The US economy will be out of the woods by the end of the year, according to Dr Arthur Laffer, former President Ronald Reagan's personal economics adviser and close friend of current Vice-President Mr Dick Cheney.

Dr Laffer, who is a true believer in supply side economics, is evangelical about his views. The man who famously drew the so-called Laffer curve on a napkin over dinner with President Reagan still believes that tax cutting is the only way forward for any economy. That curve shows how tax cuts can generate more revenue.

It was this theory that persuaded the Minister for Finance, Mr McCreevy, to halve capital gains tax, despite opposition from his Department.

Speaking yesterday before the 2001 Goodbody Stockbrokers annual policy seminar, Dr Laffer was totally optimistic. The Republic would continue to grow for years, Japan was at the bottom of the cycle and was a great location for investment, and the US would recover by the end of the year, he said.

Often spoken of as the father of supply side economics, Dr Laffer believes the current slowdown was manufactured in the US and - controversially - he attributes the blame to the Federal Reserve and its chairman, Mr Alan Greenspan.

According to Dr Laffer, the Fed was so concerned about the possible impact of the Y2K problem in 1999 and its potential to cause a run on the banks that it pumped money into the economy, filling bank vaults.

"The Fed simply threw all caution to the wind and expanded the monetary base way too rapidly; all constraints on lending were removed."

As a result, banks began pouring money into marginal firms and even larger firms with marginal products. More and more loans were made and lines of credit were dramatically extended. The inevitable result was that the Nasdaq jumped, gold rose to more than $300 (€337) an ounce and the dollar fell. At the same time, interest rates began to rise and expenditure was accelerated. The result was an economic boom with an acceleration of GDP to 6 per cent, a massive figure for a mature and large economy such as the US.

As soon as the Fed realised in January 2000 that there would be no problem, it simply sucked the money back out of the system in the form of "monetary liposuction", as Dr Laffer calls it. Credit was tightened, getting loans became a problem and, as a result, the Nasdaq fell, gold prices declined, the dollar appreciated and interest rates began to come down. People began to defer expenditure and the current slowdown got underway in earnest.

According to Dr Laffer, the US is about half-way through this process and asset prices have already adjusted. As a result, the economy will begin growing again by the end of the year. The stock market may already be oversold, perhaps by about 15 per cent, he says. But he has little comfort for anyone who bought into the Nasdaq at the beginning of last year. "The Nasdaq will not be returning to 5,500 any time soon."

However, the US is a fully priced, fully employed economy. "We're there, I'd expect much slower growth in the future." Europe, on the other hand, will need to double to catch up, while Japan has even more potential to appreciate.

"Japan is the single most exciting investment opportunity. There is no downside - it is at the bottom. If anything goes right, there will be a huge upside."

He adds that the authorities are targeting the monetary base - which is "exactly right". But the companies to invest in are not the big global firms making up the Nikkei but rather the smaller enterprises and more marginal banks.

The US outlook is exactly the opposite. A weaker dollar and falling current account deficit mean the best companies will be those involved with the outside world and traded goods.