Jeremy Warner: Why my money's with the business bulls, not the economic gloomsters

At the World Economic Forum in Davos
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The Independent Online

As participants depart the World Economic Forum annual meeting in Davos Switzerland, exhausted by the whirl of ideas and party going, what does their mood tell us about the business outlook for the coming year? One of the most striking features of Davos this time around is the contrast in sentiment between CEOs and economists. This is obviously a generalisation, but on the whole, business leaders are in more optimistic mood about the future than the economists.

The economists worry about global imbalances, the strong oil price, the American housing bubble and burgeoning budget deficits: the only question in their minds is whether these fault lines correct slowly in a managed fashion, or violently, with calamitous consequences for the world economy. Yet business leaders focus instead on booming equity markets, surging corporate profits and the growth opportunities of China and India. No-one's being complacent about it, but it is hard to recall a more upbeat mood.

I can't say which view will prevail, but I do think the gloomsters are again over egging their pudding. The anomolies that exist in today's global economy, with booming American consumption and property prices supported largely by the savings of much poorer countries in Asia, are not in doubt, and like all such imbalances will eventually correct. But how?

I cannot put it better than the ever lucid Larry Summers, former US Treasury Secretary and now President of Harvard University, so I will let him speak for himself. America's current account deficit, he observes, absorbs about 70 per cent of the exported savings of the rest of the world. Is the US's consumption-led growth remotely sustainable, given the weak fiscal position and virtually non existent savings rate? The mirror image of America's consumption-led growth is the export-led growth of the rest of the world, most notably Asia. It is hard to tell which is driving which.

Whatever the case, Mr Summers argues, the necessary adjustments cannot be one sided. Increased American savings will have to be matched by increased consumption in the rest of the world if the global economy is to avoid a nasty road crash.

Mr Summers likens these problems to waiting for buses. Economists have expected at least one of them to come along at any minute, but they haven't. The danger is that they will all arrive at once. Both morally and economically it is plainly wrong for capital to be flowing with such abandon from the developing to the developed world.

Yet it is not entirely without logic, nor does the view that America is sucking in savings which otherwise might be productively invested in the developing world really hold water. If that were the case, then real interest rates would be much higher than they are. What's more, the developing world is deliberately pursuing an export-led growth strategy. If America is to have less demand-led growth, the developing world has to have less export-led growth.

There are no obvious solutions. Perhaps the Eurozone, might do its bit by stimulating demand and allowing the economy to go into mild deficit, it was suggested at one session. "Don't count on me to deliver that", said Jean-Claude Trichet, President of the European Central Bank. Now there's a surprise.

Of course, the hope must be that domestic demand in Asia eventually reaches a level which self-corrects the problem. Given the pace of growth and development in this region, there's good cause for optimism, yet it is going to require careful and complex policy coordination on a level which, to date, the world has found hard to achieve.

In the meantime, global business is on a roll, and why shouldn't it be? The technological revolution begun in the 1980s is finally reaching maturity, and with the opening up of China and India, several billion more people have just bought into the global capitalist system. This plainly presents challenges, but it is also the biggest single expansion of the market economy in the history of the world.

Don't mention the LSE: spin by omission

Much excitement over remarks here in Davos by John Thain, chief executive of the New York Stock Exchange, to the effect that he expects to play a leadership role in the consolidation of the world's stock exchanges. "Note", he tells me after his comments put a rocket under the share price of the London Stock Exchange, "I didn't once mention the LSE in this context". But surely he must have known how his remarks would be interpreted, given that the LSE is already being bid for by the Australian investment bank, Macquarie? It's not as if Mr Thain is some wet behind the ears innocent of the financial markets; he's a former chief operating officer of Goldman Sachs.

He's not answering that one, but leaves me with the impression he thinks the story has been over spun. Yet I suspect he knew exactly what he was doing when he made his remarks. The NYSE would just love to buy the LSE, but as things stand is in no position to enter the fray. The acquisition of Archipelago has yet to complete and the NYSE's shares are not yet publicly traded.

By claiming a leadership role in stock exchange consolidation, Mr Thain holds out the hope that at some stage in the future he will be able to make that bid, thereby giving investors another reason for rejecting Macquarie, whose offer in its current form can hardly be considered serious in any case.

Properly managed, stock exchanges are growth companies with an unparalleled and at present largely untapped opportunity to sell their listed constituents a whole range of business services outside simple share trading. Unless Macquarie offers a silly price, LSE investors would be mad to sell, regardless of whether they think Mr Thain will one day come riding over the horizon.

Flights of fancy with Branson and Brin

On to a nightcap with Sir Richard Branson and Sergey Brin of Google. The subject of discussion: Space, the final frontier. This turns out to be a thinly disguised puff for Sir Richard's latest venture, Virgin Galactic, where for $200,000 a pop, passengers will be blasted beyond the stratosphere to experience four to five minutes of weightlessness, see the curvature of the earth, and then plunge, hopefully safely, back to earth.

Yet for all its marketing hype, the discussion was nonetheless a fascinating one. On a show of hands, virtually the whole room said they would take a flight on the starship Branson if they had the money. No wonder Sir Richard was collecting cards.

But what about the dangers? It will be completely safe, insists Sir Richard, who even so doesn't intend to use his Virgin airmiles on the space craft until at least 50 test flights have been conducted.

Mr Brin is more cautious still. He might consider it once 1,000 flights had been completed, but would actually prefer to wait for orbital space travel, which is going to take a lot more fire power. With money no object, he could do that already via the Russian space programme, but reckons the 3 per cent chance of not coming back alive is too big a risk to take.

This remark leads onto a discussion about risk-takers in business. Sir Richard is a risk-taker par excellence. Yet though there are plainly similarities between the way Google won through in an already highly competitive arena - internet search - and Sir Richard's attack on industries as diverse as airlines and mobile phones, Mr Brin is not really out of the same mould.

Indeed, it's hard to think of him as a risk-taker at all. He and his partner, Larry Page, left Stanford University with a search technology that had advantages over others, won the backing of venture capitalists - who injected some parental guidance in the form of Eric Schmidt, the chief executive and the driving force behind Google's meteoric rise - and the rest, as they say, is history.

Yet there is one thing Mr Brin does share with Sir Richard. They both want to put something back. Many of the latest generation of super-rich entrepreneurs have done this through foundations and charitable activities, most notably Bill Gates of Microsoft, who now works as hard at his philanthropy as his business. Sir Richard chooses to do it by risking his wealth on new business ventures. These create jobs, drive progress, and improve competition. Mr Brin is too young and newly enriched to have chosen his route, but he's already a lot more wealthy than Sir Richard. Watch this space.

Will Chancellor give a gilt-edged speech?

Confusion at the now traditional British lunch, organised by the Confederation of British Industry, over whether the Chancellor, one of the guest speakers, promised to do something about the gilts bubble. "He definitely said he'd address it," says one participant. Another reckons the Chancellor went so far as to say "We (the Treasury) are in the middle of detailed work on this". What he actually said was: "This is a question we are looking at". So does that mean he is going to do something about the way pension fund demand for long dated bonds is driving down gilt yields, thereby causing deficits to widen further? Not necessarily, says the Treasury. You shouldn't read too much into it.

So perhaps he's not going to do anything about it then? No, that's not what he meant either, says the Treasury. In fact the Government would be negligent if it were not examining in depth this growing cause of concern to UK companies and investors. Whether he intends to act, and in what manner, are rather different questions.

One way of easing the problem would be to issue a lot more gilts, but since that's what the Government has to do anyway to fund its soaraway spending commitments, it's not much of a solution. Another way would be to change the solvency rules which drive pension funds into this investment madness in the first place. Don't hold your breath on that score. The problem would seem too urgent for another long-winded Government review, but that may be the best we can hope for.

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