It has been a year since Latvia has embarked on a path to overcome the economic calamities that it encountered in 2008.
The Alps are still stunning. The snow is still piled high. And yes, it's still freezing here. But as the World Economic Forum convenes in Davos once again, the delegates recognize that the world is a very different place this time around.
The economic crisis wreaked havoc not only with the world's financial markets, but also with it's trust in business institutions, and faith in the capitalistic system.
Just how deep those chasms run is revealed in a World Economic Forum poll surveying 130,000 people from ten of the G20 economies. It found that over two-thirds of people believe the current economic crisis is also a crisis of ethics and values.
The poll results point to a trust deficit regarding values in the business world. Only one-quarter of respondents believe that large, multinational businesses apply a values-driven approach to their sectors, while over 40% believe that small and medium-sized businesses apply such an approach.
President Barack Obama may have just spiced up the debate about global banking regulation, but the prospects for success for the president’s latest initiative remain mired in the challenge of a combative Congress and a fierce Wall Street lobby.
No, the issue that will dominate this year's World Economic Forum is one that poses a more substantial threat to economic and social stability.
The executive chairman of the WEF, Klaus Schwab, has with sage insight already identified what will be the zeitgeist of this year’s Davos meetings. In a pre-event release Schwab pointed to the deteriorating budgets of both governments and individuals as the ghoul that will haunt the corridors and meeting rooms in Switzerland.
Our own week-long focus on the debt threat took in many of the periphery countries in Europe that now face the wrath of the ratings agencies and the stigma of rising sovereign debt default risk.
WEF has accurately flagged sovereign and social default as the main problem for the world economy in coming years. But what is less clear at this stage is how serious politicians actually are about bringing down ballooning deficits?
Our political masters have expended trillions of dollars in fiscal and monetary stimulus to keep recession at bay, but wiser heads in the markets know that the piper will ultimately have to be paid. The merry tune of debt finance may have saved the banks and many companies from insolvency, but the cost of our politicians' largess will suppress economic growth rates in the Western world for many years to come.
Many still grapple with the idea that a derivative of the easy money policy which created the credit crisis can get us out of our problems. Can we really spend our way out of recession?
What we do know for sure is that this money will have to be repaid over coming years. It will saddle our existing workforce with onerous levels of taxation just as they are being called upon to help finance the retirements of their parents. And it may ultimately become a burden inherited by our children.
On the face of it, the global economic environment appears to be improving. In the West, stimulus has stabilized the decline and most developed economies are expected to grow again this year. In the East, China’s blow-out fourth quarter GDP number may have raised fears about overheating, but most will take comfort from the news that there is at least very strong growth in some parts of the world.
But can this monetary magic trick survive the year? Outside of China’s state-directed lending policy, banks in the rest of the world have presided over a period of disappointing money supply growth. In spite of the central banker’s best efforts lending into the real economy has been sclerotic.
Davos brings together many of the brightest minds from the world of business, politics and broader society. It concentrates these big brains on the problems that we face; and this year the list is an exceptionally long one.
At this year’s Davos, I think it is important we enter this meeting with the idea of change.
The global financial crisis, at its heart, has turned out to be a crisis of values and trust. At the grass roots level, people feel that corporations, driven by individual and/or organizational greed and the pursuit of profit, will stop at nothing to achieve these goals—even at the risk of bringing down entire global economic systems. Whatever commentators predict about the duration and severity of the financial crisis, a full recovery will only occur once trust in global corporations is restored.
In 2008, at the World Economic Forum in Davos, it became clear that the global economy was in big trouble. As delegates made their way to the sleepy Alpine town the Federal Reserve shocked global markets with a 75-basis-point cut in interest rates and markets across the world tanked.
Then a single trader from Societe Generale was found to have lost €5 billion ($7 billion) and the mood was one of near despair as the great and the good questioned how we got into this mess in the first place.
By the time the world’s elite met again in 2009, the SocGen crisis seemed like a mere footnote to the previous year. Lehman Brothers was gone, Europe’s banking industry was on its knees and newly-elected President Barack Obama faced the biggest crisis of confidence in the market economy since the 1930s.
You could sense the fear on the ground and all the talk was of who was not attending and who would survive the next 12 months.
With central banks and governments across the world pumping billions into the system within two months the world began to look like a better place. Stocks across the world rallied sharply and as preparations are made for the 2010 meeting the bulls are hoping the worst is now behind us.
But uncertainty continues to dominate and the bears can point to so many problems that it is very difficult to believe 2010 will be a year of mild recovery.
As the World Economic Forum itself points out in its closely watched Global Risks report there is a "significant chance" of a second financial crisis. Spotting where that crisis comes from is no easy task.
WEF predicts a 20 percent chance of a collapse in asset prices that will cost the world $1 trillion. WEF also warns of a 20 percent chance of a sovereign debt crisis and is increasingly concerned that the Chinese economy is overheating and could actually be a drag on the global economy by the time WEF meets again in 2011.
I’m solo in the Davos bunker.
With the world becoming a smaller and increasingly connected place, investors, businesses and governments must think “globally” more than ever before. That is one reason more than 2,500 leaders from business, government and society are gathering in Davos, Switzerland, this week for the 40th annual meeting of the World Economic Forum .
I’ve covered this event and moderated plenary sessions in recent years, and I always look forward to the opportunity to hear from and talk with leaders on critical issues, especially as the world continues to adjust to life after the recent financial crisis.
Among the topics I’m most interested in exploring are:
1. The global recovery: Where are we? And what do many of the world’s nations see for the coming year?
2. Commodities and raw materials: Are they likely to continue rising? And a related question is, how concerned should we be about possible inflation?
3. Sovereign debt risk: Many governments are running deficits after spending so much money to stimulate their economies. How much of an issue will debt be going forward?
4. China: Just this week, global markets slipped on concerns over how robust China’s growth can really be. And then we got word that China’s economy grew 10.7% in the fourth quarter. The expectations seem to shift frequently, but there’s no doubt slower growth in China would have ramifications everywhere. It will be interesting to explore what’s driving growth there and what the warnings signs of a slowdown might be.
The meeting begins Tuesday night, and on Wednesday morning, I’ll be moderating the first debate of the conference. The topic will be the challenges and choices to prevent another financial crisis.
Among the people I’m scheduled to interview during the week are George Soros, Bill and Melinda Gates, Bob Diamond, Laura Tyson, former Chair of the Council of Economic Advisors, and many more.
It’s rare that so many people who actually have the power to shape events gather in one place to discuss topics that are important to everyone, especially investors. I will of course keep you up to date on the blog and in Investor Brief . I also invite you to watch our extensive coverage on CNBC.
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