A year ago the luminaries, power brokers and business leaders at Davos were very optimistic. The discussion in private sessions ranged widely over ever larger bids based on heavy borrowings. We were at the peak of the rule of King leverage. The attendees foresaw a continuation of the securitisation bubble and thought it represented the new economic stability.
In other words, last year Davos did not predict Credit Crunch, securitisation meltdown or the coming slowdown. The world’s most powerful and best informed got it hopelessly wrong.
So why this year, when they are predicting recession and meltdown, should we think they are likely to be any more accurate? We should recognise that Davos is heavily oriented towards Western leaders and economies. To understand the current world economy you need to understand India, China, the Middle East and Russia, as well as the USA, EU and UK.
This year will see a sharp slowdown in the Western economies thanks to the boom and bust monetary policies the Fed and the Bank of England have been following. We will also see another year of good global growth, with the new power houses continuing to grow rapidly. This year is about three main issues:
1. How quickly will the Western banks recapitalise themselves? Will the Western monetary authorities – as the Fed is doing – accommodate to limit the downturn?
2. How quickly will the world financial system find ways to transfer the huge cash surpluses in the East and Middle East to the West to keep the wheels running well?
3. How big a shift in world economic power will there be this year? How much of the world running will now be made by domestic demand in the Asian and Middle Eastern economies?
There is a chance that the Fed’s actions coupled with efforts to sure up the Western banking system will be sufficient to prevent Western recession, whilst commodity prices tell us demand is alive and kicking elsewhere in the fast developing world.
So cheer up – the experts in Davis are probably wrong again. Soros has grabbed a topical headline but he may not be right.