The legendary trader has some strict words about the European bailout—and he cautioned there are “turbulent” times ahead for the continent. Daniel Gross reports from Davos.
George Soros, slightly frail, at 82, is no longer active in the money-management business. But the legendary hedge-fund manager still has pointed views on the global economy, the markets, and politics. On Thursday night, at the Hotel Seehof in Davos, he held a group of financial journalists rapt for nearly two hours as they dined on mango salad and beef. At the heart of Europe, as the European financial establishment celebrated its success at beating back the crisis, Soros issued a stark warning. The agreement by the European Central Bank to intervene in government bond markets, supporting the sovereign debt of Italy and Spain with purchases, has worked, to a degree. “The euro is now here to stay, and the markets are reassured the immediate crisis is over,” he said. But in saving the euro, the continent’s financial powers have damaged the economy of the euro zone and created dangerous new political imbalances. As a result, “we have quite a turbulent time ahead for 2013.”
George Soros spoke at the World Economic Forum in Davos, Switzerland, on Jan. 23. (Bloomberg, via Getty)
Soros, of course, has a complicated relationship with Europe. Born in Hungary, he survived the Nazi occupation, and later made his name betting against the British pound and the Bank of England in the 1980s. Now retired from active money management, Soros said that he is “spending my time developing my philosophy of ‘imperfect understanding’ and reorganizing my foundation so that it can actually survive me.”
At the World Economic Forum, you can sit in on dozens of panel discussions and hear different varieties of the same economic conventional wisdom, rendered in generally bland rhetoric. But Soros has a few contrary views, and a willingness to air them forthrightly.
That’s not surprising, given his personal history, but Soros also has a few positive things to say about Germany and its performance in the rolling European crisis. By intervening in government debt markets—only after German Chancellor Angela Merkel agreed—the European Central Bank may have saved the currency, but damaged the continent that uses it. “Germany did the minimum that was necessary to save the euro,” he said.
The result now is that the euro zone is effectively divided into creditors (countries like Germany, Holland, and the Scandinavian countries) and debtors (Greece, Spain, Italy, Portugal, Ireland). “The creditors are in charge, and are unfortunately arguing for a policy of austerity, which is counterproductive,” he said. While the ECB and IMF have made budget cuts and tax increases a condition of receiving aid, he notes, “You can’t reduce excessive debt by reducing the GNP.” He said austerity is pushing the euro zone into recession, which will further aggravate political tensions.
The danger now is that the European Union, a voluntary association of equal states, is in danger of devolving into a system “where Europe is divided into the center and the periphery, with the center controlling policy and the periphery used to a permanently inferior and subordinate situation."
Soros equated this to the post–World War II era, when the U.S. and the developed world controlled the flow of capital and subjected the developing world to very sharp financial discipline. “The political problem [in Europe today] is that the creditors, particularly Germany, are in charge,” he said. “And effectively nothing can be proposed on the European level without first checking with Germany if it is acceptable.” The upshot: the financial solution to the continent’s problems “is politically unacceptable, and, in the long run, intolerable,” Soros said. “So the euro is in danger of destroying the European Union.”
Just because nations aren’t threatening to leave the Euro, doesn’t mean that financial leaders should get complacent. Daniel Gross reports from Davos.
This is the first World Economic Forum in at least six years that hasn’t been gripped by a financial crisis. The giant banks are shrinking their footprints and workforces, but they’re not falling. To those without a Bloomberg or Reuters terminal, government bond markets have become boring again, as interest rates on Italian, Spanish, and Irish bonds have fallen to acceptable levels. The hedge-fund managers are schmoozing, back slapping, and scheming about deals, not fingering blackberries and iPhones like worry beads. “There’s no doubt the tone is generally more positive,” said the guy in the parka strolling down Promenade, the main drag of Davos. It was Michael Dell, the founder and CEO of Dell, Inc.
From left, British Prime Minister David Cameron and Italian Prime Minister Mario Monti. (AP (2))
Europe’s financial system is still battered. But the bailouts of Portugal, Ireland and Spain, the agony of Greece, the prospects of economic shrinkage in Germany and the U.K. don’t seem to be high on the agenda. To a large degree, the bailouts—the funds provided to Spain, Greece, Ireland, and Portugal by the International Monetary Fund and European Central Bank, and the ECB’s promises to purchase Italian bonds—seem to have stopped the panic. The expectation now, as IMF Managing Director Christian Lagarde said at a Newsweek and The Daily Beast event on Wednesday, is that “the policy decisions that stabilized the financial markets are going to translate into the real economy.”
“Just because there is no talk of the euro failing and countries leaving the Euro doesn’t mean there should be complacency,” said Enda Kenny, the taoiseach of Ireland, at a panel on Thursday.
But there was plenty of complacency and self-congratulation on display. Mario Monti, the banker who helped lead Italy through last year’s financial crisis as a technocratic prime minister, took a victory lap. On Wednesday, he told the Davos crowd—his crowd—that Italy had regained the confidence of the world’s investors, thanks in large measure to the hard work of his country’s stoic citizens.
The U.K. may be teetering on the edge of yet another recession. But you wouldn’t have guessed it from Prime Minister David Cameron’s muscular, direct speech on Thursday. He boasted about cutting his country’s deficit, keeping business taxes low, and recommended other developed countries do the same. He didn’t say much about the urgency for growth, or the failure of his country to regain its pre-crisis economic peak.
Clearly, success has been redefined somewhat for European financial leaders. Flat is the new up, and not falling on your face is the new definition of success. A “C” is the new “A.” As Klaus Schwab, the maestro of Davos, put it: “We passed the exams last year without failing, but we still have a lot of homework to do.”
So, what are self-satisfied European leaders and the forgiving bond markets overlooking? Plenty, says Barry Eichengreen, professor of economics at the University of California at Berkeley and a prescient observer about the frailties of the Euro. “It’s a total no-brainer that the crisis will be back in 2013,” Eichengreen told me in the buzzing Congress Center. “The underlying issues haven’t been solved.” The much-discussed moves towards a European banking union (a common regulator for all the continent’s banks) aren’t really happening. There isn’t much growth to speak of.
Europe may have avoided total collapse in 2012, but the threat isn’t over, IMF chief Christine Lagarde told a dinner Wednesday hosted by Newsweek & The Daily Beast in partnership with Credit Suisse in Davos.
2013 will be a “make-or-break year for the global economy,” said Christine Lagarde, the managing director of the International Monetary Fund. “We had a really tough 2012, and yet a lot has happened,” from new policy efforts in Europe to a change of leadership in China. In the coming months, the efforts to calm the financial markets should bear fruit in the real economy, she said: “The question is whether policymakers and governments will continue to implement the policies that they have announced.”
Newsweek and The Daily Beast editor in chief Tina Brown shares a light moment with IMF chief Christine Lagarde at the Davos dinner on January 23, 2013. (David Biedert for Newsweek & The Daily Beast)
Minutes after delivering a well-received keynote speech at the World Economic Forum in Davos, Switzerland, Lagarde spoke with Newsweek and The Daily Beast editor in chief Tina Brown at a dinner presented in partnership with Credit Suisse. The event, which highlighted women’s leadership, also featured Egyptian democracy activist Dalia Ziada and was cohosted by Yahoo CEO Marissa Mayer, DuPont CEO Ellen Kullman, and Pamela Thomas-Graham, chief talent, branding, and communications officer at Credit Suisse.
Echoing Davos’s stated theme of “resilient dynamism,” Lagarde, the first woman to lead the IMF, struck a note of guarded optimism. She emphasized the need for vigilance and for policymakers to continue to do better. In her speech, she noted that the IMF expects global growth of just 3.5 percent this year. “The short-term pressures might have alleviated, but the longer-term pressures are still with us,” she said. On Wednesday, she noted, the U.S. Congress announced a deferral of the debt ceiling until May 18. That’s a positive sign, but not nearly good enough. Both the United States and Japan have to focus on a medium-term plan to reduce deficits, Lagarde said. In Europe, she added, “a lot has taken place—too slowly, granted—but a lot has taken place,” She cited the creation of the European stability fund and aggressive monetary policy. While a collapse in 2012 was avoided, “we should make sure we guard against the relapse in 2013,” she said. “Don’t relax.”
It’s rare for the head of an global institution like the IMF to be introduced as a “subversive.” But that’s precisely how Brown described the 56-year-old lawyer. “Christine is a subversive in the very best sense of the word,” Brown said, citing Lagarde’s plain-spokenness and “eagerness to punch at complacency.”
Lagarde has gone against the grain of the European financial establishment by speaking out against austerity. In her speech at the World Economic Forum, Lagarde said Europe should continue the “necessary fiscal adjustment at the country level, and supporting demand, especially with further monetary easing.” The IMF’s in-house economists recently took another look at the impact of stimulus efforts and concluded that such efforts offered more bang for the buck than previously thought. “I feel good that we did it,” she said.
The ongoing debate over austerity highlights the larger way in which politics can pose a threat to economic recovery. “In many countries, there is the tyranny of the minority,” Lagarde said. In the U.S. and elsewhere, small minorities of political actors are unwilling to see the world economy as a tightly interconnected whole and prefer to look only in their own backyards. “It takes brave people to raise their voice and say, ‘We all matter to each other,’” she said.
Lagarde, who was the first woman to run the international law firm Baker & McKenzie, also spoke of the need to value women in the workplace and in the world’s political systems—at the highest levels of finance and in everyday life. “Here are some numbers: 50 percent of cars, 50 percent of computers, and 85 percent of consumer goods are bought by women,” she said. “It’s not a claim. It’s just the market.” To continue to thrive and prosper, she said, all countries must figure out ways to make the workforce and educational systems more open to women. Lagarde noted that when she met with corporate leaders, she would ask about the representation of women on the boards, and she carried a list in her back pocket of women qualified to serve on boards. When Brown asked why there weren’t more women running banks, Lagarde cited the barriers imposed by strong networks in the financial world and “the barriers we have in our own mind.” Two women are running banks in Iceland, she said—banks that went bust during that country’s financial crisis but are now recovering.
Notably missing from this year’s World Economic Forum in Davos are the U.S. mainstays of years past. Paging Tim Geithner, Hillary Clinton and the Google guys? Daniel Gross on why we’re keeping a low profile.
The U.S. has a relatively muted presence at this year’s World Economic Forum in Davos, Switzerland. That’s largely because we’re in a time of transition. Davos mainstay Timothy Geithner is on his way out, and Jack Lew, Obama’s pick to replace Geithner as treasury secretary, has yet to be confirmed. In 2008, then-Secretary of State Condeleezza Rice set the tone with a keynote address. The current secretary of state, Hillary Clinton, is stepping down, and anyway, is busy this week with Benghazi hearings back home. Google isn’t throwing its traditional Saturday night bash, nor has it sent its top three execs, known by the mononyms Eric, Larry, and Sergei, and Facebook’s Mark Zuckerberg isn’t in the program. The big U.S. banks that typically swarm the place and host high-profile events are here in much smaller numbers and keeping a much lower profile.
James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., speaks during a panel discussion on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Jan. 23, 2013. (Chris Ratcliffe/Bloomberg, via Getty)
Not everyone agrees with my assessment. One American diplomat, overhearing me bemoan the lack of a U.S. presence to a group of journalists in the main lounge of the Congress Center—a kind of Star Wars bar scene for the international economy—piped in with a gruff “Excuse me.” There were plenty of important officials here, including Federal Trade Commission Chairman John Leibowitz, Undersecretary of State Robert Hormats, Federal Communications Commission Chairman Julius Genachowski, and Housing Secretary Sean Donovan.
But these people aren’t boldface names, even in Washington.
Even if it is a transition time in the U.S., it doesn’t make sense to me that the U.S. should take a back seat at Davos, especially considering the theme for this year’s gathering is “Dynamic Resilience.” I’d argue that in the developed world no economy has done a better job of reinvention and reconstruction than the U.S. in the last few years. But Americans aren’t exactly beating their chests about it. The country has avoided the deep damage of self-imposed austerity that Europe has. It pays low interest rates on its debt. It largely processed the housing and banking failure, and has, all the while, developed new energy sources. It is growing at about a 2.4 percent annual rate this quarter, according to Macroeconomic Advisers. By contemporary terms, that qualifies as rapid growth. “I think you’ve passed the height of your political madness,” said Martin Wolf of the Financial Times, dean of the economic columnists.
Economically, in other words, the U.S. has recovered some of its aggression. That was on display Wednesday morning in Davos, when JPMorgan Chase CEO Jamie Dimon, America’s leading banker (for better or worse) came out firing. At a panel, he defended his bank, the U.S. banking system, and America’s actions generally. He apologized to the company’s shareholders for the losses racked up by a trader now known as the London Whale, but not for the complexity of the business. "Businesses can be opaque. They are complex. You don't know how aircraft engines work, either," he said—the “you” referring to policymakers. (True, but aircraft engines don’t explode en masse and threaten the global economy. And when failures do occur, enginemakers don’t get bailed out by the government.) Speaking of aggression, after the session, I saw Dimon holding court in a lounge, standing just a few feet away from Dan Loeb, the edgy hedge-fund investor who has been shaking things up at Yahoo!, Morgan Stanley, and Herbalife.
But another Dimon quote that got less attention was more apropos. Dimon spoke glowingly of America’s much-maligned central bank. "I think they saved the system,” he said, nothing that the Federal Reserve bailed out the global financial system, not just America’s. Indeed, it struck me that good monetary policy that benefits others has been a form of a U.S. export. The way Brazil dispatches soccer players to leagues around the world, the U.S. loans out monetary experts to other countries. In the space of a minute in the Congress Center, I saw Adam Posen, the American economist who, until recently, served on the Bank of England’s monetary policy committee, where he was a rare voice for stimulus amid stagnation, and Stanley Fischer, the former MIT economist who is the Governor of the Bank of Israel, who has helped steer that turbulent nation’s economy through relatively calm waters.
A participant of the World Economic Forum talks on the phone at the 43rd Annual Meeting of the World Economic Forum in Davos, Switzerland, on Jan. 23, 2013. (Anja Niedringhaus/AP)
Bonuses and salaries have been cut at all of the big Wall Street firms. What’s a $500,000-a-year worker supposed to do?
“It is what it is. But what are you going to do?”
Standing in Grand Central Terminal, a veteran employee of a giant financial-services firm—one of those companies with two names that is in the news a lot—was uncharacteristically fatalistic. His firm had just announced disappointing news about compensation and bonuses.
T.S. Eliot famously said that April is the cruelest month. But for bankers, January is turning out to be pretty harsh. Typically employees receive their bonuses—the raison d’être of most financial whizzes—in the first month of the year. This week Morgan Stanley announced that instead of paying out cash and stock bonuses in January, it would give bankers with base salaries of more than $350,000 IOUs—that is to say, the sum of their 2012 bonus would be paid out over the course of three years. Those who leave earlier are simply out of luck.
Goldman Sachs has traditionally been the highest-paying investment bank on Wall Street. But last year compensation was capped at 38 percent of revenue, down from 42 percent in 2011. The average Goldman employee was paid nearly $400,000 in 2012. That’s a lot. But in 2007 the average employee was paid about $660,000.
JPMorgan Chase on Wednesday slashed the compensation of CEO Jamie Dimon in half as punishment for big trading losses racked up by the bank’s London Whale. Thursday morning, Citi, in the midst of a painful restructuring, announced ugly results. In past years, the typical reaction to a reduction in bonuses would have been rage, followed by swift action. The dissatisfied could walk across the street to another firm, or jump to a private-equity or hedge fund, or start their own asset-management firm. But now, the whole complex is under pressure.
“It’s musical chairs, and there are fewer chairs,” says one 20-year veteran of the industry. “Everyone thinks they’re special, but it’s very Darwinian out there.”
Yes, the elite players will find their way to hedge funds and alternative asset-management firms. Jes Staley, a top executive at JPMorgan Chase, recently jumped ship for hedge fund Blue Mountain Capital. But Wall Street’s middle-class bankers and traders “don’t have the options to go elsewhere,” one investment-banking veteran notes.
To a degree, the bonus clampdown is just a deferred recognition of reality. The bailouts and huge support that the government provided to the markets and individual firms in 2008 and 2009 allowed Morgan, Goldman, and Merrill to carry on as usual for a few years. That enraged the public, but kept employees happy. Now, however, the bailouts have largely been paid back, the guarantees have been lifted, and large banks are left facing a changed climate. Regulations (and the market) forbid them from using too much leverage. The Dodd-Frank financial-reform bill prevents them from gambling too much with shareholders’ money. Sen. Elizabeth Warren, a foe of the industry, has been seated on the Senate banking committee. And technology has eroded a lot of the advantage they once had in trading stocks, bonds, and other products on behalf of clients and for themselves.
The ultimate go-go 1990s company has struggled in the past decade. Is Dell now a candidate for a leveraged buyout?
Trading of the shares of Dell Computer briefly stopped this afternoon on news that the company is considering being acquired by private-equity firms. The company didn’t comment on the rumors.
Michael Dell, chairman and CEO of Dell Inc. (Alexander F. Yuan/AP)
No firms have stepped forward publicly to express interest. But Blackstone Group, one of the largest private-equity firms, is an obvious candidate. Last week, David Johnson, senior vice president for strategy at Dell, took a new post with Blackstone. And any deal is likely to be friendly and would include corporate founder Michael Dell. According to the most recent proxy filing, he owns about 14 percent of the company’s common shares. Private-equity veterans suggest that firms like Silver Lake Partners and TPG, which have long had a focus on technology firms, might also be interested.
This marks one of the few times that Dell’s stock has been in the news in recent years. And therein lies a tale of fragility and obsolescence that can be told in two tidy charts. Call it a tale of two decades.
Dell was a company custom-built for the go-go 1990s. Michael Dell pioneered a direct-sales model from his dorm room at the University of Texas and ultimately built it into an Internet powerhouse. In the 1990s, everybody bought PCs (PCs, not Macs) because they wanted to go online. The explosion of the Internet—email, website, audio, gaming, video—meant people were eager to upgrade their computers every couple of years. Which mean they bought more PCs (PCs, not Macs). And it became cool and simple to purchase desktops—and then laptops, printers, speakers, and other accessories—online through Dell. Because it had a head start in direct sales against incumbents Iike IBM and Hewlett-Packard, and because it worked like crazy on logistics and its supply chain, Dell was able to reduce prices and gain market share while also turning a profit.
The upshot. As the chart below shows, Dell was arguably the best-performing stock of the 1990s. Between January 1991 and March 2001, its shares rose a stunning 2,407 percent.
But Dell’s dominance wasn’t to last. Once everybody was online and the market was saturated, it was difficult to boost sales. Throughout the first decade of the 21st century, profit margins for computer makers continued to slip. IBM sold off its PC business to a Chinese competitor, Lenovo, in 2004. Gateway was sold to Acer in 2007. And then, seemingly out of nowhere, Apple stormed back to gain market share in desktops, laptops, and a whole new range of devices in which Dell didn’t really have serious offerings: iPods, iPhones, iPads. And so while Dell rolled out clever ads, and boosted its physical presence with mall kiosks, its position in the culture shrunk. So did the company’s margins. And so did the stock.
Check out this chart of Dell from March 2000 to the present, in which the stock lost nearly 80 percent of its value. The broader stock market has enjoyed two epic rallies, and new technology companies have sprung from the fertile ground of Silicon Valley. But Dell has wilted. In order to get investors to stick around, last year it resorted to that old-economy tactic: paying a quarterly dividend of eight cents a share.
The company is shedding 5,400 of its 63,500 employees and taking a number of charges that will halve its quarterly profits. But the real blow is its outmoded consumer and business travel business, says Daniel Gross.
“We’ve been working on this change. I’ve talked about the convergence of online and offline. We have implemented actions to be able to operate more effectively in the digital marketplace.” A media executive speaking prepared notes for Davos? A big-box retailer holding forth at the Consumer Electronics Show? No, that was Kenneth Chenault, CEO of American Express, speaking in a conference call Thursday night in which the financial-services giant announced it would lay off 5,400 people and take a series of charges that would halve its quarterly profits.
American Express Co. corporate credit cards. (Andrew Harrer/Bloomberg, via Getty )
Headquartered in the World Financial Center, American Express has blanketed the globe and segmented the market—gold, platinum, centurion. In the process, it has become a brand for the 1 percent and its many aspirants. Chenault, having run the firm since 2001, enjoys one of the longest tenures of any big New York financial firm. Virtually alone among the city’s financial bigwigs, his reputation is of such quality that his name was seriously floated for Treasury secretary.
American Express makes money by facilitating and processing all sorts of retail transactions, by lending money to its customers, and by helping people and companies arrange travel. The core business is doing quite well. Card spending was up 8 percent in the most recent quarter, and customers are doing a much better job keeping up with their payments. “The write-off rate of the U.S. lending portfolio (principal only) was 2.0 percent for the quarter,” the company reported.
While AmEx’s card business benefited from one of the big business-friendly trends of 2012, the improving consumer, the company was hurt by some of the year’s other big trends: tougher regulation and the relentless disintermediation of established business models by the digital revolution.
AmEx announced Thursday that its earnings would be impaired by three major charges. The first, $342 million, was done to account for a slight uptick in participants cashing in their points in its Membership Rewards program, in which card users accrue points redeemable for travel and other rewards based on spending. Given that Membership Rewards points are a liability for American Express—they have a cash value to customers and will be used at some point—the fact that more will be redeemed in 2013 rather than 2014 is more of an accounting issue than a fundamental business one.
A second charge can be directly ascribed to Washington forcing financial firms to change their behavior. AmEx is reporting a charge for $153 million to account for money it will have to return to card members. “This amount deals with fees, interest and bonus rewards as well as an incremental expense related to the consent orders entered into with regulators last October,” the company said. Translation: the Consumer Financial Protection Bureau, the creation of Sen. Elizabeth Warren (D-Mass.), last year nailed American Express for a host of violations.
“This action is the result of a multipart federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws,” the CFPB said. The litany of accusations included levying illegal late fees and wrongly charging late fees. American Express had agreed to refund at least $85 million to some 250,000 consumers and pay a penalty of $27.5 million. The sum the company announced yesterday is the result of its own accounting for customers it had wronged.
The white-shoe firm is cutting back on bankers and traders, and doubling down on the old-fashioned brokerage business.
And then there was one.
Today’s headlines are about Morgan Stanley, the famously white-shoe investment bank, cutting up to 1,600 posts in banking and trading—not in back offices or low-margin areas, but in the sexy, white-hot heart of the financial-services industry.
Bankers walk in front of Morgan Stanley headquarters in Manhattan. (Mario Tama/Getty)
As Tom Wolfe documented in this space, Wall Street’s Masters of the Universe—beset by high-frequency trading, the triumph of Silicon Valley nerds, limits on leverage, years of poor stock performance, and a host of new regulations—have morphed into the Eunuchs of the Universe. And now Morgan Stanley is about to neuter 1,600 more.
It’s all happened very fast. Five years ago, there were five huge, New York–based investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. These big-shots controlled the lucrative advisory and initial-public-offering businesses, ran internal hedge funds, managed assets, and traded with abandon. Using huge amounts of borrowed cash, they minted giant profits, paid large bonuses, and bolstered the economy of the tristate metropolitan area—all without pesky government oversight. Each employed tens of thousands of people, and sent its top executives to key posts in Washington.
But when the mortgage crisis hit, the wheels came off.
Bear Stearns, the runt of the litter, was the first to go. Undone by excessive leverage, poor management, and bad bets on subprime mortgages, it was taken over by JPMorgan Chase (with the assistance of the Fed) at a fire-sale price in March 2008.
Five months later, Lehman Brothers, undone by excessive leverage, poor management, and bad bets on subprime mortgages (sense a theme?), hurtled into bankruptcy, and nearly took the whole global financial system down with it.
Why aren’t business leaders more concerned about the debt ceiling? Everyone rallied to prevent a fall off the fiscal cliff, but that damage would’ve been contained, while a failure to raise the ceiling would be catastrophic, writes Dan Gross.
There’s always an encore in cabaret and in Washington fiscal crises. The ink was barely dry on the cliff deal—or if you prefer a more up-to-date metaphor, we’d barely disabled our fiscal-cliff countdown widgets—when we started to focus on the next drama: the debt ceiling.
On the plus side, this latest crisis at least sounds more benign: while you fall off a cliff, you only bump your head into a ceiling. But economically, the ceiling has the capacity to deliver far more damage. Had the U.S. gone over the fiscal cliff, taxes would have reverted to higher levels, and unemployment benefits for some would have ended. But the damage could easily have been undone by a post-cliff deal.
A breach of the debt ceiling, by contrast, and a failure to pay government debts, even for a day or two, would be far more problematic. The Bipartisan Policy Center says the “X” date—the date on which the U.S. will have exhausted its borrowing authority and won’t have sufficient funds to pay all its debt—is between Feb. 15 and March 1.
So what happens when we hit the “X” date? Some people who are expecting government payments wouldn’t get them, and the republic would survive. But if the government refused (or was unable) to pay interest on its bonds for a few days, the republic wouldn’t survive. And neither would the global financial system.
Why not? Treasury bonds, the safest form of capital known to man, are held in huge volumes by U.S. and foreign banks, by the U.S. and foreign central banks, and by companies and savers around the world. A default, or even a quasi-serious threat of default, would cause U.S. bonds to lose a lot of value immediately. That would trigger a round of margin calls, capital flight, and unintended consequences that would make September 2008 seem like a paddle in a swan boat in the Boston Public Garden. The unique role that Treasuries play, and the fact that leveraged institutions (including the Fed and the Bank of China) hold so many of them, means that it’s doubly, triply important not to goof around with America’s promise to pay.
Of course, the markets, as they did with the fiscal-cliff situation, have thus far declined to freak out over the debt ceiling: the VIX, a measure of stock-market volatility, has slumped in the past week. The stock market is surging ahead. And while yields on U.S. government bonds have risen a little so far this year, the bond vigilantes are still blissed out at their all-inclusive resort in Turks & Caicos.
And yet Washington Republicans, with the tacit approval of much of the press corps, seem willing—even eager—to create a new hostage situation. Democrats believe, rightly, that the debt limit has nothing to do with future spending and everything to do with carrying out past tax and spending policies. President Obama doesn’t want to negotiate over it. Republicans are eager to use the debt ceiling as leverage to get President Obama to cut entitlements. And they’re eager to have the conversation—again and again. House Speaker John Boehner even mused about staging a debt-ceiling hostage crisis every month.
Public-sector job losses have been dragging down the recovery for years. But there are new signs that the bloodletting is easing up at the state and local levels. Daniel Gross reports.
As the federal government has provided stimulus through extended unemployment benefits, food stamps, and heightened spending in the post-bust years, state and local governments have acted as a counterweight. Revenues fell off a cliff in 2009, and since state and local governments are prohibited from running deficits, they responded by cutting spending and raising taxes. The reduced spending resulted in sharply lower government employment.
Job seekers line up a job fair in Washington, D.C., Dec. 5, 2012. (Bill O'Leary/The Washington Post, via Getty)
According to the Bureau of Labor Statistics, in every month since February 2010, the private sector has added positions. That’s 34 straight months of private-sector job creation, in which companies have added a total of 5.323 million jobs. That’s pretty good, but not nearly enough to recoup all the jobs lost during 2008 and 2009. By contrast, government employment has fallen in virtually every month since May 2010. Between May 2010 and December 2012, the government sector has reduced employment by 1.072 million, or about 4.7 percent. Now, the employment figures in early 2010 were inflated in part by temporary federal census employment. But the tale of decline is clear and obvious. Since the beginning of 2009, local governments have cut 529,000 positions and state governments have cut 126,000 posts.
Amid all the cries of socialism, then, the shape of the economy has subtly shifted. Government spending on defense, entitlements, and social insurance may be up. But the government’s role as a direct employer has declined. In February 2010, 82.6 percent of all jobs in the U.S. were private-sector positions. In December 2012 that proportion had moved up to 83.6 percent.
To be sure, a large chunk of government job cuts can be chalked up to the type of needed efficiency measures that private-sector companies undertook in 2008 and 2009 as they fought a battle for survival. But it’s worth remembering that in prior recoveries—under George W. Bush and Ronald Reagan, for example—government employment generally expanded. It’s not like we suddenly woke up in 2009 and realized we had several hundred thousand redundant teachers, policemen, firefighters, bus drivers, and civil engineers.
But there are signs that the government job carnage may be coming to an end. As the economy has continued to grow—albeit too slow for anyone’s liking—and as the housing market has continued to recover, the revenue picture for state and local governments has improved. Public coffers have been receiving incrementally more payroll taxes, property taxes, corporate income taxes, and sales taxes. According to the Rockefeller Institute for State Government, state revenues in the third quarter of 2012 rose 2.1 percent from the year before. “Tax collections have now risen for 11 straight quarters, beginning with the first quarter of 2010.”
Those are modest gains, and in many states the increased funds are simply going to plug gaping gaps that continue to pop up in budgets. And even if the current-year revenue picture improves, states like Illinois are grappling with massively underfunded pension liabilities. So it’s not as if a bump in revenues will lead to the rapid expansion of employment.
Still, some analysts believe that the trend of rising revenues and continuing growth will put state and local government in a position to recall some of those teachers and other workers fired in the past three years. Marissa di Natale, an economist at Moody’s, told Fortune that she expects state governments to add 70,000 positions in 2013. USA Today reported that Moody’s says state and local governments will add 220,000 jobs in 2013.
The Qatar-based news network bought Al Gore’s experiment. Cue the expected freakouts. But isn’t foreign direct investment as American as apple pie? Daniel Gross on why those who don’t like the deal can just change the channel.
Let’s all calm down about the catastrophic geo-politico-media-financial import of Al Jazeera buying Current.
It is easy to see the purchase of Current TV by Al Jazeera for a reported $500 million as simply the latest in a dreary set of data points. Yet another sign of decline: we’re progressively selling our birthright and assets to foreigners who may not share our values and interests.
But foreign direct investment has been an important contributor to the recapitalization of post-bust America. And I’m not simply talking about the central banks of China and Japan buying U.S. government debt. The flow of funds into the U.S.—purchasing companies, factories, real estate, building new entities from scratch—has been relentless. The U.S. generally leads the world in foreign direct investment. According to the Organization for International Investment, FDI rose from $158.6 billion in 2009 to $236.2 billion in 2010, and fell slightly to $228 billion in 2011. Of course, the FDI crown will not be ours forever. As recently as 2010, the U.S. received twice as much FDI as China did. In the first half of 2012, the OECD notes (PDF), FDI in the U.S. was running at a slower pace than in 2011, and the U.S. was trailing China.
Think of Fiat buying Chrysler, Indian outsourcer Inofsys opening software development centers in the U.S., Russian oligarchs buying trophy assets like insanely expensive condominiums and NBA franchises. Here’s a nice list from CNBC on iconic brands that are now foreign-owned.
FDI is part of the larger story of how engagement with the world has helped the U.S. rise from the depths of the financial crisis. Exports are up about 50 percent on a monthly basis since the low of April 2009. (The steady flow of FDI is, in fact, a key pillar of anti-declinist arguments, like the one I made in my book, Better, Stronger, Faster)
Why are foreign companies so willing and eager to pay so much to get into the U.S.? For all America’s problems, no other country boasts the same combination of size and wealth. No other country has as many well off consumers as the U.S. does. Having a presence in the U.S. market is incredibly valuable. It’s hard to be big in the world if you are not going to be big in the United States. What’s more, despite all the squawks you here, the U.S. is a remarkably secure place to invest. Property rights are protected, our system is relatively uncorrupt, and the government isn’t likely to snatch your business and pack you off to jail if you cause trouble. We don’t have coups, and the U.S. dollar is an extremely stable currency by global standards.
This transaction shows that the eyeballs of Americans remain remarkably valuable. Think about it. In purchasing Current, Al Jazeera is simply doing what many foreigners are doing these days: paying a high market price to gain access to what it views as a very valuable market. It has paid $500 million to have access to 40 million eyeballs—or $12.50 per subscriber.
House Republicans are unlikely to make a fiscal-cliff deal until they start hearing from CEOs and investors. And that’s not happening yet.
So of course the pro forma meeting between President Obama and congressional leaders ended Friday without a deal, or even a new proposal. And why should it have? Obama, the Senate, and the House Republicans have made their positions abundantly clear. With about 78 hours left to go before Jan. 1, 2013, it seems that both sides prefer going over the cliff to compromising further (in the Democrats’ case) or compromising at all (in the Republicans’ case.) (In the Senate, Majority Leader Harry Reid and Minority Leader Mitch McConnell are continuing to discuss a potential deal.)
U.S. President Barack Obama speaks on ongoing "fiscal cliff" negotiations during press conference in Washington, DC, Dec. 19, 2012 . (Win McNamee / Getty)
When news broke in the late afternoon that the White House was not going to make an offer for a small, cliff-avoiding deal, the Dow Jones Industrial Average, which had been trading down about 50 points all day, dropped an additional 100 points. The movement raises serious questions about the intelligence of people trading based on what they think will happen at these meetings. But the reaction—down about 1 percent—was also quite muted and lame. And that’s part of the reason there hasn’t been a deal yet. If people are hoping the markets and the private sector will push the public sector into a deal to avoid the economically damaging cliff, they’re going to have to wait a few more weeks. Too many entities in the private sector are either in denial about the situation, or are not yet feeling the pain.
Let’s start with denial. Earlier this week, I argued that Starbucks’ initiative to encourage bipartisanship by having baristas scrawl the words “come together” on coffee cups was likely to fail. Friday afternoon, I received an email from Marriott International CEO Arne Sorensen. “Leaders need to reach a balanced deal now, before we go off the fiscal cliff at year end, and without creating a new set of future conditions that recreate a new fiscal cliff in the future,” he noted.
Of course, there are a host of balanced plans out there. The White House keeps proposing them. The Senate has passed one. The two parties agreed on spending cuts of $1.5 trillion in 2011. But the House Republicans aren’t interested in a balanced plan because they believe taxes are already high enough. When House Speaker John Boehner presented them with the possibility of voting on a wildly unbalanced plan—one that preserved Bush tax cuts for everyone making $1 million or less—the rank and file told him to forget it.
Instead of distributing emails to journalists or making blog posts, CEOs who are really interested in a deal should get on the phone to Republican elected officials and ask, order, and beg them to make a deal that will effectively raise taxes on the CEOs. And CEOs are not nearly at that point of desperation.
Instead of one day with the Dow down 150 points, we will need several days in a row where the Dow is down several hundred points. That will cause CEOs’ net worth to fall sharply, making options worthless, and render corporations incapable of issuing new debt or stock, striking alliances, or doing deals. When traders walk into work feeling nauseous because futures are down so low, and when Grand Central Station at 4:30 p.m. looks like a casting call for one of those zombie television shows— half-dead creatures staggering around, their hair a mess, clothes ripped—that’s when private-sector pressure for a deal will really start to mount.
As time runs out before the fiscal cliff deadline, President Obama told the press Friday he is still determined to 'get this done.'
Events have overshadowed the year-end shopping season. But consumers are spending freely—even if they’re not clogging the malls.
Last week, I had to make my way to 30 Rock for an appearance on MSNBC, and I almost missed my hit. Why? I had forgotten about the need to allot an extra 10 minutes to wade through the crowds in front of Saks Fifth Avenue, to fight through the hordes of tourists and locals thronging the midway at Rockefeller Center, gawking at the tree, watching the skaters, and swinging massive shopping bags like maces.
FedEx employee, James Johnson, sorts through items being shipped through the Fedex World Service Center on Dec. 10, 2012, in Doral, Fla. (Joe Raedle/Getty)
It’s been easy to forget that the holiday shopping season is hurtling toward its close. Our attention has been occupied by far more serious matters that make shopping seem irrelevant, even crass—Hurricane Sandy, the fiscal cliff, the Newtown tragedy.
Nonetheless, the season remains vital to retailers because they rack up huge sales in this five-week period. Back in October, the National Retail Federation projected sales would rise 4.1 percent to $586.1 billion. A good rise, better than average. It looks like it is going to live up to the solid expectations.
The frenzy that started with the shopping season encroaching onto Thanksgiving and the usual Black Friday stampedes subsided rather quickly. That’s in part because people tend to front-load their holiday purchases. Also, Hanukkah came early this year. Then, real life intervened.
We may not have seen the same number of reporters doing standups at the mall this year. But the underlying trends that support strong spending growth are intact. Jobs, wages, and rising housing prices tend to translate into rising retail sales and spending. And that is what we have generally seen throughout 2012. Retail sales were up (PDF) a solid 0.3 percent in November from October. On Friday, the Commerce Department reported that personal income rose an impressive 0.6 percent in November from October, while personal consumption expenditures (the engine that drives the economy) increased 0.4 percent. Translation: more wages were paid, more money was spent, and more money was saved. Americans are quietly going about their business—working, paying bills and mortgages, and shopping.
The International Council of Shopping Centers, along with Goldman Sachs, measures same-store sales at bricks-and-mortar retail outlets. The ICSC’s index for the last several weeks can be seen here. Sales fell off after Black Friday, declining (on a week-to-week basis) in the periods that ended Dec. 1 and Dec. 8. But they bounced back strongly last week, up 4.3 percent from the week before. On a year-over-year basis, however, for the past four weeks, same-store sales have been up 3.3 percent on average. That’s solid, but not spectacular.
But these days, looking for the enthusiasm of holiday shoppers at malls is increasingly like looking to tabulate the enthusiasm of voters by going to polling stations on Election Day. So much of the activity in both realms now happens elsewhere.
Investors are shrugging off the fiscal chaos in Washington because they’ve become used to the brawling—and because this week’s economic data had good news.
Washington is obsessed with the fiscal cliff. But nobody else seems to care.
John Liotti (R), works with fellow traders on the floor of the New York Stock Exchange Thursday, Dec. 20, 2012. (Richard Drew/AP)
Not the stock markets, not global bond investors, not consumers, and not businesses. In fact, it’s quite possible that, given where we are in the economy cycle, and given what is driving the economy, Washington’s ability to hurt activity in the non-Beltway economy may be quite limited. And, that, paradoxically, is limiting the outside pressure on politicians to cut a deal.
What do I mean? On Thursday and Friday, almost everybody in the politico-financial complex was riveted by the absurd action at the Capitol. House Speaker John Boehner spent the week engineering a faux-confrontation over the fiscal cliff by plotting to pass a symbolic and futile measure to extend Bush-era tax cuts for everyone making $1 million or less. But he couldn’t sell it to his own caucus. Chaos.
Meanwhile, in the real world, several pieces of data indicated that people were generally ignoring the fiscal-cliff hostage situation and getting on with things. On Thursday, the National Association of Realtors reported that existing home sales rose 5.9 percent in November from the year before. In the most bullish monthly report in years, NAR reported that prices were up (more than 10 percent from the year before), inventory was down to levels not seen in half a decade, and the proportion of distressed sales was slipping. Evidently, the uncertainty surrounding the election and the fiscal cliff didn’t deter people from buying homes.
On Friday, two more pieces of data bore witness to the fundamental strength of the U.S. economy. The Commerce Department reported that personal income rose an impressive 0.6 percent in November from October, while personal consumption expenditures (the engine that drives the economy) rose 0.4 percent. The savings rate also increased. Translation: more wages were paid, more money was spent, and more money was saved.
At the same time, there was good news from the industrial economy. Orders for durable goods bounced back in November, rising 0.7 percent from October. Compared with 2011, orders are up 4.5 percent through the first 11 months of 2012. Evidently, the uncertainty surrounding the election and the fiscal cliff didn’t stop businesses from placing orders.
The data points released today led forecasting firm Macroeconomic Advisers to raise its projection for fourth-quarter economic growth from an anemic 1.0 percent, to a more respectable 1.5 percent. The fundamentals may not be particularly strong, but they’re pretty solid.
There should be no surprise that Republicans are incapable of compromising on a fiscal cliff deal. When it comes to taxes, for the GOP it’s a matter of theology—not business.
This is not a business transaction. Those of us in the press who follow both business and politics tend to think there are certain similarities between the two realms. But the fiscal cliff hostage situation, now in its brutal 44th day, is highlighting one of the key differences.
Speaker John Boehner, R-Ohio, conducts his weekly news conference in the Capitol Visitor Center where he fielded questions on the "fiscal cliff" negotiations and gun control laws. (Tom Williams/Getty)
In business, when two sides want to make a deal, or have to make a deal, there’s a certain protocol that is followed. The two sides stake out their positions. They argue, threaten, charm, and cajole. Ultimately, if there is a zone of agreement—an array of outcomes that are acceptable to both sides—then the two parties will cut a deal and meet in the middle. This is what happens when a stock trades, or when people get hired, when companies are sold. I offer 10, you bid nine. We have a deal at $9.50. If there is no mutually acceptable price, the two sides simply walk away.
Politics is often transactional in just this way, especially on issues of spending. But when it comes to issues of taxes, and when Republicans are involved, it’s less business than theology. People don’t tend to compromise on theology. And we don’t expect them to. When a Catholic who believes in the Holy Trinity meets a Jew who believes in Adonai, they don’t shake hands, meet in the middle, and agree that there are two divine figures, a sort of Holy Duo. They agree to disagree, and then coexist.
People in our world too frequently fail to take professionals at their words. The modern Republican Party doesn’t believe in raising taxes. Full stop.
In fact, as a rule, its members believes that taxes are too high. When they get in power, Republicans try to cut taxes, regardless of the economic or fiscal situation. George W. Bush may have had a failed presidency in many ways, but you can’t deny his success at reducing taxes on income, capital gains, dividends, and estates. When they are out of power Republicans agitate to cut taxes and oppose tax increases. When they run for office, they promise to cut taxes and oppose tax increases.
And when confronted with the prospect of massive tax increases that will result from mere inaction, they have proven, thus far, unwilling to take evasive action if it means raising taxes on anybody.
It’s a widely held belief that Grover Norquist and the Club for Growth act as modern-day Komissars, enforcing a rigid anti-tax ideology. But for Republicans in general, and for the Republicans in the House in particular, the overwhelming majority of whom come from safe, conservative districts, their arms don’t need to be twisted.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
The economy added 203,000 jobs in November, according to today’s data—and the unemployment rate dipped for the right reasons. There’s just one downside: stubbornly stagnant wages.