Heard in Davos 2010: Dispatches from the Conference

Davos 2010: Who Will Pay the Piper?

Geoff Cutmore, |CNBC Anchor

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.

Looking Back at Davos 2009

At a time when societies are being asked to pull together for the greater good, many are asking why they should contribute when they didn‘t participate in the bonus-fuelled good years?

Median salaries in many Western countries have languished as the spoils have been enjoyed by the wealthy. Under investment in infrastructure has disproportionately affected those who rely on public services the most. Aging populations are making greater demands on state healthcare systems as governments are under pressure to cut deficits. And we haven’t even touched on the farce of climate change talks in Copenhagen, the misery in Haiti, and President Obama’s domestic challenges.

I am at Davos hoping to hear some answers. I am also hoping to hear some good ideas and lastly I’m hoping someone will know how the piper will get paid.

Please join us for our daily coverage from WEF starting Wednesday.