Davos 2012: Setting the gloom level to 11
Is there any good news for the economy?
Not much, if this year's meeting of the World Economic Forum (WEF) is anything to go by.
For starters, the global economy seems to have become so unpredictable that the organisers ditched one of the forum's big opening events, the annual session making an economic forecast for the year ahead.
They replaced it with a session that asked a more fundamental question: does capitalism have a future?
Still, economic worries dominate all discussions here: will the eurozone fall apart? (Not if Germany's Chancellor Merkel has her way.) Are bubbles building up in Asia's economies? (The housing market is cooling a bit, asserted one Chinese speaker.) Is austerity or free spending the right answer to our economic troubles? (I haven't heard from too many fans of austerity here.)
Last year, at least, investors were still confident that big risks could deliver big rewards; it seems to have worked for many of them.
This year, as some Western economies lurch back into a second recession, many wonder whether the basic flaws of our financial system have been fixed at all.
Still, if you look beyond the dire warnings, Davos also offers plenty of hope.
Hiding under a blanket
In one Davos session, a straw poll was held: is the financial system safer now? Of the 140 business people and economists packed into the room just 10 agreed. And about half of them worried that it had become even worse.
On the panel, the mood seemed to be even darker. In line with Davos rules, the panellists cannot be quoted by name, but among them were top bankers and investors, a leading economist and one of those people who help to bail out struggling countries.
Their gloom level was firmly set to 11 as they pondered the impact of a crisis of "unprecedented magnitude and complexity".
This was not just a European problem, they said, the United States and emerging markets would suffer as well.
"I don't think the eurozone will fall apart," said a man in charge of one of the world's largest banks, "but accidents can happen, and if it falls apart, I want to curl up in a corner and hide under a blanket."
The other panellists were not much cheerier.
"The markets have deteriorated so fast, we never expected that to happen... The credit risk is now as high as at the time of the Lehman collapse," said one.
"Every conceivable debt is at record levels," warned another. "I just don't see how it is tenable to say that we can grow our way out of it."
Only one of them professed to be more relaxed now than in 2007 and 2008: "Now we are talking about the problem; previously people didn't know or didn't understand what was going on."
Not that he was any more confident about the economic prospects: "It will be painful, some countries will have [economic] depressions," he said, and warned of the danger of "social warfare".
There could be inflationary spirals, or even worse, "stagflation" - a combination of low growth and high inflation - that could last 10 to 15 years.
The only way to escape the crisis, they agreed, was by pushing growth rates above the rise in debt levels.
In another session a group of economists (two Nobel laureates among them) agreed that this crisis was here to stay. "You're optimistic if you think this will be over by 2017," said one of them.
Loving risk, hating uncertainty
Here's the problem that Davos is grappling with: previous trouble was localised. Asia here, Russia there, maybe a country or two in Latin America. This time round the economy is globalised, and the crisis is felt everywhere.
The man who helps organise the bailouts argued that this crisis was "different, the scale is much bigger, the global impact is much bigger" while poor economic growth leaves governments with too few options to act.
Business and banks, meanwhile, have another problem: we live in uncertain times.
Risk is not a problem for Davos man and woman. They thrive on it because it holds the potential for reward.
Uncertainty, however, is economic poison. It stifles investment, undermines confidence and makes banks reduce their exposure to risk. And that in turn squeezes money out of the system.
"How do you run a banking system without any risk-free assets, apart from German Bunds [government debt]," asked a banker, and explained how savers were pulling out of any investments that could be considered a risk.
Even sophisticated investors like the banks themselves are not sure where to turn. To balance risk, they hedge their investments. But that assumes that if the original investment goes wrong, the hedge will be paid. "I just don't know whether counterparties [of the hedge] will be able to pay up."
A short, sharp shock?
Most disturbingly, while most people agree that things are bad, there seem to be few proposals - never mind agreement on proposals - to solve the crisis.
There was just too much debt in the system to apply a "short, sharp shock" because what works for a country like Argentina does not work for the system as a whole.
Three big problems are weighing on the economy: liquidity, solvency and regulation.
The European Central Bank, the Federal Reserve and others seem to have solved the liquidity crisis. But many banks were still short of cash, the bankers warned, and regulation was patchy.
"There is no global financial jurisdiction," warned the boss of a central bank. "You can't have financial stability if every country has its own jurisdiction."
But here's the good news. Just leave the rooms packed with bankers, regulators and economists, and you can't shake off the feeling that they're telling only half the story.
One Davos session explored the opportunities for economic growth, and if the bosses of some of the world's largest companies are to be believed, there are plenty.
And the focus is on high-growth countries like Brazil and the emerging markets across Asia.
"There are 1.8 billion people who can be called middle-class, of which 23% live in Asia. By 2030, 4.8 billion people will be middle-class, and 66% of that will be in Asia," ventured the minister of an Asian government.
And once people are in the middle class, they start to consume and drive economic growth.
The proof is in the Magnum
She pointed to her own country, where Unilever had built a factory to make Magnum ice cream. After the first year, the output was running 1,000% above target.
It is anecdotes like this that excite Western multinationals, although they also see the limits of growth. In a few years the earth's population will hit 9 billion people, and "only if we build sustainable supply chains, eliminate waste during the creation and delivery of products... can we underpin the growth of these markets," said the boss of one of the world's largest companies.
Despite the hope, the uncertainty remains.
2012 is the year of the water dragon, ventured a Chinese executive. "Water dragons bring fortune, but if there is too much water, you'll drown."