Davos, Switzerland With its stellar cast of political and economic leaders, the World Economic Forum here provides an excellent barometer of the latest economic and political trends.
But this year’s Davos was positively scary. Its overwhelming message was that the world is changing in ways more unnerving than most of us have grasped.
The baby boom generation grew up during a period of unprecedented prosperity, with the expectation that life would be even better for their kids. The magnitude of the current economic crisis has undermined those expectations. “We are still in denial about how serious this is,” the noted British historian Niall Ferguson said at the forum.
I believe he is right. At Davos, there was a strong sense of the passing of the American era. The widespread anger at the United States’ responsibility for the crisis — the reckless mortgage lending, the complex financial instruments that few understood, the lack of regulation — was tempered by one big factor: the hope that President Obama can make a difference.
His election is the saving grace that prevents anti-American sentiment from growing stronger — for now.
Yet, despite goodwill toward Obama, few at Davos believed he could save the U.S. economy from more unraveling. “I’m very worried,” financier George Soros told journalists at a luncheon. “We’re still heading into the storm rather than out of it.”
Ferguson said he believes the crisis is “a turning point which signals the decline of U.S. power.” He pointed out that it was a combination of large debts and low growth that “did Britain in” as a global leader in 1945.
Over the last eight years, the United States has run up huge deficits financed largely by borrowing from China and Arab oil states. Americans saved little and spent big, egged on by a White House that said deficits didn’t matter.
That tide of red ink is turning into a tsunami, as more government funds are poured into bailouts and stimulus packages. This bad balance sheet is not sustainable, especially if — as Ferguson believes — the U.S. economy will grow only 1 percent a year for the next decade.
Ferguson predicts the American debtosaurus will succumb to the same double whammy that did in British global dominance: large indebtedness and low growth rates. Americans will no longer be able to sustain the same standard of living we took for granted all our lives.
Some economists at the forum thought Ferguson’s growth predictions too pessimistic. But the U.S. economic model — once the object of emulation at Davos — was the whipping boy this year.
Chinese premier Wen Jiabao castigated the “unsustainable model of development” of some unnamed countries, characterized “by prolonged low savings and high consumption,” and he attacked the “blind pursuit of profit.” In previous years, Davos-goers might have scoffed at that language, but this year, Wen drew rapt attention.
No longer is Davos the bastion of the Washington consensus that championed wholly free markets; this year, the forum was consumed by talk of the need for state intervention to save industries and banks.
But what really conveyed the sense of an era passing was the palpable loss of confidence in America’s economic savvy. Over and over, attendees asked how investment bankers could have been so stupid.
Others had the same question about U.S. regulators, the rating agencies, the borrowers, the investors and the politicians who thought more home ownership could be created out of thin air. Ditto for the Federal Reserve under Alan Greenspan. As one economist complained, “How could the Fed have been so stupid in ignoring its regulatory responsibility and believing that the markets were always right?”
One also had the sense that Americans had lost faith in themselves. There was little agreement on how to overcome the crisis or coordinate a global response to it — or on how to forestall a worldwide wave of protectionism that could severely restrict trade.
The only upbeat American I heard at Davos was Al Gore, who insisted that the United States retains the capacity to lead the world by synchronizing a stimulus package with a push for alternative sources of energy. It was a relief to hear someone who hadn’t succumbed to the palpable feeling of fear in the air.
One of Obama’s great challenges will be to persuade the world, and his public, that America’s can-do spirit and genius for innovation will surmount the tough times ahead.