Voice

The craziest guy in the room at global debt talks is heard from…

On Monday, there was some throat clearing in debt crisis discussions in Washington and in Europe. The theatrics came from the one participant common to both discussions, one who had been omni-present but comparatively quiescent for the past few weeks.

This participant hasn't made headlines in the way that Barack Obama, John Boehner, Jean-Claude Trichet, or Georges Papandreou have recently. In fact, the participant has been virtually silent compared to the loudest, most flamboyant participants in the budget debates, the Eric Cantors and the Silvio Berlusconis. But yesterday, this participant said in its unmistakable, firm, monied accent:

I am here, I have been listening, I have watched your one-step forward, two-steps back, approaches, heard your ideological posturing, listened to your threats and I have one thing to say, none of you powerful men and women are as powerful as I am, none of you will have the last word on this. You will produce the outcome that I want or I will produce an outcome that you dare not contemplate. And I am not a politician. This is not empty rhetoric. I have no constituents to report to but myself. I have a long-term perspective that lets me absorb short-term pain. And, one more thing, I'm the one character that you don't want to tangle with in the fight. Make no mistake about it. I am the craziest guy in the room. I will move so fast, respond with such fury to what you may see as a casual throw-away comment or just another minor delay, that you won't know what hit you. But you will all be gone, out of work, forgotten or worse, remembered badly. Remember, I am the guy who made Herbert Hoover who he is today. And then you will ask yourself, why didn't we listen to him? "

This previously relatively soft-spoken guest didn't have to raise his voice to send this message … but the other participants really did have to listen to hear it. What we all should fear is that some ignored it, were too entranced with the sounds of their own voices to get the message.

The player who spoke out was, of course, the markets. The sharp drop in world stock markets and the spiking of the rates at which countries like Italy could borrow may have come primarily as a result of the concerns that arose late last week about the ability of Italy's political "leaders" to manage that country's debt burdens. But it was a message also to the participants in U.S. debt discussions. It said:

You toy with deadlines at your peril. Today was 150 points. But at some moment between now and August 2 if I see this coming off the tracks, I will speak much more loudly and remind you that I am the biggest narcissist among all of you preening narcissists. I am the market. You think it is about you and your politics and your sound bites and your next tweet. But it is always about me."

The message sent was that the next intervention of this cigar-chomping fat cat to the budget talks may come at any moment and it may feel like a sharp-right to the kisser. It could be 450 points that time. Or it could be 700. And it could say, in no uncertain terms: "Remember that Lehman Brothers moment? That was nothing."

And for all the talk of "Lehman Brothers moments" -- the point in the 2008 crisis in which Washington realized it could dither no longer and had to act -- it sadly seems this one will be necessary to drive home the message that this time around it's different, this time around it's much worse. This not a mere housing crisis -- although there is still one suppurating in the United States and one brewing in Spain and real estate bubbles ready for the popping from China to Brazil. This is not a mere banking crisis -- though the exposure of international banks to serious sovereign debt risks measures in the trillions and yesterday's down day for financial stocks carried a message that the markets are worried about them. It is not a crisis with roots in just country. The U.S., Europe, Japan, China, Brazil, and other major markets are all at risk now, all interconnected. It is not a crisis that comes after a period of expansion but instead it comes after a period of severe weakening in the developed world.

No this time, say this market rumblings if you listen carefully, the price of dithering and delay will be different, the costs incalculably higher, the challenges dramatically more complex and sweeping. The biggest economic disaster of the past 75 years, that of 2008 and 2009, will suddenly seem only to have been a prelude, an overture, a foreshadowing.

It's also not a crisis where the solution is as simple as governments writing a big check to restore market confidence. Because this crisis is not just about saving banks or countries that are "too big to fail" (but seem to be at risk of failing fairly constantly these days). It's also about fiscal mismanagement and the piling up of huge debt burdens. Which means the markets will want two conflicting signals to get out of it. The first will be a sign that the governments are getting serious about fiscal soundness. The second will be that the governments will do something to stop the free-fall that is the looming risk. That means that this time the only way to placate the markets will be coordinated, global intervention that offers both the promise of savings and serious stimulus. Spending and cutting.

You can feel the next intervention coming. It might be at the next breakdown of talks among Eurozone finance ministers. It may be after the next walkout for the cameras in Washington. It may be when a trial deal is floated that seems too small, too short-term, to narrowly conceived. And, because this participant in the talks really is the one with the shortest fuse, it may be because months of pent up anxiety will have no place to go.

But rest assured, if the negotiations lag further or continue to produce unsatisfactory responses or suggest an appetite for nothing but stop-gaps and punting, the message will come … and the this one player will, as always, have the last word.

Yesterday, in Pamplona, they were running with the bulls for a sixth straight day. And the inevitable happened as it has a habit of doing. Two people were impaled on the horns of the beasts thundering through that city's streets. It's a worthwhile lesson to politicians toying with the markets. Run with the bulls and you will get gored. And that's nothing compared with what happens when, to borrow an image from a recent post, you run with the bears.

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David Rothkopf

Now taking bets on the global economic ugly pageant

Here at Les Recontres Economiques d'Aix-en-Provence we are ostensibly discussing "The States of the World" but in reality the buzz around the event is about the global economic ugly pageant. Although much of the conversation among delegates --whether at the venerable conference sites like the law school of the Universite Paul Cezanne or the local outpost of Sciences Po -- focuses on the harrowing state of the Eurozone, one can regularly hear concern expressed for the other contestants in the current perverse competition among the world's economies.

To understand the competition, you just have to understand the old joke about the group of friends whose picnic is disturbed by a hungry grizzly bear. As the friends bolt from their campsite, one stops to put on his sneakers. The others ask what he is doing, worried that he will never be able to outrun the bear if he stops. The one in the sneakers observes as he starts sprinting away, "I don't have to outrun the bear, I just have to outrun the rest of you."

So it is now with the global economic ugly pageant. While most of the major economies of the world are spluttering and the possibility of an unprecedented geoeconomic disaster remains palpably real, what money there is does have to go somewhere. That place is likely to be the least ugly of the world's economies. In other words, absent a true safe haven, capital will seek the safest haven of those available. It's one reason the dollar has done fairly well recently, for example. While the U.S. government seems to do everything in its power to screw things up economically, investors buy dollars because the managers of the world's other big currencies, the Europeans and the Japanese, are screwing things up worse.

The question now is will our "luck" remain the same going forward? How will the world's economies fare in the next round of this contest? Here's the current betting line based on my scientific eavesdropping on conversations here in Provence, appropriate discounting for self-interest and biases of the speakers and my own reading of the tea leaves that get floated as economic news in the world's newspapers. (Note: I am focusing only on national and regional economies here. Suffice it to say that almost certainly the big losers of the coming months -- whether policymakers accidentally blow up the world economy or they dodge disaster through a judicious combination of austerity and stimulus -- will be the poor. They have no voices advocating for them (as do, for example, the makers of private jets currently lobbying to keep the corporate tax breaks their purchasers receive under present U.S. law). Austerity programs will squeeze them further. Disaster will crush them. And almost certainly the biggest winners will be big corporations and the super-rich who will venue-shop and use their access to cash to buy up devalued assets including fire-sales among privatizing formerly state-owned bric a brac like roads, ports, powerplants and water rights.)

5. The Southern Tier of Europe

The most optimistic outlook I've heard for the weak southern economies of the Eurozone (such as Greece and Portugal, but  extending to include Spain and Italy) is for a recession that only lasts three or four years. The best case is crushing austerity, the will to sustain it, slashed government programs, increased taxes, political volatility, and maybe, in a few years, a return to slow growth. The worst case is that some of these states spin out of the eurozone, enter into prolonged crisis, and become pariahs of the investment community -- except perhaps for the bottom-feeders seeking to profit off of government defaults. (Odds they win the ugly pageant: 1,000,000 to 1.)

4. Japan

Many thought that after nearly two decades of floundering, Japan was poised for a modest recovery...prior to the devastation of this year's earthquake, tsunami and nuclear disaster. And those people who thought that were considered wild optimists. The problem with Japan is that its political system is broken and no one has emerged with a likely fix. Prime ministers shoot through their system like three-week old sushi and the result is an inability to tackle crucial problems like their demographic crisis, their need to embrace immigrants, their debt burden, their high tax rates, etc. Now it looks like another lost half-decade at least for the long-suffering Japanese. (Odds they win the ugly pageant: 100,000 to 1.)

3. Northern Europe

Even if the northern Europeans were to cast off the dead weights in the south and re-engineer the eurozone into something smaller that actually addresses structural defects (by having common monetary and fiscal policies and real enforcement mechanisms for those who break the rules), the turbulence caused by spinning off the south is likely to be hugely costly. Further, this smaller eurozone -- which might also be called Greater Germany -- will be heavily dependent on continued robust export growth to places like China -- not a sure thing. And they will be more dependent on Russian gas -- and it's never a good thing to be dependent on the Russians. Also: it's unlikely they will either blow up the Eurozone quickly enough to stave off a prolonged period of crisis or that they will address their real structural problems anytime soon. (At least there is no sign of that yet.) (So, the odds they win the ugly pageant are: 50-1.)

2. China

China has a growth rate that is nothing short of freakish in historical terms. The Chinese are committed to growth and have shown a remarkable ability to manage potential hiccups and dodge looming catastrophes. But here's the problem: they have a real inflation problem on their hands, civic unrest bubbles beneath the surface throughout the massive country, many Chinese companies are enjoying investor interest based on cooked books and a big, big scandal is coming there that could let the air out of those markets...if financial or real estate bubbles don't do it first, and the country has not come close to making the political adjustments they need to truly modernize their society or compete effectively in the information age (they don't play by the rules and still resist true openness.) Also: they're not a reserve currency and won't be for many years...although my bet is that they will be sooner than many expect. (Odds they win: 4-1.)

1. The United States

Can it be? Can the country that gave us the Bush tax cuts and wars that may cost $3-4 trillion, a bottomless pit of a jobs crisis and a housing catastrophe to match, plus a grid-locked, polarized political system actually "win" this contest and end up remaining the world's capital safe haven? Well, yes, actually. Despite the most recent deeply depressing unemployment figures and the fact that the Congress is recklessly playing chicken with the debt ceiling, America is still the world's leading economy, still the best bet as a reserve currency, has long-ago solved the issues of how to operate federally that Europe is choking on, ditto the issues of being open and stable that China dares not even address, and our political leaders actually sound like they may hammer out a debt compromise that would at least send a message of seriousness that the markets will appreciate. The deficit cuts will be too little, the tax hikes and reform will be much too little, many of the "savings" will no doubt be fake or in the impossibly distant future, but it could send a signal that markets will appreciate.

It won't be ideal, but it will be very much akin to stopping to put on our national economic sneakers...we may not be faster than the bear, but we are likely to be faster than everyone else. (Odds we win the ugly contest: 3-1.)

Of course, given the nature of politics and history's lesson that political leaders often do not respond to crises until after the fact, real ugliness could lead to there being no winner in this contest and a series of cascading failures and market shocks that introduce global depression back into discussions like the one I am attending here in France. Which would be horrifying. But if it happens, Aix marks the spot to discuss it -- good boulangeries, good wine, warm people, fresh seafood. As Paul Cezanne demonstrated, it's the kind of place where a life stripped down to its simplest essentials can seem beautiful enough to push the ugly from our minds for a while.

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