weak growth. Sadly, the flip side is that private consumption is 60% of GDP versus 68% in the US. As for the fiscal squeeze, Perkins notes this was undoubtedly a key element suppressing growth the last couple of years. However, now that the squeeze is waning, this should help encourage growth, and thus also encourage QE tapering: If the negative impact from fiscal policy begins to fade, the world's major central banks will be able to ease up on their stimulus efforts without fear of destabilizing financial markets or undermining growth. We expect the Fed to end its QE programme in 2014, while further asset purchases from the Bank of England are also unlikely. The main exception, of course, will be the BoJ which - after more than a decade of deflation - is committed to aggressive QE for some time to come. The BoJ might even have to step-up its QE campaign in 2014, if inflation expectations and wages fail to respond. Related links: Greenspan's dilemma revived - FT Alphaville Technology vs globalisation as cause of the declining labour share - FT Alphaville