Here’s my big picture Davos takeaways so far:
1. Everyone is bullish on the U.S. economy, and worried about changing U.S. foreign policy and global politics. At a dinner I moderated last entitled “Pundits, Professors, and Predictions,” folks like Eurasia Group founder Ian Bremmer, Harvard Professor Joseph Nye, Paris School of International Affairs dean Ghassan Salame and several others spoke about how old alliances (between the U.S. and Japan, for example, the U.S. and Germany, or the U.S. and Saudi Arabia) are loosening, while new ones are forming. America’s growing energy independence—which is at the heart of America’s future economic growth—means that the U.S. may have less interest in the Middle East in the future, a vacuum that could be filled by China, which may care less about the doings of nations like Israel. Meanwhile, global conflict is moving East into Asia, and especially into the East China and the South China Seas, as growing Chinese influence brings conflict with Japan, and possibility the U.S. Could we be looking at a 1914 moment, in which small conflicts between nations that are suspicious of each other become big ones?
2. The middle classes in the developed world and developing world are switching places. In a fascinating session about the “squeezed middle,” Berkeley professor and former Clinton economic advisor Laura Tyson made the point that the middle class in America peaked in 1999—that’s when median family income started to fall, and it’s down by 13 % since then. Our expectations for both a better life for our children and our belief in our own economic and political system is weakening. Meanwhile, greater inequality means that the rich are increasingly uninterested in investing the public good—they build private systems of education and healthcare and pay less taxes as a percentage of income than ever, making it tougher to invest in the public programs that pull the rest of the country up, thus creating a snowball effect of more inequality, and social instability, since mobility decreases as inequality increases. One silver lining, though, is that lower wages are making the U.S. much more competitive in terms of job creation–the manufacturing boom in the U.S. means that the rich world may become the producer society, as the emerging world (where a growing middle class has more spending power) become consumers.
3. Bankers believe the financial system is safer–but nobody else does. Risk relative to assets in the world’s largest financial institutions is down a little bit from 2008, but still much higher than it was thirty years ago. Meanwhile, $15 trillion worth of central bank money dumps since the financial crisis have distorted markets and left both stock and bonds vulnerable to a big correction. And debt hasn’t so much gone away but changed hands from the private to the public sector, which now has less firepower to offset a future crisis. Global regulations like Basel III banking rules and Dodd Frank regulations have been watered down, and few believe they’ve ended the Too Big To Fail problem. Walking around Davos, I sometimes get the feeling that the leaders of the TBTF institutions draw straws every year to defend the industry (last year Jamie Dimon got the short straw; this year the British bankers from places like Barclays and HSBC seem to be holding it). But when a hedge funder like Paul Singer will admit that derivatives “have been a net negative to society” you know something is still rotten in the state of finance.