Curious Capitalist

Why the Elites Are Losing Sleep

Direct from Davos, the bubbles and risks that worry top bankers and CEOs

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Simon Dawson / Bloomberg / Getty Images

Axel Weber, chairman of UBS AG, left, speaks during a Bloomberg Television interview on day three of the World Economic Forum in Davos, Switzerland on Jan. 25, 2013.

Who says nothing gets done at the World Economic Forum in Davos, Switzerland? As the weeklong winter fest, which costs tens of thousands of dollars to attend, has grown over the past decade, it has become as much about dealmaking as about brainstorming solutions to the world’s problems. In fact, gray-suited consultants slipping around the Magic Mountain in their city loafers now seem to outnumber genuine thought leaders (to use a very WEF term) by about 2 to 1. Still, the elite haven’t abandoned Davos. This year’s shindig drew several heads of state, the world’s top bankers and a good helping of Fortune 500 CEOs, Nobel laureates and rock-star entrepreneurs (though, for once, no rock stars). Davos remains, as Foreign Policy Group CEO David Rothkopf put it, “the factory in which conventional wisdom is manufactured.” And so it is in that spirit that we offer this year’s best takeaways, factory-direct.

A New Bubble?
We are now in historically uncharted territory in terms of how much central bankers are doing, in lieu of real political action, to try to boost the global economy. They are buying up trillions of dollars’ worth of bonds and buoying world markets in the process. Apart from a few worried Germans, nobody was talking about this last year. Now everyone is fretting about how the Fed, the European Central Bank (until recently), the Bank of Japan and even Chinese authorities have distorted the prices of assets from stocks to bonds to real estate, quite possibly laying the foundation for a market crash or, in the longer term, hyperinflation. “Central bankers can buy time, but they can’t fix the world’s underlying economic problems,” said UBS chairman and former Bundesbank head Axel Weber, who worries that easy money and low interest rates are covering up the fact that most rich countries still need to pay down debt and create a lot more jobs. “We’re buying short-term fixes at the expense of future generations.”

(MORE: Davos Wisdom 2013: Five Lessons from the Global Forum)

Hedge-fund titan George Soros believes that the problems could come sooner rather than later. When every country wants to keep its interest rates down and its currency weak in order to boost exports, there’s an inevitable race to the bottom. Soros predicted that Germany, the growth engine of Europe, will start to slow down in 2013 as a weaker yen makes Japanese cars and consumer goods more popular than German ones. That could throw the euro zone, which has begun to stabilize a bit, back into crisis.

Bank Anxiety.
A crisis is exactly what we don’t need, given that there’s still so much risk in the global banking system. One of the world’s richest hedge funders, Elliott Management’s Paul Singer, used the Davos stage to continue his public fight with JPMorgan Chase head Jamie Dimon over the lack of transparency in big financial institutions, saying that even his team of skilled analysts couldn’t make heads or tails of the trading positions of major global banks via public documents. For their part, Dimon and other bankers fretted over the fact that they are being asked to do more lending—while being asked at the same time to keep risk low and retain more capital. Meanwhile, fresh players are moving into lending: emerging-market sovereign wealth funds are doling out money for infrastructure projects worldwide, and peer-to-peer lenders are providing hundreds of millions for small businesses in the U.K. (New rules coming soon in the U.S. may allow them to take off here too.) The message to banks is clear: if you don’t lend, others will.

(MORE: The Future of Davos: Is a Hipper World Forum on the Way?)

Global Free Riders.

Multinational companies are under fire. Five years on from the financial crisis, countries with shrinking public budgets are finally pressuring rich firms to pick up some of the costs of globalization rather than just the benefits. British Prime Minister David Cameron gave a powerful Davos speech on this front, promising that now that the U.K. has taken over the presidency of the G-8, he will name and shame multinationals that use creative accounting to avoid taxes. Cameron made a pointed “wake up and smell the coffee” reference to Starbucks, which recently came under fire for paying only a few million in taxes on billions of U.K. revenue in the past 14 years. (The firm volunteered to cough up $31 million as a result.)

Of course, whether Cameron or any of the other G-8 leaders will be around long enough to enforce that threat is another matter. As the multinational Trust Barometer survey unveiled every year at Davos by the p.r. firm Edelman shows, faith in public officials in many developed countries is low. This year there’s a big gap in trust between elites and the common man: the former put a lot more stock in public institutions of all kinds than Mr. Main Street does. That’s one bit of conventional wisdom that the Davos establishment would do well to remember.

10 comments
FdfdAsaa
FdfdAsaa like.author.displayName 1 Like

THE ELITE ARE LOSING SLEEP BECAUSE THE SHEEP ARE WAKING UP ! 

jb9999
jb9999

Does anyone  know more about her reference under BANK ANXIETY that "New rules coming soon in the U.S. may allow (P2P lenders) to take off here too"?  Would like to understand more 



DeweySayenoff
DeweySayenoff like.author.displayName like.author.displayName like.author.displayName 3 Like

My father, an old-school economist, and I had a discussion regarding economic policies and the things needed to create a more stable economy.  

My position was simple: New job creation only comes from demand.  Demand is only created from bottom-up spending for goods and services offered by companies selling them.  It requires the consumer to spend money to create that demand.  But, in this economy, the consumer isn't spending money because they don't have it on anything other than necessities.  Disposable, discretionary income is pretty much a thing of the past in an economy which replaces many liveable wage jobs with low-wage jobs requiring more jobs just to make ends meet.

His position was fairly typical of supply-side economics: Create a good product at a cheap price by financing businesses and those with the money with more money, and people will then buy these products, stimulating the economy through their spending.  This is the typical top-down viewpoint of 1980's economic policy.

The fallacy of his reasoning, which he could NOT refute, is that if the consumers have no money to begin with, they're not going to buy the new, cheap product at all or in enough numbers to matter.

The fact is the top (that is the wealthy) have almost all the money.  They want more.  They paid for politicians to ensure the flow to them stays strong and, indeed, the only sector in the economy to continue to benefit over the last thirty three years has been the wealthy.  

My "solution" to the problem was relatively simple: Tax the wealthy.  

I would also remove all taxes on businesses, the reason being that everyone receiving money would be taxed on that money.  Businesses could build up a limited cash reserve, but public businesses would still have to pay investors who would then pay tiered taxes on that based on overall income at an income tax rate.  Any PERSON getting money from businesses, in income, investment return, merchandise and "perks" would pay taxes on the value of those things all as "income".  Because at SOME point, the businesses will be paying people.  They can't hold onto the money forever (hence the limited amount of cash on hand in reserve - a number someone else can figure out what would be good for businesses without sucking the economy dry).

My father argued that this would penalize the ":job makers", reducing the incentive to make money.  I pointed out that no new significant job creation has ever arisen in a depressed economy by giving the wealthy money to "create jobs", and that if the money didn't go to the "job creators" (who generally spend only an insignificant percentage of their wealth), it would go somewhere else, most likely to those who spent a great deal more of a percentage of their wealth on things.

Spending money lubricates the wheels of an economy.  Holding it in pools - in businesses, in banks, in investments - keeps it out of circulation.  The wealthy don't SPEND ENOUGH of their money (mostly because there aren't enough of them in enough places to make what large amounts they actually do spend positively impact the economy).  They invest the vast majority of it.  This means it isn't circulating in the economy.

In the U.S., in 2010, the richest 20% of Americans controlled 93% of the wealth of the country.  This contrasts with 1980 when the same demographic controlled 65% of the wealth.  The people who spent money - the other 80% - went from controlling 35% of the country's wealth to 7%.  That amounts to around 40-50 trillion dollars or about three times the federal budget.  That's money which is NO LONGER IN CIRCULATION.  Back when supply-side economics was touted, people actually HAD discretionary wealth on which to spend for things. 

In 2013, that is no longer the case.

Am I promoting "wealth redistribution"?  Of COURSE I am.  Over 30 years, 28% of the wealth of the country went from the poor to the wealthy.  The wealthy could afford to lose 28% of their wealth OVERNIGHT, without seriously impacting their standard of living.  During World War II, the highest tax rates the U.S. has ever known - 96% - was levied on the wealthiest Americans, and none of them went without a home, food, clothing or amenities or saw a decreased standard of living.

This article merely shows the problem.  The wealthy have the money and are doing what they can to stimulate the economy by trying to generate demand from a supply-side point of view.  They're trying to get blood from a turnip and carry on as they have in the past because that was working so well FOR THEM.  For the rest of us, not so much.

By shifting the tax burdens OFF those who can least afford it onto those who can most afford it, wealth will automatically be put back into the economy.  Discretionary income will rise.  Goods and services will be bought.  Demand will go up.  New job creation can begin in earnest.  My plan may not have a lot of viability, but there are wiser heads out there who understand that the basic premise of the problem is what I perceive it to be and who may come up with a better solution than what I propose.  But the simple fact is that the money has to go from the people who have it and don't spend it to the people who don't have it, but would spend it if they did.

Be that through mandatory wage increases (which penalizes businesses) or increasing the taxes on the wealthy (which, IMHO penalizes no one because they are the disproportionately greater beneficiaries of a good economy than the workers), or some other plan, it's the only way to fix an economy that seriously needs to be fixed.

kolagunta
kolagunta

The economic climate is volatile and getting harsher all across the globe. The experts gathering at Davos are only debating the text book methods to put back the economy on the rails. They are mainly considering steps to boost the GDP. The thrust instead should be to aim at reducing the negative GDP (NGDP). The two major factors contributing to NGDP are waste due to over consumption and security due to terrorism. Almost 15 to 20 % of the worlds working population including some of the world's best brains are engaged in activities connected with these two NGDP factors. The percentage is only increasing by the day. You can imagine the energy used for this. Infact in both cases energy and resources are used both for producing and controlling. In the case of terrorism some states are abetting it while others are trying to control the same.Some states do both since their economy depends on this activity. Both ove consumption and lack of security are badly affecting the quality of life. It is high time that the elite of the world, governments and the UN start devising ways to counter these evils and ensure improvement in the quality of life of the citizens of the world. 

antonmarq
antonmarq like.author.displayName 1 Like

These guys call themselves an economic engine, when in fact, they're all economic has-been. You can't drive prosperity with a globally poor population. All their ridiculous (automated) manufactured products do not create work. However, all their products are been made for the poor, who can't afford it but are granted "loans" to purchase them, which only feed the downward economic spin. What none of these individuals propose is the need for new, sustainable production models that advantage the workforce against technologies. 

Technologies are a great tool when properly used. However, technologies should have never been used to replace skill labor. The rush to have the latest gadget work for some advances, but they make no sense for other where technologies are use to cut and shape. Moreover, are global future goals are non-existent, we have absolutely nothing to look forward to. There's no unity in the global workforce that is steered to meaningful objectives, which because of our blindness, greed, and eventual inaction, are plenty.  

Whatanotion
Whatanotion

goodvibeagency below has a good point.  In America, the children of the 2kid family units have some really funky resources, such as, computers and MILF high school teachers.  The hollowness begins there.  The lack of family values came along with a life of abundance.  The poor have beds and air conditioning if they want  it.  But what the poor do or don't have is not the problem.  

The typical American has self gratified and instant gratified himself/herself to boredom.  As such he/she  has no desire to own decorative flatware and fancy linen or drapes.  This might be a good thing.  For once a mass of people have soured on the advertising media and realize the "Coke after Coke after Coka Cola" isn't that good for one.  Neither is having bitchy neighbors or fighting wars for snotty fellow citizens.  I never remember asking for a : "You asked for it you got it: Toyota."  I would rather have neighbors I cared about.

KeithRowley
KeithRowley like.author.displayName 1 Like

It may be that within the next ten years, the hyperinflation that occurs across the western world will make that experienced by the Weimar Republic seem pale by comparison in its consequences. All of these governments have simply run out of other people's money, taxed their populations to the hilt and nurtured a socialist monster that suppresses and kills the wealth creation process. This vast printing of valueless money will one day bee seen as a product of the mental derangement of the western world which simply cannot accept that it is broke - skint - bankrupt. And sadly, catastrophically, only the 'reset button' can rectify matters, We have entered the prelude to a dark age of the west.

meddevguy
meddevguy like.author.displayName 1 Like

"A New Bubble" is going to be inflated no matter what -- because the throwing of money that we don't have buys votes to keep those doing the throwing in power. No really, it's that simple.

And the "Free Riders" -- Easy! Every company pays full taxes in every country they do business on their entire global revenue. Of course that means that most global firms will be paying 27,000% tax -- but it is their patriotic duty -- and its "fair". Remember we want to stop those countries who will charge little or no taxes to entice those companies to create jobs there ... and the jobs can be taxed. You forgot the prime liberal economic rule: Business bad, Government good. I told you this stuff was easy.

goodvibeagency
goodvibeagency

The multinationals can't buy back trust at this stage or throw some money at the tax man and expect all this to go away. We have entered a completely different phase that requires adjusting ourselves to new conditions as quickly as possible. The elites are losing sleep because something has shifted and they can't put their finger on what that is exactly. So let me explain - people have changed. People just don't get the same sense of satisfaction from buying a $1000 shirt that they did a few years ago. It's not only that we have less money to spend. People are beginning to realize that one more trip to the mall is not going to change the way they feel inside. It may erase that empty feeling for a few fleeting moments but that's it. So if you are a at the head of a huge corporation you really should be worried because you have no idea how to talk to these new people, understand what they really need right now and what they will need in the future.

bryanfred1
bryanfred1 like.author.displayName like.author.displayName 2 Like

I'd like to hear what UK tax laws Starbucks violated.  My guess?  None.  The $30MM+ was blood money.

And I really don't want to hear Soros' thoughts on this.  As much as he has done to influence American politics in a way to ensure the deficit spending and debt accumulation continues, he bears more culpability than just about any private citizen.  The hypocrisy of the left embracing one of the most ruthless financiers of the last 40 years is astounding.  But hey, as long as he donates to the right (left) causes.