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Good morning, everybody.
Welcome on this glorious Swiss winter day to the traditional opening morning
session on the global economy in association with TIME Magazine. My name is Michael Elliott.
I’m the editor of TIME International. I think this is the sixth year I’ve had the pleasure and honor
of doing this. Before we get on
to this morning’s business, I just want to say a few words
about the circumstances in which we gather here at Davos. We, of course,
all have come here in the shadow of a terrible tragedy in Haiti
ten days ago. Many of you will have picked up
this sheet with your package of information yesterday with details, many of the initiatives of the forum, and the Clinton Global Initiative
and the UN are pursuing in relation to alleviating the tragedy in Haiti
this week, and I encourage you to look at it
and do what you can. As always, we are joined
on the stage this morning by a terrific array of talent
who will discuss with us the prospects for the global economy
over the coming year. On my immediate left,
Dennis Nally, chairman of PricewaterhouseCoopers
International from the U.S.A. On my immediate right,
returning to the panel, Nouriel Roubini of the Stern School
at New York University, the Cassandra of Washington Square,
I think we can call you. On Nouriel’s right, David Rubenstein
of the Carlyle Group. Further on, another welcome
return to the panel, Heizo Takenaka
from Keio University in Japan. Immediately on Dennis’ left,
Raghuram Rajan from the University of Chicago.
If we’re in the prophecy business, I think we can call you
the Jeremiah of Hyde Park, how is that? seeing as you
and Nouriel were both warning of what might happen
a few years ago. And then finally, on my far left,
Arif Naqvi, the founder and group CEO of Abraaj Capital
in the UAE. They will all be as brisk and as brief,
as they are all brilliant because I know from past experience
there will be lots of questions from the floor. But I thought,
to kick us off and to very, very quickly remind us
what has happened and to give us a sense of how
the global economy is likely to look in the next year,
I turn to our regular introducer of these sessions, Nouriel Roubini.
Nouriel. A pleasure being back here. Skip the last year where the worst
economic recession and financial crisis in a decade,
the policy actions by authorities around the world led to the beginning
of an economic recovery. And right now, there is a debate
about the shape of this recovery. Those who are more optimistic
believe that we are going to go back to potential growth very rapidly,
a V-shaped recovery. I’m more in the camp of those
who believe this is going to be a U-shaped recovery –
anemic, subpar, below trend, what the folks have been calling
“the new normal,” and there is even risk
of a double-dip recession, downside risk; maybe low probability
but something we have to think about. So what’s going to be the outlook
for the U.S., for Eurozone, Japan, and for emerging markets? I would summarize my view by saying
that emerging market economies are going to do better
than advanced economies, first of all. In advanced economies,
the first half of the year is going to be better
than the second half of the year. The first half, we are going to see
the effects of the monetary and fiscal stimulus,
restocking of inventories, base effects,
and other temporary factors. By the second half of the year,
I see a faltering of growth in U.S., in Europe, and in Japan. Now, why do I believe it’s going to be
a U-shaped recovery? First of all, labor markets conditions
are still very weak, unemployment rate
around ten percent in U.S. In the Eurozone,
job growth is going to be less, labor force growth,
so unemployment rate is going to go up. Secondly, this was a balance
sheet recession due to excessive leverage and debt,
and while there is lot of talk about de-leveraging,
the private sector debt ratios are stabilizing at high level and now,
as a way of socializing private losses with a massive re-leveraging
of the public sector will increase the public debt
and deficits. Now, if you take this interpretation
of the crisis in addition to the weakness
in the labor market, there are other reasons
why the recovery is going to be anemic in advanced economies. First of all,
consumption has to grow less than GDP in order to increase savings
and de-leverage. Therefore, GDP growth
is going to be slow. Second, with capacity utilization
at 70 percent in U.S. and Eurozone, cutback spending by the corporate
sector is going to be anemic. Third of all, the credit markets
are still very crunched. In advanced economies,
credit growth is still negative. Even if and when it’s going
to become positive, it’s going to be more anemic
than the years of the credit boom and therefore, the ability
of the financial system to finance residential investment,
construction activity, cutback spending, and so on is going
to be more constrained. Four, the fiscal stimulus
by the second half of the year becomes a drag on growth and therefore,
unless there is a recovery of private demand,
the recovery is going to be slow and we respond to this fiscal drag
by accelerating, spending, and reducing further taxes.
At some point, financial markets are going to worry about runaway
fiscal deficits and monetization and you could have a backup
and long term years is going to crowd out the recovery. Finally, global imbalances.
The overspending countries that were running currently
account deficits and now are retrenching
like the U.S. while the oversaving countries
like China, Germany, Japan, and emerging markets
are not compensating for the fall in demand
but the overspending by reducing their savings rate
and increasing their own spending. So globally
when there is a lot of capacity, there is going to be a weaker recovery
of aggregate demand. So those are the reasons why this
is going to be a U-shaped recovery. Now, if I’m bearish about
the United States, I’m also bearish about the Eurozone.
In the Eurozone, especially in the periphery,
take Greece, but the same problem occurs in Italy,
in Spain, in Portugal, there is not just a public
sustainability problem. There is also
a competitiveness problem. They are losing market shares
to China and Asia, then wages grew more than productivity.
Union labor costs were rising. Real appreciation,
current account deficits. So even if you solve their debt
and fiscal problem, you still have
a competitiveness problem. This is the very first test
of the monetary union in the Eurozone and I think I am quite bearish
about that, about the growth prospects, especially of the periphery
of the Eurozone. I am also concerned
about what’s going on in Japan, where, unless there is an acceleration
of structural reform, there is anemic growth.
The demographic is against you. There is a very large stock
of public debt. There is a beginning again
of acceleration of deflation. So the overall outlook
for advanced economies is weak. You can be more bullish
about the emerging markets for three reasons: their potential
growth at five to seven percent is greater than advanced
economies with two, three percent. They did not have, with the exception
of Central Eastern Europe, the kind of leverage
in the financial sector. In the household sector, there was
a problem in the advanced economies and they’ve been able to do kinds
of cyclical monetary fiscal stimulus given the shock coming from the scent
of the global economy. However, a few caveats: China alone cannot be the only engine
locomotive of global growth. After all, Chinese GDP
is only $4 trillion. The U.S., European, and Japanese GDP
is $40 trillion. Second point, the model
of export-led growth with each currency in Asia and China
is now challenged by the fact that countries like U.S.
are spending less, consuming less,
and importing less. And what China has been doing
is by stimulating public demand but eventually, the demand has to move
from net export to product consumption demand. Unfortunately,
there are structural reasons why consumption rates are low
and savings rate are high in China. And the response of China has been
to do even more fixed investment, increase in the glut of capacities
existing in China. So while on one side,
China is overheating in the short run, I think their policy response
is going to lead to a lot of capacity in real estate, in manufacturing
that eventually is going to have deflationary pressures in China
and around the world. So those are important caveats. So in the short run,
I see deflationary pressures in the advanced economies as well
as slack in goods and labor markets. Eventually, over time, monetization
of fiscal deficits is going lead to rising long-term interest rates
and the crowding out of recovery. One important point is that
the sovereign risk is now increasing in advanced economies.
We have trouble in Greece, in Ireland, in UK, and eventually,
unless there is fiscal consolidation, even in the U.S. and Japan,
the bond-market vigilantes might wake up and realize there is going to be
a fiscal problem down the line. Final observation
about financial sector reform, I think that the proposals
of the Obama administration are going finally
in the right direction and now, people like Trichet
and maybe King are also supporting those kinds of restriction, but in my view,
those restrictions are not enough. If financial institutions
are too big to fail, they are just too big
and these should be broken up. It is not enough just to take away
profit trading activity from bank holding companies. I think the repeal
of the Glass-Steagall Act was a mistake and we should
separate commercial banking from investment banking. So the reforms are going
in the right direction but we should be doing more toward
a more sustainable and stable financial system. Thank you very much, Nouriel.
We’ll pick up on financial market and financial sector reform
with Raghu later on. I very much want to make sure
that we take a look at the global economy,
but I think it’s useful, particularly with everything
that’s happened in the last week, that we sort of get a baseline view
of what’s happening in the U.S. Dennis, you talk to a lot
of leading CEOs, industrialists, private sector companies.
How does it look to you? Well, thank you. I agree with many
of the comments from Nouriel. We just completed a global
CEO survey – 1,200 CEOs from across the world,
surveyed 52 countries. Sentiment pretty much,
as we’ve been talking about in terms of things much better today
than what they were 12 months ago. We all know the environment a year ago
very much one of survival. Today, I think much more optimism,
but I would couch that as being cautiously optimistic
about the next 12 to 18 months. In particular, you start to see issues
around jobs, for example, the whole issue of job creation.
While 25 percent of the CEOs indicated that they would be adding jobs
in the next 12 to 18 months, when you look at the extent
of job creation, it is probably less than five percent,
so not a robust recovery from a job creation standpoint.
And quite frankly, you have almost 25 percent of the CEOs
in the survey who said they would actually be cutting jobs
in the next 12 to 18 months, and I think that tells the story
about how the business community is really looking
at the next 12 to 18 months. In terms of the management agenda,
that the CEOs are focused on, very much focused on cost issues,
cost containment, cost management, productivity improvements,
supply chain enhancements, again, very much
short-term orientation in terms of the focus
of management actions. Bottom line, cash flow is king,
an intense focus around liquidity. Having been through a very difficult
12 to 18 months in the past, casual is very much at the core of
everything that people are focused on. And I’d say the other area that’s
getting an awful lot of attention deals with the whole question
of risk management. And many CEOs in the survey
quite frankly indicated that they were caught off guard
with some of the issues that came up
over the last 12 to 18 months, so you’re seeing a much more intense
focus around the whole issue of how to manage risk,
how to take a much more strategic view on those issues,
and betting those in business units, and taking a longer-term view
and one of the lessons learned. So I think
there are a number of areas that, coming out
of the last 12 to18 months, the business community is focused on, but it’s fair to say
we’re not out of the woods yet. I think there is very much
a cautionary view as to what the next 12 to 18 months
are going to look like and a lot of concern
around a couple of critical issues, such as the whole regulatory debate
that was referenced. We can spend more time
on that today. Obviously, one of the key concerns
that CEOs are most concerned about and the second area I think
that’s getting a fair amount of focus is the whole issue of protectionism
and the debate around that and quite frankly, those two issues
combined raise the concern level as to the strength of the recovery
and whether or not that can, in effect, derail what it is we’ve seen
in the last several months here in terms of the next
12 to 18 months. So better today than a year ago
but nonetheless, not out of the woods yet
is the way I would couch it. Thanks very much, Dennis.
I’m particularly pleased that you mentioned about CEOs,
what they’re saying about jobs, and then Nouriel picked up issues,
labor market issues in his opening remarks,
because of course, I think one of the things
that we’ve learned in the past couple of weeks,
particularly in the U.S., is that it’s labor market issues,
it’s employment issues, and the question of jobs
that is driving so much of the political debate,
which is changing the environment in which we think about the economy
and financial reform. David, follow on and give us
a sense of your view again, mainly of the U.S. economy and then
we’ll spread out in a little while. Okay. I guess I agree
with some of the comments that have already been made. I don’t think I’d take either
of these gentlemen on a marketing trip with me
to fund raise for our funds, but there’s no doubt
their comments are very perceptive. I’m just trying to deal with reality. The U.S. economy has largely recovered
in the view of professional investors, I think, from the worst
of what we’ve gone through. We’ve gone through a bit
of a heart attack and heart attacks are not fatal so much
anymore and so we’ve learned a lot, and I do think it’s now a time
where investors are beginning to put money back in the economy. In fact, while the deals done
in 2004 to 2007 may not turn out to be the greatest investment deals
of all time, in fact, of the 20 largest deals
done in the United States during that period of time, none of them has actually
file for bankruptcy yet. Some are not in great shape but none
has actually filed for bankruptcy. And I think that a lot of them
will work their way through the system and actually will get
reasonably good returns. Some will get spectacular returns. The deals done in 2009 will turn out
to be some of the best deals done in this decade because –
or that decade and perhaps for the next five years or so
because the prices were very low. People got extraordinarily good
bargains and people bought things at the stressed types of situations,
so I think a lot of people will make a lot of money off
of deals done in 2009. Going forward, there are a lot
of great opportunities we see in the United States
and around the world. The most attractive place to invest
probably right now is the emerging markets. The emerging markets did not go down
as much as they traditionally do in a recession, in a global recession
and they rebounded much more rapidly than the developed markets have
and as a result, China, India, Brazil, among other places, are very
attractive places to invest. Korea, Taiwan, Turkey, Saudi Arabia,
Russia are all places that will see a lot of capital going
into these countries because prices are lower.
The growth rates are sloped to V and I think are likely to be very,
very high, much more attractive in terms of growth rates than
the developed markets in Western Europe, Japan, and United States. In terms of specific sectors
in the United States, I think the energy economy, the energy
will still be very attractive, both the green economy or green energy
area and the carbon energy area. We’ll still see a lot of demand
and I think prices will go up and investments
will be pretty attractive there. I think the health care sector, whether
the legislation goes through or not, and it’s unclear whether it will,
will still be an important part of the U.S. economy and a great place
to invest because the Baby Boomers are retiring and they will spare
no expense in making sure that they have artificial hips,
artificial everything else, plastic surgery,
assisted living, everything that they can do
with their money to make themselves live better
and live longer, they will do, and a larger percentage of the U.S. GDP
will go into health care. I also think financial services
were unduly depressed during this recession and therefore,
financial service investments will turn out
to be extremely attractive for people who are willing
to go into that area. And last, I’d mention
government-supported areas. The United States government
is not shrinking its size. It’s supporting a lot of industries
and is subsidizing a lot of industries, and lot of those industries will be
very attractive places to invest. In terms of the regulatory reform,
it’s unclear whether the president’s new proposals
will actually be adopted by Congress. Congress is operating right now
in a mode where they don’t really know exactly what the mood is
in the United States. They know that there is some mood
for something to change but it is not clear whether it’s
to beat up on business and be more of a populist
type of approach or whether to be more of a centrist
approach and try to get the Republicans and Democrats to work together,
and that will sort itself out over the next several months.
Right now, I don’t think that Congress is likely to pay us any significant
legislation in any area because I don’t think they know exactly
what the mood of the country really is and they are going to wait a while
for those things to sort out. To summarize, I’d say it is probably
a pretty attractive time to invest because the prices are relatively low.
I think the risk of systemic failure in the United States, financial system
or the global financial system is gone and as a result, I think investors are
now willing to put capital to work again and to get reasonably attractive
rates of return. While they may not be as spectacular
as they were for the deals done in 2009, I think the returns will be much better
than they were for deals done in 2004 to 2007. Thank you very much.
David put on the table the mood of almost institutional paralysis
in Washington, particularly in Congress, and I predict you’ll hear a lot more
about that in Davos this week. Arif, Dennis, David said
that emerging markets were particularly attractive
in terms of investment. Nouriel said that he was more bullish,
though cautiously – though cautiously
on emerging markets. You’re an enormous investor
in what we now call MENASA, Middle East, North Africa, South Asia,
and you were telling me earlier that there was a very bullish mood
in the Gulf, so tell us why. Well, to start with, I would take David
on a fundraising trip with me because he speaks
of my region so well. So thank you, David. I think overall,
some of the comments I’ve heard from people in the panel here today, we really have to start
differentiating ourselves between whether we are optimists
or realists. I think most people that find their way to Davos
are just naturally optimistic, but we’ve been through
such a massive shock in the global system that we can’t
expect to recover from it overnight. And David said earlier that
a lot of companies who have bought between 2004 and 2007
have not filed for bankruptcy “yet”. I think we are still going to see
a few more shocks in the global systems. I agree with what Nouriel is saying. The problem is it is a globalized
economy so yes, we can talk about negativity or arguably,
less optimism in the West and the United States
and so on compared to emerging markets, but we do take the cue from what is
happening in other parts of the world, especially our governments.
So when Western governments talk about regulation and re-regulation
and arguably, protectionism, I think our governments take
a lot of notice in emerging markets, especially in the MENASA markets.
And the problem with that is that we have just come out
of protectionism and we have just come out
of intense regulation. So going back into that cycle
is arguably very dangerous. Having said that, emerging markets
are a very, very good place to be in right now,
particularly driven by the fact that we are making up for lost time.
It’s the first time that emerging markets
have found their feet. We’ve always talked about them
being more risky than the West and whenever invertors were looking
at the markets in the emerging world, they had a premium for risk,
but when risk came, it came from home. So this rethinking of the parameters
has been very interesting and yet, because these markets
have got liquidity, they’ve got strength, they’re going
to make up for lost time. Just looking at the region I invest in,
which is MENASA, Middle East, North Africa, and South Asia,
we account for, I’d say, about 30 percent of the world’s
population, half of which is under 25. That means 800 young adults
and children looking to enter that consumer society
that everybody craves. So I think the opportunities
are tremendous. I think because of that
and because the liquidity of governments in the region,
the expense that will be incurred on infrastructure is going to be very,
very large, and we are already seeing it
in countries like Qatar and places like Abu Dhabi and so on
and India, for example, where highways are being built almost like they are coming out
of a freight train. So it’s interesting to see how the world’s attention
is going back in it. Just a small quick word on the GCC,
I think the world cannot do without oil. And for the foreseeable future,
it is the fuel on which the global economy moves.
And I think what people need to realize is 60 percent of the world’s energy
reserves sit under the ground in the GCC, 60 percent. And yet annually, only 30 percent
of global production, and I’m taking some license
around rounding off the numbers. I’m not an economist. So 30 percent of annual production
is actually coming out of the GCC. So this mismatch means that
as we run out of oil or oil resource dwindles
or as prices go up, the GCC share in global production
is just going to keep going higher and higher.
So liquidity is very much there. The desire to spend is very much
there and I think this time around, the desire to curtail excessive
spending is very much there. So all in all,
I think a very good place to be. It should be noted
that the emerging markets, it’s a dated term a bit;
it was invented in early ’80s and probably was applicable then,
but now, the emerging markets include most countries in the world
actually except for United States, Western Europe, Canada, Australia,
and Japan. In 2014, the GDP of the emerging markets will surpass
the GDP of the developed markets. It’s the first time
it’s ever happened. And so therefore, really,
it’s a little bit unfair to still call China an emerging market
or India an emerging market when they are in the same category
as Chad or Mozambique. The truth is some of these countries
have really emerged already and we should come up
with a better term. But there is no doubt
that the large emerging markets are going to be among
the most attractive places to invest over the next couple of years. Athens turns to Beijing for bond sale,
just to make your point, a headline that I don’t think
we would have expected to see only three years ago. Heizo, give us a sense
of how this looks from East Asia. Thank you very much
for this opportunity. First of all, I am from Tokyo.
I’m not from Beijing. But anyway, let me describe
what’s going on in Asia. This year, 2010, will be
a very impressive year for Asian countries, I think.
First of all, China’s GDP will exceed that of Japan,
definitely, and Shanghai’s GDP or Shanghai’s production
will exceed that of Hong Kong, and so all Asian countries are now,
in the short term, growing very rapidly;
China, nine percent, Korea ten percent, and Singapore sometimes ten or more.
But anyway, we should recognize that we are now on the track
of W-shaped recovery, in my understanding,
W-shaped recovery. This I also discussed last year. After the Lehman shock,
the GDP stock price plunged. But in the first half of last year,
it stopped. Now, we see some type of recovery
but in my understanding, this is not sustainable
in the current pace. Two reasons for this recovery now:
one, the China factor. China’s GDP, as I mentioned,
it’s almost equal to that of Japan, and this is increasing by ten percent.
This is affecting a lot to the surrounding countries.
This is the first factor. The second factor is fiscal expansion. We have never seen such a large-scale
fiscal expansion in the history of economic history.
But important point is I say China’s growth will continue
but fiscal expansion will not continue, is not sustainable. That’s the very
most important point. In my understanding, we can distinguish
four groups in this region. One is the emerging countries,
BRICs maybe, especially China. This country will continue to grow. Let me mention a little bit China.
Now, we still have an image China the economy is growing
based upon huge input of capital, input of labor, input of energy.
However, this growth pattern had been changing dramatically
in the last several years. Based upon the new estimate,
about 1/3 or more than 1/3 of China growth
comes from technological progress or growth of total
factory productivity. So the China’s growth pattern
is much more, in a sense, modernized or normalized. And also, they now have a very good
know-how for micromanagement, I think, especially in monetary policy.
It’s now being provided so just mostly successful
from market economic management. This is the second reason. Anyway, so China and some of these
BRICs countries or emerging markets will, in a narrow sense,
will continue to grow. The second pattern is the countries
that — the second category, the countries who can incorporate
the dynamism of these countries like China. A typical case is Korea.
The Korean economy is now growing, as I mentioned, ten percent or so.
These countries, like Korea, who can, let’s say,
sell a major great product to the middle class
of emerging countries, can grow. The third countries, third categories
are particularly in Australia. Some of them, some of these countries
have very explicit new type of growth strategy, and I guess
with Australia, maybe you know that they have a very numerical
target for population, and that is another discussion on that.
But anyway, Australia’s population is expected to grow by 60 percent
or 70 percent in the coming 25 years or so.
This is the third category and the first categories
are the countries, so European countries,
most European countries, the United States,
and Japan belong into that. But finally, I’d like to raise two
risk factors we did not discuss yet. One is deflation. Based upon
a very bitter experience of Lost Decade of Japan,
this deflation is very difficult to be tackled. Under a situation
of deflation, their interest rates go up even if nominal interest rate
is around zero percent. We have been suffering from deflation
for nearly 15 years. So I’d like to say the monetary policy
is always very important on such circumstances. We have been
discussing the role of fiscal policy for the last several years but monetary policy
should be discussed here. And the second point is, well, also,
in the last year or so, we discussed very intensively
the need for activism of the government, but we should discuss now how to avoid
over-activism of the government. A symbol of over-activism
is protectionism. And also, for some countries in G7,
the general election will be held. Recession is there, activism is there,
and the election is there. Rather populist policies are emerging.
We have to be very careful with that. Thank you very much. Raghu, you and I were at a World
Economic Forum Conference in Delhi just before Christmas and we are
talking about the Indian economy and other developing economies, and I thought you were particularly
interesting then on the challenges that face the developing economies. I’m trying to avoid
the word “emerging.” So just talk a little about
how optimistic you are about growth outside the kind
of core Atlantic economies and some of the challenges
that face the largest of them. Sure. Well, let me just start
by taking off from where Heizo left off.
I mean I do think we’ve moved from a period
of great economic uncertainty to a period of great
political uncertainty. And to my mind, the two numbers
which really reflect this are ten and ten,
and what does that mean? Ten percent unemployment in the U.S.,
ten percent growth in China. And how does this play out
as we have the elections, the midterm elections in the U.S.,
and elections elsewhere, I think that’s the great uncertainly. Certainly, there could be
a move towards populism. There could also be a move
towards protectionism. Both are potential outcomes
and I think that’s one worry. Going to the issue
of emerging markets themselves, I think the old description
of emerging markets was indebted governments,
very accommodating monetary policy, suspicion of markets,
polarized electorates, and I suspect, private sector.
My sense is the countries that would most fit that description
today are the industrial countries. The problem I think — now,
before jumping, I think, to argue that the emerging markets
are the new industrial countries, I think we should pause
and ask why this has happened. My sense is that what we’ve had
a situation of excess demand being created
by the industrial countries. Now, the hot potato, in some sense,
of excess demand is being shifted
to the emerging markets. Historically,
they have never managed it well. That is why they actually
cut back and let the U.S. spend and relied on export leg growth. Question is this time around,
will they do it better? And I think at this point,
we have to suspend judgment. The hope is that policies
in emerging markets will be much better this time around,
but demand is very hard to manage, especially in your own country, and there is the risk
of going from boom to bust again. On India itself, I think India is certainly
beginning a period of strong growth. It dipped quite a bit
during the recession but has come back. On the backs of strong domestic demand,
the auto sector is taking off, the housing sector is taken off,
and there is also a fair amount of rural demand partly
as a result of government policies providing rural insurance.
In some sense, if you look over the next ten years,
India really should not have a problem growing because the fundamentals
are all in place. The demographics look good,
a very young population, which is increasing
the labor force quite a bit. Savings should increase.
This the sweet spot that all the Asian economies had
when they grew a very high labor force, low dependency ratios. That’s coming to bear on India now,
but India needs to create the jobs. To create the jobs
for this labor force, it needs to improve infrastructure,
which is really the key word in India today, and has to also work
very hard on shifting rural jobs to industrial jobs
and service sector jobs. That means all the things
that other countries have to do, India has to do in steps,
create that infrastructure, create education. And this is where you have to start
asking some questions of Indian policy. Is implementation good enough?
Should it be better? Is there too much populism
at this moment? Is India redistributing before,
in fact, creating enough income to redistribute?
And is it going to be held hostage to the entitlements
it creates in the future? And of course,
like every other emerging market, it’s tackling the issue of inequality,
which is creating political pressures, I think. In India, there are
the super rich and the very poor. That is creating tensions in society and that’s something this government
is trying to address. Nouriel, can I come back to you
on the developing economies? In your opening remarks,
it seemed to me that you were trying to remind the audience that although
there was an exciting growth story outside the U.S.
and the Atlantic world, one should be very, very cautious
in jumping to the conclusion that what was happening outside
the advanced industrial economies could, in any short-term scenario,
replace an absence of substantial growth in the traditional industrial economies.
Am I summarizing you accurately? Yes. For the last decade,
the United States and a few other countries
like the UK, Spain, Ireland, Iceland, Central Europe, Dubai,
Australia, New Zealand, where the consumers are the first
and the last resort, spending more than their income,
running current account deficits, in part because all of these countries
had a housing bubble that now is going bust.
While on the other side of the world, you had the producers
of first and last resort spending less than their income,
running current account surpluses – China, emerging Asia, Latin America,
Japan, Germany. Now, the overspending countries
are cutting on their spending, on their consumption, their imports,
and therefore, the oversaving country cannot rely anymore on producing
more than they spend and selling their surplus
to the overspending countries, and that’s the challenge
that I think China is facing, of switching demand from exports
and fixed investment to domestic consumption.
So that’s one caveat for China. And for the rest of the BRICs,
I would say, Russia is in trouble. You have the demographic decline.
You have problems in terms of health of the population. You have
institutional constraint to growth. You have a one-sided economy
that’s based only on oil and energy. In the case of India, reforms are
occurring but more slowly than in China. You need to have
more openness to trade, to FDI, reforms in the labor market,
size of the government, things of that sort. And in a democracy
it’s much harder to do reforms faster than in an authoritarian regime
like China, so those are the challenges
that India is facing. In the case of Brazil, again,
the growth prospects are positive. You have to give credit to Lula
for bringing stability on the macro side, low inflation,
fiscal adjustment, but this not doing anything
of the structural reforms that are needed — micro structure
to lead to an acceleration of growth. We’ll see who is going to be
the next president and whether there’s going to be
commitment to do more of those. Structure reform is going to lead
to an increase in the potential growth rate of Brazil.
So I would say I’m cautiously optimistic
about the BRICs but in each one of them,
you have different types of economic and financial challenges
that have to be addressed over time. Very good.
David. It’s very difficult to predict exactly
where economies are going to go over the next six months or a year.
I think you’ve done a very good job in predicting a lot of the problems
that the economists faced over the last couple of years,
but most economists generally, over longer periods of time,
don’t have a great track record of predicting six months or a year,
two years in advance and so professional investors
don’t often rely as much on economists as other things.
And right now, I’d say – there is nothing with disrespect
to the economic profession, but sometimes, as I said,
generals fight the last war, economists fight the last recession. And I think that professional investors
are often looking at other factors. Right now, the thing that I think
most professional investors are most worried about is the uncertainty
of that government policy. What is government going to do
in reaction to the problems we’ve had over the last couple of years
and will there be an overreaction? Markets often overreact and sometimes,
governments overreact. I think most professional investors
are worried that governments in the developed markets, as well
as perhaps the emerging markets, are going to overreact to the problems
we have in the last couple of years, and I think it would be better if we were to have less
of an overreaction and let markets not be
unregulated completely but not overreact
to some of the problems we’ve had. I think in terms of what
the U.S. government is likely to do, no one really knows
whether the Congress will go more of a populist mode
or more of a centrist mode. Will Rogers,
a humorist in United States, once famously said that, “The country is never safe as long
as Congress is in session,” and there may be some merit to that.
We don’t really know what our Congress is going to do
right now because Congress is still reading the tea leaves
from the election in Massachusetts, and that is a case lesson,
“Be careful what you wish for,” because it was the Democrats,
not to disparage them, but the Democrats
who changed the law in Massachusetts to enable there to be
a special election. Had the law that had been in effect
for nearly a century been allowed to stay in effect, the governor would have
appointed the senator. The governor presumably would have
appointed a Democratic senator. That Democratic senator
would have been the 60th vote. The health care legislation
would have gone through and we wouldn’t go on through
the kind of upheaval and uncertainty we now have in the United States. So I think be careful
what you wish for, in some cases, both in professional investing
and also in economics. That gives me a nice segue
to bring Raghu back in. The title of this session,
we should remind ourselves, is to do with the new normal.
And part of the new normal, it seems to me, is a radically changed
intellectual environment than we’re enjoying or that
we were experiencing three or four years ago,
particularly as it refers to financial market reform,
to banking reform, and so on. Ad that changed intellectual
environment is, of course, melded with a changed
political environment that David was talking about
a second ago. You have been writing on this sort
of stuff for many years, a famous paper in 2005,
the Jackson Hall Conference on the risks of financial innovation
and then a terrific op-ed in the Financial Times just yesterday.
Stand back a little and kind of try and explain
how the intellectual climate has changed as one looks
at these issues and how that is likely to effect
the political debate, particularly in the developed world
and in U.S. Well, clearly, what’s happened
is there’s a lot of fear of market forces. Now, whether
the market should be feared of something else should be feared
is an important question. But clearly, I think across countries,
there is a suspicion that the markets didn’t perform well.
There is also, in some countries, particularly the United Kingdom,
based on the example of Iceland, a real fear that you have
an uncontrolled financial sector which could take the economy down.
I mean in Iceland, many of the liabilities
of the financial sector have rebounded to the government
and are enormous relative to its GDP and certainly, countries
like the United Kingdom and perhaps, even Switzerland, feel that they have
a monster which they need to curb. So the kind of regulatory efforts
in the United Kingdom, to my mind, stem, to some extent, from fear
of the monster they’ve created. In the U.S., it’s more outrage.
The unemployment numbers set against the huge bonuses, I think,
make for a lot of pretty politics, and as a result, I think
you’re going to get a lot of action just on the basis of that outrage. “Somebody is making too much money
and at the expense of Main Street,” that going to be the rhetoric. And then there is a sense of dismissing
the financial sector as unimportant. That’s also an undercurrent
that you see. Nobody is going to get financing
from this sector for a few years to come
so why not shut it down. What’s it doing anyway
that’s useful? They are not lending
so let’s go ahead and attack it. And so in all this, I think with
this undercurrent sort of at work, actions that have maximum visibility are, in a sense,
making their way to the floor. The action on bonuses, now,
how much that will help is debatable, but certainly, that’s upfront.
Now, of course, recently, talk about banks being too big
and cutting them down to size, the problem with many of these,
of course, is while broadly, they make sense at first glance, when
you look at them in closer detail, you have to ask whether
they tackle the real problems. And this is where I disagree
with what Nouriel said about the financial sector agreeing with much
of what he said on the real sector. I mean too big to fail
is just one potential problem and there are many other problems.
You could have too many to fail. You could break up the big banks
into many small banks and have to bail them all out.
That has happened in the past also, so long as they all
take the same risk. So I think we are in danger of just
attacking the most visible problem without thinking through what,
in fact, we need to do in order to make sure what happened
didn’t happen again. And the downside to that kind of attack
is you go in a yo-yo. You overregulate and then
because you overregulate, you start whittling away
the regulation and then you again go too far
and whittle away too much. So to just end, I think the mistakes
we are in danger of making: we are going to regulate the visible.
We’re going to compound interventions. We made some interventions in the past.
We’ll add more interventions in order to undo the effect
of the previous interventions. We get more of a mess and we’re going to risk causing
the financial system a lot so that when, in fact,
when we come out of this recession, the financial system
is going to be unable to step out. The greatest danger, of course,
is what I have pointed out, that the emerging markets take
their cue from the industrial economies and do exactly the same and find that
they’ve killed their own growth. I have three people wanting to come in.
Dennis first. In the UK, fear is driving policy.
In the U.S., outrage is driving policy. Is either a good driver
of decent policy? I don’t think there is a big debate
about that there needs to be some form of regulatory
change to take place. I think the real question
is what is it? And I’m reminded by the fact,
over the last 12 to 18 months, central banks, different regulators
from around the world, the business community,
a lot of interested parties worked very effectively
to deal with the crisis, the financial crisis, in a very coordinated,
collaborative way. To me, that’s the type of reform
that really needs to take place. The debate needs to take place
to really deal with, I think, a set of very complex issues that really affect
our global capital markets. What you’re seeing today, I believe,
is a lot of populist debate and discussion taking place
on a country-by-country basis that quite frankly, looks good,
sounds good when you look at the headlines
and the reporting of that. The question is will they really
be effective in dealing with the long term issues
affecting our global capital markets? And one of the biggest fears
I think we all have is that we will rush
to quit through reform and changes because it seems like
the right thing to do and maybe they are in the short term,
but will they effectively deal with the issues that gave rise
to this financial crisis and therefore, not really deal
with the substantive issues that will really fix the situation
that we’ve dealt with over the last 12 to 18 months? So I think there is great discussion
and debate taking place with the G20 and with the various regulators
from across the world, people who are knowledgeable
about the issues that gave rise to the crisis.
I think it’s much more complicated than compensation, for example.
I think there needs to be issues around transparency dealt with, issues
around regulatory reform changes, transparency, and whatever.
Those are the fundamental issues that I think need to be addressed
and if they’re done in the right way, I think they can really help
sustain our global capital markets for the longer term. But Congress is going to pass
some kind of regulatory reform. We don’t know exactly
what it’s going to be. It will be something
so that they can go home to the voters and say, “We passed something.”
It probably won’t be as grandiose as some people have proposed. But the bigger problem that Congress
has to address are the three Ds, which are debt, deficit,
and the dollar. And right now, our debt
in the United States is $14 trillion, not counting $41 trillion
of unfunded pension liabilities for Social Security, Medicare,
and Medicaid. It’s roughly, when you add it all up, about $230,000
per every man, woman, and child in the United States.
They have to get that under control and they have to do that beginning
with getting the deficit under control. We’re running a $1.4 trillion deficit
every year. Our deficit is bigger than anybody else’s annual budget. And
until they can get those under control, we are not going to deal with the
third problem, which is dollar. And the dollar is the only
reserve currency in the world and it’s going to be
the only reserve currency for at least the next ten or 15 years, and it’s going to be sinking down
a fait bit increasingly unless we deal with the debt
and the deficit. And the only way Congress
is probably going to be able to do that is some type of commission
that’s now being proposed – the president will probably
address it tonight – that really, in effect, does something
that requires Congress to, in effect, cut spending
and increase taxes a bit, almost despite their best
instincts otherwise. Unless we get spending under control
and our debt under control, I don’t think the dollar can really
be the reserve currency for as long as the people in the United States
would like it to be, and that, I think, is the far greater
problem than regulatory reform. Arif, you wanted to come in. Yes. I just wanted to say
that like everybody else here, I think regulation is a good thing
and it’s important for everybody to know a given set of rules
by which they operate, and I think that better regulation
should emerge that realigns market participants
with regulators, not the other way around.
And the important thing is, picking up from something
someone said earlier, it actually is not being operated
or orchestrated on a global basis. Regulators in different countries are looking at things
slightly differently, and I think that populism
is actually ruling the game right know. So a lot of what we are hearing
is coming out in an effort to assuage populist sentiment,
but this is a very, very big issue. It is populism that is being addressed,
not sentiment. And sentiment is actually a very,
very different thing from what needs to be done,
for example, in the UK by a government
that appears to be on its last legs and is doing a lot of things
in order to win populist support, but sentiment is totally different. For example, U.S. companies
are actually turning around. They are doing well,
but unemployment is increasing. So the difference between the people
that work in those companies and the companies themselves is a gulf
that is becoming wider and wider. So the way I look at it
is if you go back into just for a second stopping
and thinking that this is a crisis that has now been three years
in the making or revolving, okay, and people,
we’re dealing with people. We’re dealing with sentiment. People are emotional
and people react with emotion. So who is the most important
constituent in the global economy? It was the housewife in Utah. It may no longer be the housewife
in Utah five years from now. It could be the office worker
in Shanghai, with no disrespect
to any other country in between. So we have to stop and think
for a second how do we address emotion in the context of everything
that is happening? Tough years, ladies and gentlemen.
Change people’s behavior. They change people’s core values and no economist model
accounts for emotion. That’s where I have a problem. And I hope we pick that up
during the week. Heizo and then Nouriel
will come back in. I am an economist,
sorry about that. But I used to be a policymaker
at the time. I was in charge of the disposal of ten years ago as a cabinet member. based upon my experience.
Sentiment is very important. Maybe expectation is very important,
I’d like to say, as an economist anyway.
But anyway, based upon my experience as a policymaker,
I have one strong lesson and that is
it is impossible for politicians to understand the finance. This is
a very important lesson for me. Well, at the same time, well, we now have two important lessons
on current situation. One is the so-called shadow bank
or shadow banking should be regulated to some extent.
It is inevitable. We are fortunate
that we have been focusing for a long time on the banking sector,
but shadow banking is important. Other factors as well, human capital
training is much more important. Technological progress
in financial technology is not bad, but this time, human capital
could not catch up with this advance of technology and also, this is
applicable to the general public. We have to decide in the final stage
in the democratic process, under such circumstances,
support of a general public is very much needed. At the same time,
other important lesson is bankers, financiers are also
hated by the general public, so it is sometimes very difficult.
Well, the discussion among specialists, it’s quite understandable and I can expect they are now
discussing in the right way. However, in the very final stage,
the education of general public and some leadership by political
leaders are indispensable. This is the only way to avoid so-called
populism we’ve been discussing. So based upon my experience in Japan
where you had – it took ten years or so
to persuade the people, so a strong leadership
is very direly needed in this process. Very interesting point.
Nouriel, you wanted to come back in. Well, some people in the panel
expressed concern about overregulation of the financial system.
My concern is the opposite, that we’re going back to business
as usual. There is now increasing leverage
and risk taking by financial institutions.
Profits are rising. Lots of proprietary trading activity.
Compensation is again becoming obscene in terms of bonuses. There is
no really reform of compensation by adding clawbacks or other kind
of incentive compatible compensation. We have zero interest rates
among advanced economies. We are quantity leasing
with forbearance and we forget
that between recapitalization, liquidity support,
the insurance guarantees, about $11 trillion were committed
to the financial system by the U.S. alone; three
out of the 11 already dispersed. So we have a situation
in which right now, we are returning to business as usual. There are now
dollar-funded carry trades. There are asset bubbles
created in the United States and emerging markets around the world,
and I worry that we are in the beginning
of a cycle of excessive and now return to asset bubbles,
to credit growth, to leverage, and then it will lead to the next bust.
So the issue that in the short term, well, of course, we need the stimulus
and forbearance but we have to impose a restriction
to the financial system to avoid making the same mistake
of the past is forefront to me. And I think it’s worth picking up on
a point that Arif made a second ago. Another thing that indicates
return to business as usual, there’s been a little bit
of discussion here about the need
for international cooperation. The G20 has been mentioned
a number of times. But in fact, if you think back to where
we were on this panel a year ago, hoping that there would be
significant international cooperation, shared regulatory regimes,
and so on and so forth, you would have to say, wouldn’t you,
Raghur you are nodding your head, that that had run
into that sand so far. Yes. I mean I think
it has run into a paralysis. At least,
we are not seeing much come out. Now, it may be that what is going on
is recent thinking. The problem is the time frame
for action is very limited, especially with the pain
that the general public is facing and they want to see
something done about this. They want to see something done
about the problem. And I think part of the problem
also has to do with the fact that the regulators
and the finance ministries have been treating
the financial sector with kid gloves so far.
And that goes to Nouriel’s point that some of these high bonuses
and so on are waving a red flag in the eyes of the public.
And unfortunately, the banking sector has not
covered itself with glory also, recognizing the mood of the public
and reacting appropriately. But I think it ultimately
goes back to Heizo’s point which is that the details
of what need to be done on a careful basis are very hard
to communicate in public. And therefore, the tendency
is to do visible things which are maybe peripheral
to what really needs to be done. For example, if you look
at the history of Glass-Steagall, it really had nothing to do
with the problems that actually emerged at that time but it was a blow
against the banks, which Senator Carter Glass had been
trying to inflict for many years and he got his chance finally
and did it. And afterwards, there were lots of anecdotes
about how it might have worked, et cetera, but it wasn’t based
on the data and I think we’re in danger
of doing something like that again. Just inflict a blow
for the sake of inflicting a blow though not necessarily
in order to further regulation. Finally on international cooperation,
there are a few things on which cooperation can work;
I think capital requirements and on a bankruptcy regime.
These are hard problems. I think otherwise, a lot
of the country-by-country regulation has to be done by country regulators.
There is not that much scope for cooperation because the financial
systems vary so much across countries. The U.S. is very different
from China or India and the same regulations
might be hard to apply. Oh, yes, Heizo. A small comment. We are now discussing
the need for international cooperation. I do not deny that.
That’s multilateralism. At the same time,
we should seek very seriously for that best combination
of multilateralism and unilateralism. Consider the case
of the London Conference in 1933. At that time,
European countries tried to preserve the Gold Standard but the United States
took some unilateralism to deny that. This decision
advanced the global system. So sometimes, sometimes,
yes, basically, some international cooperation
is needed. But at the same time, we should consider
very solid attitude of bank to leaders to move forward. That’s
the important point to be discussed. I think we should go to questions
from the audience. We’ve got a little over 20 minutes and I’m sure you have lots
of questions for our terrific panel. I can already see lots of hands up.
Ernesto, who is bidding in an auction, just wait for the microphone
to come over. Please identify yourself
and then we’ll — Yes, Ernesto Zedillo
from Yale University. Nouriel, a few months ago,
you wrote a very provocative FT op-ed. I think you called it
“The Mother of all Bubbles.” Most of us thought
the mother was in ’07, but you were talking
about the new future. Now, this reference to these bubbles
that we have seen all over the world, we talk about commodities,
stock markets, and so on, was only mentioned marginally
in your presentation. Have you become less concerned about
these new zero interest rate policy it’s causing in the world? To Raghu, do you think that this
lite Glass-Steagall Volcker Rule is going to cause some sort
of financial repression in the banking sector so that the other part will explode
not so far in the future? They’re very clever at Yale. They
manage to get two questions in one. But anyway, Nouriel on bubbles
and then Raghu on the Volcker Rule. Well, in that FT piece, I spoke
about the mother of all carry trades, the work I’ve done suggested
there is a significant amount of this carry trade going on not only
towards high-yielding interest rate countries but also towards
commodities, equities, credit, emerging markets.
The high correlation between all asset classes
suggested exactly these dollar-funded carry trades
are driving decrease in asset prices. Of course, the recovery
in asset prices, in part, is due to the fact
there is a global economic recovery and less risk aversion
but I think it’s becoming too much, too fast, too soon,
and the U.S. monetary policy right now is exported
to the rest to the world because China is a big factor
to the U.S. dollar. The rest of Asian emerging markets
are worried about appreciating their currency too much. They are
all intervening very aggressively. The rate of reserve accumulation
in emerging markets is now at the annualized rate
of $1 trillion. Most of it is not fully stabilized
and is leading to excessive monitoring and credit growth is going
into asset prices, from commodity to credit
to equity and so on, and I think that eventually, if this
asset bubble were to continue, become excessive, it could have
a massive correction and that’s going to be dangerous.
So I think that U.S. monetary policies are really imposing
a significant easing bias towards all other countries
in the rest of the world. Arif, actually, before I get Raghu
onto the second part of the question, Arif, I could see
you sort of nodding with a slightly worried look
that you had — Actually, just agreeing. Just agreeing? Very good. Okay, Raghu on the Volcker Rule,
as it’s now called. Well, I think it’s, again,
one of those rules which makes a lot of sense
when you think about it, but when you think about
a little more, you worry. I mean my sense is size
is a very crude measure and clearly, there have been
some large banks which have been very poorly managed
and I think there would be a consensus generally
that they should be broken up. There is also a sense
that it was enlarged banks which are very well managed and the question
we have to ask ourselves is do we get less risk
when you get a lot of tiny banks which take the same risks? There are also situations
in the world where we have rescued banks
because they were too many to fail even though they were all
very small. So I’m not sure that it necessarily
will help the risk taking if we focus on size
as an absolute limit. And the point that you’re making is,
to some extent, it could drive activity away
from the banking sector elsewhere, and that, I think, is something
that a lot of proposals have to answer. Are we better off seeing it
in the banking sector or having it hidden somewhere else,
where it comes back to hit the banking sector
in the worst of times? That’s exactly what we saw
during this crisis. How does this proposal deal with that?
Are we going to move activity away in order for it
to actually come back and hit us? Ken Rogoff and Carmen Reinhart
have come out with an epic study that showed that
over the last 800 hundred years, we’ve had a lot asset bubbles
and the governments haven’t been able to really deal with them,
and I think we should recognize that we’re not going to be so smart
as to eliminate all bubbles around the world. It’s just
not in our ability to do so. They have been around a long time
and they are going to be around for at least
another 800 years or so. A second point is on the Volcker Rule,
I don’t really know whether it’s going to go into effect or not.
Congress has to deal with it. The president just proposed it.
And the private equity industry isn’t certain what its position is
because if we come out in favor of it, it might not pass
and because our own popularity is not so wonderful
so we’re not sure whether we should say anything
about it or not. But I suspect that probably something
like that will ultimately get done, maybe not quite
what the president proposed, but something along those lines
probably will get done but with a transition rule
of three to five years, so I don’t think it will have
a dramatic effect on any institution right away. Bubbles, like the poor
and Manchester United, certainly are always with us.
Arif. I think we talked about regulation
and we talked about how Glass-Steagall should be repealed.
XYZ should happen. We forget about the fundamental pillar
of capitalism, which is the shareholder.
And what is happening right now is we are looking at institutions and
we are talking about too big to fail and we are looking at issues
relating to the banking industry. I’ve had lots of conversations
with very, very senior bankers in the last couple of years who said,
“Look, we didn’t suffer enough pain. We went through a process
where we did wrong, things happened,
but we didn’t get punished. Governments bailed us out
whatever happened and we’re back
to the same old games.” What has happened to the role of the shareholder turning around
and holding people accountable? It’s gone away, it seems.
We have completely delegated our ability to do anything
as individual activists to the shareholders to government
and seeking more reform. I think we should pull back some
of what made capitalism good and great and turn around and say,
“What is it that is wrong with that institution? How do we
bring accountability back?” Lady in the front row. Please, there’s a microphone coming
and please identify yourself. Hilda Ochoa, Strategic Investment
Group, Washington D.C. There is a silver bullet
but no one wants to look at it, and a silver bullet,
in the case of a corporation that has more expenses than revenue,
is to restructure the balance sheet. In the case of a government,
the only way to start restructuring the balance sheet
is to devalue the debt. But there are tons of assets
that can be sold and can be sold to surplus countries.
I’m talking about the United States. The United States government
is the largest owner of land and natural resources in the country.
Why is the dialogue not concentrating on a rationalization of the use
of natural resources and other assets in the United States by selling them
to surplus countries to raise $3 to $5 trillion in assets
over the next five years? Well, because I think what would happen
is there was a rumor in the late ’70s that — or I should
say in the early ’80s – that the foreigners were buying up
American farmland and as a result, legislation was passed to make it
more difficult to do that. The reaction of the United States
to that, I think, would be legislation
that would restrict the sale of these assets to foreigners
because we’d be concerned we’d be selling our natural assets
and national assets to foreigners and that would probably produce
a political problem in the United States. So I don’t really think
that would likely solve the problem. Even though it might
economically do so, I think politically, it would be
untenable to the United States to tolerate selling our major
natural resource assets to foreigners. I don’t think it would work. You lend it to them. Nouriel. I mean there are definitely
political constraints. I think in addition
to trade protection right now, there is a concern about asset
or financial protection, and we saw it in the Cnooc-Unocal case,
in the Dubai Port case. As long as foreigners
were willing to buy low-yielding treasuries
in the United States, things were fine. When they suddenly want
to take control of real U.S. assets, either private or public, now, there is
a political backlash against it. I think it’s very unfortunate
there’s a backlash against sovereign wealth funds,
but that’s a political constraint we’re going to face. Of course, in an adapter country
like the United States cannot be too choosy about the way
the rest of the world is financing itself and at some point,
the U.S. would have to deal with the fact that given
the large current account deficit, given the large fiscal deficits,
unless it allows the foreigners to buy the kind of asset
they want to buy, an increase in debt
is going to be equity, foreign direct investment,
things of that sort rather than low-yielding treasuries,
there will be a financing problem. And the traditional way we deal
with this is inflating our economy, as you know,
and I’m an expert in that because I helped to get inflation
to 19 percent when I was in government, which is not easy to do. But we’ve had,
over the last 20 years or so, inflation has been
roughly 2.2 to 2.3 percent in the United States. It’s almost
certainly going to go up and that’s how we’re going to deal
with our debt problem. That’s the only way and I think
is inflate our way out of this. Never mind Cnooc and Unocal
and stuff like that. Some of us are old enough
to remember when selling Pebble Hills golf course
was a political issue too. In my view, the inflation solution
to that problem is not going to be the right solution. If you’re going to have high inflation,
eventually, you’re going to need the Volcker style very severe recession
like they did too, one. Two, a lot of the debt is short term.
It’s going to essentially roll over at higher interest rates
and expect the inflation goes. And the last time we used inflation tax
in the ’70s, where in that crisis of country
and then a lender running current account surpluses
who are to use the inflation tax the rest of the world
is financing as today. It’s not going to sit idle and accept
a real levy on their dollar asset. There’s going to be
a rush-out of the dollar. It could be a collapse of the dollar,
spike in interest rates, and a severe recession.
So unfortunately, while there is a temptation
to use the inflation tax because running the printing press
seems to be the path of least resistance, even the willingness to raise tax
to cut spending, the inflation solution
will be actually much more damaging than alternative ones. Gentleman right in front. Michael, I want to –
I’m Joe Schoendorf with Accel Partners. We are venture capitalists
that find high tech innovation around the world — China, India,
Israel, Europe, Silicon Valley. You saw me this morning and you said, “Hello, how’s it going?”
and I said to you, “You know, really, really great,”
but I feel bad saying that here. And the conundrum is this.
In the 40-some years I have been in Silicon Valley,
I’ve never seen more core innovation that’s happening, whether
it’s in personalized medicine that’s you’re going to hear about
or alternative energy or the digital economy.
Look at Google’s numbers. Look at what Amazon
is probably going to do. We just looked at our companies,
most of whom you haven’t heard of yet. They didn’t just do good last year.
They blew through numbers. So you’ve got this economy
that’s the digital economy that’s going like this
and there is a shortage of workers, and by that, I mean we don’t have
the talent we need in the U.S., programmers and people who can design
chips and make these things work. And on the other hand,
we’ve got an unemployment that’s ten percent
and if you count the real number, meaning people who would like
more work than they can find, it’s a much bigger job than that.
And the jobs that this new economy is going to produce
by the very nature of the technology, we’re designing labor
out of it. I mean for us to sit here and believe
that China isn’t going to be the world’s largest producer
of solar panels is na�ve. The jobs to put these things
on people’s roofs aren’t going to pay
the $70 or $80 an hour that the automobile industry paid.
So I’m curious how this conundrum works out
and what you think about it. The good news is we’ve never had
a brighter future from a global innovation
point of view. What it does
to global employment is a TBD. Dennis, come in, yes. I want to say it’s really a great point
because one of the areas that we’re really focused on
in the CEO survey was this whole question of talent
and talent development. And notwithstanding the comments
around unemployment and jobs over the next 12 to 18 months, one of the top issues
that’s on the mind of every CEO is how you develop talent.
But more importantly, how do you move talent
to where the real opportunities are? And when you look back
over the last 12 to 18 months, one of the key issues
that many CEOs talked about was the imbalance that exists
in terms of where their employees are, their talent is today, where it
could have been deployed elsewhere in a more productive way across border, and the issues and challenges
that deal with that. One of the top areas for investment
in the next 12 to 18 months is talent, talent development, how you attract,
retain, retool a talent, the number one — one of the top
concerns that everyone is focused on, and I think the organizations
that really have that in the spotlight are going to be the ones
who’ll really win into the future. And actually, you’ve always stressed,
haven’t you, that the U.S. has a — I don’t know whether
the right adjective is “unique,” but has a tremendous ability
to see people migrate from one reason to another,
from one industry to another, and that labor mobility and labor
adaptability in the U.S. is Without question.
I think the whole issue of mobility is going to be one of the top
challenges that we all face to really deal with making sure
that all of our talent, wherever it sits today,
is deployed in the most effective way. Raghu and then Arif
wanted to come in. Well, I think
if you look back in history, you see that crises,
big crises tend to be around times of big technological change,
and with correlation, how it works out, people have models of it but it’s
certainly something seen in data. And that speaks to your point
that typically, the technology creates
a whole lot of turmoil but after that, it takes hold and there is a period
of fairly strong growth. So if you look back at history,
one would feel confident looking into the future.
Somehow, we’ll work this thing out and then those
technological advancements that you’re talking about
will be taken up. But I think key to that
is to preserve the flexibility and that’s why you have
to be bullish on the U.S. if, in fact, it can preserve that
flexibility going forward to adjust. Now, it may be that not all the jobs
will be in technology, but there could be
a lot of support jobs outside technology for the few who
actually are in the technology area. Where they will be specifically,
it’s always hard to predict. That’s why it’s extremely hard
to combat the people who say it’s very bleak
because you really can’t tell whether jobs will be created,
but they will be created. Arif and then Nouriel Yes, I think innovation
and technology are critical. Your point was excellent and it’s
important to continue that focus. But again, going back to something
that I was saying earlier, it’s that emotion
and negative viewpoints around where the economy is going.
More conservatism leads to cut backs. People and all the services
that I have been looking at, including your talks about CEOs
being obsessed with conserving cash. That means less expenditure in R&D,
which means less expenditure in innovation. So in a sense,
we enter a self-fulfilling cycle which leads against what you’re saying,
which is very bad. We need to focus on it. The innovation is not coming
from big companies. It’s coming from startups
where there is enough. But you’re right.
The challenge is with big companies de-funding R&D,
which is creating this where the innovation is happening. My concern is that traditionally,
you are right, that bubbles have been associated
with technology and innovation. You had the railroads,
the car industry. You had the tech bubble
that went bust. And after each one
of these bubbles went bust, you had at least a base
of productive capacity, like having all this nitro technologies
and so on. But in the last 30 years in the United States
where there are three bubbles, two of them have been associated with
essentially real estate going bust. And the last one was real estate
and financial innovations. So my concern is that those innovations
that are leading to technological advancement
probably lead then in a backlog of technology
that can be spread around the world. In the case of real estate
and financial innovation, I didn’t see this
technological innovation occurring. The biggest challenge
that’s really occurred in technology the last 20 years
is not the technological changes that you and others have invested in.
It’s the fact that you are not saying that you are investing in and you have
operations in China and India and other parts of the world. It used to be the center technology
innovation was in Silicon Valley but it’s changed dramatically
and so many of the great technological investments
over the next ten, 15 years are going to come not
from Silicon Valley but from India, China, and Israel
and other parts of the world. Heizo. Okay, the case for shift
for technological progress prevailing every year maybe
and everywhere I think, including China, Japan,
et cetera, etcetera. The realistically
much more important problem, how to finance, how to realize
and commercialize that technology, in my understanding, but maybe you are discussing
a much more core technology. But in the case of a China dimension,
now, they have a capacity to finance this. They realized financially so that’s
an important social aspect of technological progress,
I think. Give them the Facebook
at the initial price. as a Facebook. If you go outside
the convention center this morning, incidentally, you will see in
a prime piece of a real estate that I think Reuters and the BBC have
had at various times CCTV, China TV. I was very struck. One quick question
with very, very quick answers. The gentleman right here at the back
has been trying to catch my attention. Tony Poulter
from PricewaterhouseCoopers. We’ve heard a lot about –
yes, not aimed at Dennis. We’ve heard a lot about sentiments,
electoral sentiments in particular, and the constraints that might
impose on decision making, in the U.S. and the UK at least,
whether it’s regulatory reform or government asset disposals.
I mean given that, how realistic is it to have hopes
for a multilateral solution? And if it’s not realistic,
does it matter, given the discussion
we just had about We touched on that a little earlier.
Does it matter if we have multilateral approaches to this?
What hopes are there for international cooperation?
Kind of quickly around the table. Heizo, do you want to start? Well, we are now discussing
these issues in various places also. For example, financial regulation
will affect a lot of Asian countries and so we are now sharing the views,
sharing the interests on that point. In that process, I think
the multilateral advancement will be realized, I think. Okay, David. At the World Economic Forum,
you should always say, “Yes, multilateralism is possible and
we’re going to all come together.” But to be realistic, getting national
solutions is difficult enough. Getting multilateral solutions
to these problems is going to be almost impossible. You should always say,
“International cooperation is essential
but be prepared to be disappointed.” Multi-stakeholder solution, yes. Yes. But what he is saying
is very important and probably correct but it is critical.
I think we’re sitting at a watershed moment
in global history. Thirty years from now,
sitting at the World Economic Forum, we are going to turn around
and look at occasions like this as seeing moments
where the world is changing. Don’t forget
the last big economic recession led not only to the New Deal
but it also created new monsters and world wars, okay?
So one big shock in the system and we could all be going back
to a seriously big issue. We do need multilateral solutions. We do need it. The trouble is
the global economy is becoming globalized more than before
trade channels, migration, capital movements, technology,
information being transmitted around the world,
but policies are becoming national. And if you think about
the big economic challenges, whether it is energy, security,
global economy change, reform, international monetary system,
reserve currencies, global imbalances, financial regulation, supervisions, those solutions have to be
international and apart from the question of, say,
trade in which we have an organization like the WTO,
in which there is enforcement. With the other questions,
there is disagreement. There is no cooperation. Well, I think there are some issues
which need multilateral cooperation. My sense is increasingly,
those will not be done at summits but will be done
through a global upsurge, through a global democracy via
the Internet, via the Web, via NGOs. I think we’re going to see
a lot more of that. Rather than leaders meeting together and deciding things, it will be an upswell with push of
leaders to actually do the right thing. Dennis, do you think you can answer
as someone from PricewaterhouseCoopers? Because I think you can.
I think you can. I, for one, just believe
that if we don’t continue to strive for a global solution to deal
with some of these complex issues, we are going to go backwards.
We’re not going to go forward and I think it’s absolutely essential
that we keep this top of mind in everything
that we’re trying to focus on. Ladies and gentlemen,
please have a look at this folder that you got with your materials
on Haiti-related activities at the Forum this week, and please join me in thanking
an absolutely terrific panel. Have a stimulating and enjoyable Davos.
Thanks very much. Terrific. Great.

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