The Economic, Anti-American Mood at Davos

Every Davos annual meeting tends to be dominated by one or two major issues that get discussed at many sessions, including a plenary session where participants debate and choose the most important near-term issues facing the world. Last year, the focus was on global warming. This year, the state of the world economy and the potential recession in the United States, with its worldwide impact, took center stage. The main questions were:

1. How likely is a U.S. recession in 08?
2. Will we see a decoupling of the U.S. economy from the global economy, with the rest of the world continuing to grow even as the U.S. stalls?
3. What are the implications of investments in major U.S. banks and by Sovereign Wealth Funds (“SWF”) such as those owned by Singapore, China and Dubai?
4. Have the regulatory bodies, particularly the Fed and other central banks, lost their ability to influence the global economy?
5. Is there a need for more financial regulations to prevent the kind of financial crises we have recently seen?

As in every debate, opinions were quite varied. Most people believed that a mild U.S. recession would occur in 2008 and some thought that it might have already started, even though most business leaders thought their businesses had not yet been affected. A significant concern was expressed that the drumbeat of recession, amplified by the media, will undermine consumer confidence and result in a recession even if the economic fundamentals did not really justify one. The most extreme opinion was espoused by George Soros who predicted that this will be the worst economic crisis since the depression. Of course, it was hard to tell if he was serious, or whether he wants to contribute to an acutely negative psychological mood that would benefit a possible bet his hedge fund has made on a recession.

Many participants believed that the torrid growth in Asia’s developing economies will compensate for any slowdown in the U.S. economy. India was thought be the most immune country, followed by China -- despite the huge dependency of Chinese exports to the U.S. Europe and Japan were thought to be moderately affected.

There was a lot of anxiety about foreign governments owning a stake in major U.S. and western financial institutions such as Citibank and Merrill Lynch. The SWF were said to control over $3 trillion today and that this could reach $9-10 trillion in three years, as petrodollars and export surpluses continue to grow. The question was asked whether such ownership could lead to foreign control? Here again, the opinion varied. Some speakers reminded the audience of the exaggerated U.S. fears during the 1980’s about Japanese control of prime American real estate properties such as Rockefeller Center. Others argued the more common view that the SWF investments are small in ownership percentage terms, and would remain harmless as long as they did not exceed 15-20%.

There was a televised debate on CNBC that focused on the influence of central banks over markets and national economies. One view held that central banks are ineffective and have failed to prevent the current financial crisis, despite high profile liquidity injections, just as they failed to moderate the drop of the U.S. dollar. However, the majority view held that while central banks made errors in steering the regional and global economies, they still wield a lot of influence -- as the Fed has shown with its recent aggressive interest rate cuts. There was a sharp difference in opinion about whether monetary authorities should intervene to burst emerging bubbles such as the current sub-prime bubble, the recent housing bubble, or the stock market bubble in 2000-2001. Some argued that central banks might ‘prick the wrong balloon’ and that they should not second guess the price levels determined by the free market. Still, there was a consensus on the need for stricter regulations on lending standards and derivative instruments.

It’s worth noting that there was a pervasive view that U.S. power, as well as moral leadership, is rapidly declining both politically and economically. Anti-Americanism sentiment runs rampart, particularly among Europeans, Middle Easterners, and most Muslim nations. The majority believe that the U.S. has lost its influence in the world and is unable to get anything done. That it is drowning in a deficit that foreshadows its economic decline. That it preaches to the world principles it violates every day. That it is militarily over-extended in Iraq and Afghanistan. Some asserted that the decline is irreversible. It was highly ironic that a South Korean university professor was the only defender of the U.S. on a panel that included a Harvard professor who led the U.S. bashing. One of the most outrageous assertions was that the U.S. created the conflict between Sunnis and Shias, who lived in peace, unity and harmony until the U.S. created an artificial divide between them. In several sessions, I found myself rising to defend the U.S. and cautioning against writing America’s obituary too soon.

Believe me, I would much rather argue about the impact of cookie deletion!