Davos: Enjoy the party while it lasts
In yet another effort to reassure themselves that there’s no monster lying under the bed, participants at the World Economic Forum (WEF) in Davos, Switzerland, have started emphasizing the virtues of capitalism, while also criticizing some nasty “excess,” such as the fact that 1 percent of the world’s families own 40 percent of its wealth.
However, this time the mood is even sourer than last year. Europeans shudder at the thought of a eurozone breakup, but as Germany imposes a long recession on the rest, fiscal cracks turn into political ones – it is becoming harder to keep the monetary union intact. According to Nouriel Roubini, who spoke at Davos on Jan. 25, Greece might be forced to exit the eurozone in 18 months.
Outside the euro area, instability looms on the EU’s eastern flank, while the United Kingdom’s economy contracted by 0.2 percent on a quarterly basis in the final three months of 2011, it was revealed Jan. 25.
On the other side of the Atlantic, the U.S. Federal Reserve has pretty much reached the limits of what it can do to heal the economy – late on Jan. 25, it announced that it was keeping the benchmark interest rate at near-zero until “at least through late 2014.” (That’s the main reason for the appreciation of emerging market currencies, including the Turkish Lira, yesterday.)
We frequently criticize the Turkish Central Bank for its “unorthodox” monetary policies. But let’s be fair, what’s “orthodox” about the Fed’s unprecedented promise? By late 2014, the U.S. will have had near-zero benchmark rates for five years!
Markets still expect new rounds of “quantitative easing” in the U.S., Britain, Japan, the eurozone and elsewhere. Chinese policy makers, meanwhile, are trying to cope with their newly elevated status in the global economy.
It is of no surprise, then, to see the stars of the system so pessimistic. One does stand out, though. In comments to Newsweek ahead of the Davos summit, George Soros, the man who broke the Bank of England in a single day in 1992, sounds like he’s been staring into the abyss for some time now.
“The situation is about as serious and difficult as I’ve experienced in my career,” he says. “We are now facing a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”
A “disorderly collapse” of the euro, for Soros, will bring the danger of a “revival of the political conflicts that have torn Europe apart over the centuries.” Such is his concern that the whiz financier has been refusing to “short” the euro, being the responsible investor that he is!
Mohamed A. El-Erian, the CEO of investment management giant PIMCO, has been writing about the overlooked features of the crisis for years. In his latest article on how to repair the “global plumbing,” El-Erian suggests policy moves which, by themselves, display the severity of the situation: Unblocking the crucial housing sectors, imposing “sizeable haircuts” on creditors, establishing public-private partnerships to finance infrastructure investments and most important of them all, striking a new balance between “generations, labor and capital, and recipients and taxpayers.”
The Davos crowd doesn’t look like a group of leaders capable, or even willing to ponder such policies. On the contrary, most of them appear content with being part of this splashy winter party for another year.