Frankly, I've been so happy with all the snow in Lake Tahoe, near my Reno office, that I just plain forgot to go to Davos, Switzerland, where the famous Economic Forum kicked off last Wednesday. Apparently, the gathering began on a sour note after a pair of prominent economists warned that the global economy cannot cope with a deep U.S. recession. Specifically, Nouriel Roubini, the chairman of consulting firm Roubini Global Economics, said that "the rest of the world can't decouple from the recession" in the United States. Roubini added that a potentially "severe" U.S. recession is inevitable, predicting a contraction that's likely to last at least three quarters. Roubini concluded that the U.S. consumer--the driver of global growth--is tapped out.
Roubini's words were followed closely at Davos, since he was the only member of last year's World Economic Forum panel to predict a significant U.S. downturn as a result of what he called the "three bears," namely a credit crunch, a bursting housing bubble and soaring energy prices. As if to second Roubini's outlook, Morgan Stanley's Stephen Roach said that with U.S. consumer spending amounting to some $9 trillion, a tighter grip on pocketbooks is going to have big consequences for the U.S. and world economies alike. Roach said, "I think it's going to be a fairly painful and relatively lengthy recessionary period." Interestingly, Roubini said the European Central Bank is likely to end up following the Fed and other central banks in cutting interest rates.
These opening comments by Roubini and Roach led others to pile on the U.S. economy. For example, George Soros stated that the U.S. economic downturn would put an end to the U.S. dollar being the world's default currency. He stated, "the current crisis is not only the bust that follows the housing boom," but Soros said, "it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."
Continuing this dismal theme, Nobel Prize-winning economist Joseph Stiglitz said the Fed was losing control and "made bad judgments." He added that the Fed's 0.75% rate cuts were too little, too late, because monetary policy usually takes 6 to 18 months to be effective and the United States is clearly in the midst of distress. As a result, there was a lot of gossip about whether or not the Fed would cut another 0.5% at its meeting this week, to catch up with falling market rates.
The other gossip at Davos was the growing influence of Sovereign Wealth Funds, which continue to bail out many troubled financial institutions, especially in the United States. These Sovereign Wealth Funds control assets believed to be worth at least $2 trillion. Some of them have recently invested more than $30 billion in Wall Street banks, including Citigroup, Merrill Lynch and Morgan Stanley. But with additional problems at Societe General and other European banks, it may just be a matter of time before these Sovereign Wealth Funds come to the rescue of Europe, too.
By week's end, however, the party atmosphere at Davos appeared to cut short this dismal debate. As usually happens in such gatherings, the contrarian optimists may become next year's heroes.
