Reports from Davos: How the US Fed Stole the Show

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The skiing may be great, but the surroundings seem largely lost on attendees at Davos in Switzerland, known to the frivolous of us as more of a top-class ski resort than a once-a-year talking shop for politicians, economists and owners of the largest hedge funds.

The Federal Reserve rather stole the show this year when Ben Bernanke announced (from Washington) that the Fed expected to keep interest rates at near zero until the end of 2014 and signaled further quantitative easing was an option being considered.

Clearly the Fed and the likes of George Soros are in agreement about one thing: the broader US economy is not in the robust health that recent stellar results at Caterpillar and Apple would have us believe. Employment remains one of the Fed’s major concerns and the belief that a combination of high unemployment and depressed property prices make a recipe for sluggish growth that is likely to continue for the next few years.

Euro-scapegoats

Nevertheless, most criticism at Davos is reserved for the Europeans and their inability (or unwillingness) to take the necessary action to resolve their sovereign debt/banking/competitiveness crisis. The Europeans would love to see growth numbers match those predicted for the US market by the Fed of 2.7 percent in 2012, 3.2 percent in 2013 and 4.0 percent in 2014, but even the Fed is cautioning these are dependent on a solution to Europe’s problems, not a meltdown.

Davos has given a forum for criticism that has been going on in a less high-profile way the world over. As politicians take over from bankers as the class to blame for the world’s ills, Carmen Reinhart, senior fellow at the Peterson Institute for International Economics, is quoted as saying in the FT that with denial among policymakers still rife, the outlook was poor. There will be a “serious economic crunch or yet another sub-par year of stubbornly high unemployment, weak growth and delayed recovery in general in all the advanced economies.”

Professor Joseph Stiglitz of Columbia University also warned of the risk of another crunch, particularly with policy constrained in some countries and deliberately tight in others. Any crisis will be “all the worse because of the weakness of appropriate government responses.” Commenting at the annual press lunch at the World Economic Forum in Davos, George Soros characterized action taken by the ECB to push cheap loans onto Europe’s banks (which they have subsequently recycled into buying Italian and Spanish bonds at well below what the market was demanding just weeks ago) as “half a solution is not enough,” meaning immediate debts have been rolled over but the underlying problems remain.

Soros is quoted in the Telegraph as saying Germany was now acting as the “taskmaster,” instead of the IMF imposing tough fiscal discipline. “This will generate both economic and political tensions that could destroy the political union; there is a real danger that the euro will undermine the political cohesion of the European Union…the trouble is that the austerity that Germany wants to impose will push Europe into a deflationary debt spiral.”

Read more about what Soros said, not to mention Nouriel Roubini’s input, later in Part Two.

–Stuart Burns

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