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Analysis: Even the smart, rich and powerful can't see where the global economic crisis is headed.
DAVOS, Switzerland — This is supposed to be the high church of global insight, the place where the great minds and great accumulations of wealth all come together and tell us how it is going to be.
And they get a little skiing in as well.
But this year at Davos, it was hardly a comforting message of confidence from the smart, the rich and the powerful.
“The real answer to where we are now is that we don’t know,” Peter Sands, CEO of Britain’s Standard Chartered bank, observed over the weekend.
Not exactly a reassuring assessment from one of the few banks to weather the current financial crisis in reasonably good shape.
The close of Davos comes as the drum beat of devastating economic news seems to grow louder.
In fact, the description of the ongoing crisis emerging from the international financial elite gathered at the four-day World Economic Forum meeting in this Swiss ski resort is beginning to resemble a mythical monster, something like the T-1000 cyborg in Terminator 2, which changes its shape just as you think you have managed to blast it to bits.
The bottom line is that, far from being over, the real crisis may be just beginning. The experts can see what is happening. The public is just beginning to find out. The Great Depression in the 1930s started with the stock market crash of 1929, but didn’t reach its peak until 1932. The current crisis, according to many economic analysts here, looks like it may follow a similar scenario.
The problem stems from the fact that a key engine driving much of the world economy has been American consumption, which makes up about 70 percent of U.S. gross domestic product.
The rush to spend was egged on by enormous amounts of cash flowing into the U.S. from emerging markets looking for a place to invest. The flood of cheap money inevitably led to increasingly risky deals. “Ultimately, the system cracked,” says Harvard professor Ken Rogoff.
“If it hadn’t been the subprime (crisis), if it hadn’t been the crazy decision in 2004 to allow investment banks to leverage 33 to 1 instead of 12 to 1, it would have been something else,” Rogoff added.
With American consumers increasingly frightened, the machine hasn’t exactly stopped, but it is slowing down considerably. The problem is that if it isn’t stopped right now, the deceleration will pick up speed creating a vicious downward spiral that may take everyone with it.
As people buy less, companies lay off workers, and that frightens everyone who hasn’t lost his or her job into spending less, which makes companies lay off even more workers.
“The behavior of companies accelerates the crisis,” says Jeroen van der Veer, the CEO of Royal Dutch Shell, "but we really don’t have a choice because we have to do what is best for the company.”
Best for the company, but not necessarily best for the world.
The solution, according to chatter at Davos, is to find a replacement for the American consumer to fill in as the engine for economic growth. Getting Americans to spend more money frivolously is not the way to go. As Ken Rosen, a professor emeritus at the University of California puts it, "We were spending money we didn’t have on goods we didn’t need.”
Expecting a sudden burst of consumption in China and India is also not very realistic, either. Zhu Min, an executive vice-president of the Bank of China pointed out at Davos that Chinese consumers only account for $1.5 trillion compared to the $10 trillion that Americans were spending. U.S. consumers, in fact, spent three times as much as all the consumers in China and India combined.
“The American model is not sustainable,” says Zhu Min.
What is going to be needed, in fact, is a radical change in lifestyle — not just for America but for the world. In the short run, we might want to spend our resources on things that really are essential. China and India are both planning to pump their stimulus packages into building up their infrastructure. The U.S. desperately needs to revamp its highways, bridges and rail lines, and it needs to invest seriously in health, and education.
The other major theme emerging at Davos was climate change, and in the long term this may provide one of the escape routes out of the current mess. The effects of climate change are already visible to anyone who cares to look, and dealing with the problem could usher in a new technological boom.
One of the projects mentioned at Davos is a joint deal between Nissan and Renault to provide a network of service stations that will make electric automobiles practical in Israel.
The idea is to cut Israeli dependence on Arab oil and reduce greenhouse gas emissions at the same time. The Nissan-Renault cars are projected to give off two grams of carbon per kilometer instead of the 120 grams per kilometer emitted by a Toyota hybrid Prius. The cars will only have a range of 150 kilometers (90 miles), but most people drive less than 60 miles a day, anyway.
The idea is to use the electric car for short commutes, and keep a fuel efficient diesel for longer trips on the weekend. By the time it catches on, Nissan and Renault expect to have a sizeable lead over Detroit in breaking into a hot new market.
In the meantime, the major question is what shape will the crisis morph into next? The consensus at Davos was that the two most immediate threats now are protectionism and civil unrest. In the 1930s, protectionist tariff barriers set by the well-intentioned Smoot Hawley act managed to turn a serious recession into a global depression.
Egypt’s minister of trade and industry, Rachid M. Rachid said that the signals coming from a closed door meeting of trade ministers were not encouraging. The message from Washington, he said, was that “everything that had been on the table was now off the table.” The change in administration means unavoidably that everything is now open for renegotiation, and hence open to uncertainty.
At a dinner for Washington insiders, the message was even more clear. Pressure to counter the “buy America” provision in the U.S. bailout package, or to prevent the administration from bailing out the auto industry in Detroit would very likely forever doom U.S. participation at the trade liberalization talks in Doha.
The answer seems to be to work out a compromise in which there are limited restraints on the free market, but not so many that it shuts down the world economy. The trick is to negotiate the ground rules ahead of time with a broad range of partners. The most likely venue is the upcoming G20 summit at the beginning of April.
In the meantime, France, England and Russia are already experiencing demonstrations by workers worried about losing out in the tightening job market.
Christine Lagarde, France’s elegant economics minister, stressed that it is now imperative for political leaders to explain the seriousness of the situation clearly to their own public, and to get buy-in for the difficult times ahead, before it is too late.