By Claus Vistesen
Despite the efforts of yours truly to create as strong a profile as possible in the world of econ-blogging, I regret to inform my readers that the organizers of the World Economic Forum in Davos have not found it within their hearts to invite me to Switzerland.
This is a pity actually, as the last couple of years have been dominated by doom and gloom; it appears that this year champagne corks are flying high once again and the good times are back. How else could you interpret the Bloomberg story from the forum that the big banks, far from being tarnished knights, are now back in full confidence?
After spending much of last year’s meeting defending the industry and debating proposed rules, bankers plan to focus on wooing clients and winning business, according to executives at three Wall Street companies, who spoke anonymously because they weren’t authorized to comment publicly.
(…)
That means banks will be spending on parties. JPMorgan upgraded its cocktail reception to the Kirchner Museum from last year’s event at the Tonic Piano Bar at Hotel Europe Davos. Bank of America’s Moynihan and the firm’s other top executives will meet clients for drinks on Jan. 27 at the Steigenberger Grandhotel Belvedere — the same night Morgan Stanley’s Mack is hosting a private dinner at restaurant Gasthaus in den Islen. Standard Chartered Plc and Deutsche Bank AG are both hosting events at the Belvedere the following night.
Nomura Holdings Inc. is having a British journalist and a newspaper editor speak at a dinner for clients, the first such event the Tokyo-based bank has held in Davos, according to a person familiar with the planning. Barclays Plc will again hold its annual client dinner at the Hotel Schatzalp, and Credit Suisse Group AG is hosting two client lunches, one discussing financial regulation and the other focused on emerging markets.
I can add little more to this than a simple shrug. If the world of high finance was weird to me before the crisis, it has not become any less weird by the fact that the industry seems to have returned to its old ways only a few quarterly statements after many of them were injected with shots of tax payer money and pumped full of free money from the Fed and the other central banks.
I think it was more interesting to see the reference to a report (published back in November) by Standard Chartered about a new super cycle of economic growth:
(Quote from Bloomberg)
Lyons and his colleagues predict a “super-cycle” of historically high growth that will last at least a generation and will be led by booming trade, investment and urbanization, according to a report published in November. He reckons such a cycle has occurred only twice since the end of the 18th century: the four decades before World War I and the three following World War II. He’s betting the new phase will contribute to a reversal in the three-decade decline for U.S. bond yields after 10-year Treasury notes lost an average 40 basis points a year since the early 1980s.
Now, much of this, of course, is based on growth in Asia and other emerging markets. But the comparison with past golden years of global growth makes me a bit uneasy. Indeed, I would say that it is somewhat of a stretch to assume that the origins of the financial crisis will lead to a recovery of these proportions. But, of course, I am being a party pooper now; I would certainly not exclude the possibility that the global economy is in for a super cycle of economic growth. However, I would only put a small probability on this happening.
What I am basically saying here is that I can understand why the global intelligentsia and finance jet set, by simple virtue of the need to do something different, are exuding an almost über-positive message in this year’s get-together.
Yet, while I promised not to spoil the party, I thought that I would still let you in on my presentation, prepared for Davos in the hubris-like expectation that I naturally would be invited as a keynote speaker for several of the finest cocktail parties. The positive is that my presentation would be very short and only downbeat insofar as all those intelligent men and women at the forum would not be able to tell me (and you) how the developed world is supposed to maintain economic growth going forward. This should be easy then, or maybe not …
Being a European I would then start with the following chart;
(click for larger picture)
I probably would not say much here, but anyone believing in any form of a ‘super cycle’ hitting the shores of Europe should at least be able to explain where growth is going to come from. This is especially the case in the context of the ongoing focus on fiscal austerity, which is going to pull away the main source of growth. This would, then, bring me neatly to my next chart;
(click for larger picture)
Obviously, at this point, I would probably be branded a fiscal apologetic who believes that governments can just spend as if there is no tomorrow. That would be a mistake. Indeed, if you want to speak of debt and fiscal problems, I am all ears. Even with estimated tightening noted above from the IMF’s forecast, countries such as Italy and Japan will still be running large structural deficits in 2014 (i.e WITH relative "austerity" accounted for) and this only goes to show that there is really only one end result here.
But this is also a situation of damned if you, damned if you don’t.
If governments choose to focus all their efforts on growth and let fiscal excess continue the already huge debt problem will become worse. And if they don’t, they must face growth rates that are not only low, but perhaps even negative for a long period of time. A very recent shot fired across the bow today by the S&P comes in the form of the downgrade of Japan’s sovereign debt.
I would then pose my Davos audience one simple question, asking it to reflect on one simple issue: What is the trend growth in the OECD and her individual economies with a balanced fiscal budget? And once we have agreed on that answer the obvious next question would be: how will the world deal with a substantial part of its economies exhibiting negative trend growth rates for as far as the eye can see?
More than anything, I think that this has probably yet to sink in for markets and policy makers alike. Indeed, after having pissed in the proverbial bunch bowl I would probably go on to talk about the necessity of substantial debt restructuring in the Eurozone (despite my praise for the apparent success of the Euro bond issuance).
Alas, at that point my microphone would have long been switched off and I would probably, to boot, have been taken out by the in-house Davos sniper tasked with the elimination of any spoilers of the good mood.
Good thing I wasn’t invited then.