TIME Davos

What Obama and Davos Plutocrats Have in Common

A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015.
A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015. Chris Ratcliffe/Bloomberg—Getty Images

Global wealth has changed dramatically. It's time our tax code should, too

If President Obama’s State of the Union speech Tuesday night and the chatter at the World Economic Forum in Davos, which opened Wednesday, are any indication, inequality will be the hot economic topic for another year running.

The president’s proposals for changes to parts of the US tax code that mainly benefit the wealthy revives the conversation Warren Buffett started a few years back with his op-ed about why his secretary pays a higher tax rate than he does. (Answer: She works for wages, whereas the Oracle of Omaha earns money on money itself, in the form of capital gains, interest income, etc.) At the WEF in Davos, where world leaders meet every year to hash out the big geopolitical and economic issues of the day, one of the most talked about reports is Oxfam’s new brief looking at how the 85 richest people on the planet have the same amount of wealth as the poorest 50%, a huge jump from last year when it took a full 388 plutocrats to equal that wealth. Some 20% of the billionaires come from the world of finance and insurance, a group whose wealth increased by 11 % in the last twelve months. And $550 million of it was spent lobbying policy makers in places like Washington, something Oxfam believes has been a major barrier to tax and intellectual property reform that creates a fairer economic system.

Plenty of those plutocrats are here on the Magic Mountain, and some are undoubtedly checking in with their tax planners. I expect that we’ll hear lots more in Davos this week about how to restructure tax codes for the 21st century, mainly because the nature of wealth and how it gets created has changed so dramatically. Today, more than ever since the Gilded Age, money begets money; income earned from wages has been stagnating for years, or decades even, depending on which type of workers you tally. Meanwhile, changes in the tax code and corporate compensation over the last 30 years or so has concentrated more financial resources at the very top of the socio-economic food chain. Indeed, financial assets (stocks, bonds, and such) are the dominant form of wealth for the top 0.1 %, which actually creates a snowball effect of inequality.

As French economist Thomas Piketty explained so thoroughly in his now famous 693 page tome on wealth inequality, Capital in the 21st Century, the returns on financial assets greatly out-weigh those from income earned the old-fashioned way—by working for wages. Even when you consider the salaries of the modern economy’s super-managers—the CEOs, bankers, accountants, agents, consultants and lawyers that groups like Occupy Wall Street railed against—it’s important to remember that somewhere between 30% to 80 % of their incomes are awarded not in cash but in stock options and stock equity. This type of income is taxed at a much lower rate than what most of us pay on the money we receive in our regular checks. That means the composition of super-manager pay has the booster-rocket effect of lowering taxes (and thus governments’ ability to provide support for the poor and middle classes) while increasing inequality in the economy as a whole.

MORE How 7 ideas in the State of the Union would affect you

It’s a cycle that spins faster and faster as executives paid in stock make short-term business decisions that might undermine long-term growth in their companies even as they raise the value of their own options in the near. It’s no accident that corporate stock buybacks, which tend to bolster share prices but not underlying growth (you know, the kind that creates jobs for you and me), and corporate pay have gone up concurrently over the last four decades. There are any number of studies that illustrate the intersection between the markets, our tax system, and wealth gap; one of the most striking was done by economists James Galbraith and Travis Hale, who showed how during the late 1990s, changing income inequality tracked the go-go NASDAQ stock index to a remarkable degree.

As Piketty’s work shows, in the absence of some change-making event, like a war or a Great Depression that destroys financial asset value, the rich really do get richer–a lot richer–while the rest of us become relatively worse off. One of the few levers that governments have to combat this trend is the tax code. While Piketty argues for a global wealth tax, something that will likely never happen, President Obama’s stab at capital gains taxes and trust taxes is probably just the opening round in a tax debate that will go on throughout this year, and into the 2016 presidential race.

I say, bring it on—given that the nature of wealth has changed, it’s high time the tax system should too.

TIME Economy

Expect Talk of Oil, Terrorism and Sex Scandals at Davos

A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015.
A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015. Chris Ratcliffe/Bloomberg—Getty Images

Even the most powerful cannot completely control the agenda at the World Economic Forum in Davos. Here’s what you can expect from this year’s conclave of the elite

Even the powerful men of Davos can’t control their own agenda.

The CEOs, top academics, and world leaders—many of whom have traveled by private jet and then helicopter to Davos, a secluded Swiss ski town—for this year’s World Economic Forum have come officially to discuss how power in the global economy is shifting, from traditional leaders like the U.S. to the emerging markets.

Instead, on the eve of the conference, which officially kicks off on Tuesday night, there were signs that the economic order of the past few decades seems intact. The latest sign came on Monday, when Chinese stocks plunged 8%, their largest drop in six years. Meanwhile, Brazil’s economy is stagnant and the collapse in oil prices has pushed Russia into a crippling recession. At the same time, U.S. GDP rose 5% in the third quarter, once again making the nation the driver of the world’s economy. That’s likely to lead much of the talk in Davos this year.

And while the monied men—and they are, once again, mostly men—have come to talk economics and global policy, at least some of that high-minded fare will be overshadowed by more salacious talk. The U.K.’s Prince Andrew, who is attending the World Economic Forum this year, is likely to get hit with questions about a scandal with an American woman, who claims he used her as a sex slave when she was 17. It will be the first time Prince Andrew has been in public since the allegations were made.

The World Economic Forum’s official agenda often gets pushed aside by world events that unfold while the powerful are walled in by Davos’ peaks. But it has been six years since leaders in Davos were meeting in the midst of what looks to be growing economic turmoil. And it’s the first time in a while where at least a portion of that instability is coming from the conference’s home turf.

European leaders will be speaking on the eve, once again, of a vote in Greece that could break up the euro. That and the plunging price of oil threaten to hurl the world’s financial system back into tumult.

Officially, the title of this year’s World Economic Forum is “The New Global Context.” The economic context that has emerged in the past few months is one of cheaper oil and instability in economies in Russia, Europe, and, most recently, China. That’s likely to make oil the spotlight of any discussion at Davos. On Wednesday, the secretary-general of the Organization of Petroleum Exporting Countries (OPEC) Salem Adballa El Badri will speak on a panel with Arkady Dvorkovich, deputy prime minister of Russia. Also on the panel will be Khalid Al Falih, the CEO of Saudi Aramco, the Saudi Arabian oil company. The discussion will likely focus on whether the drop in oil prices is supply-driven, a gambit by Saudi Arabia and other nations to drive out other higher cost oil suppliers, or if it’s a sign that the world economy is slowing more dramatically than it may initially seem.

Central bankers around the world should expect some criticism, and that includes those in Switzerland, who last week surprised the world, causing currencies around the world to tumble compared to the Swiss franc. On Wednesday morning, New York University Professor Nouriel Roubini and hedge funder Paul Singer, both of whom have criticized the Federal Reserve for keeping interest rates near zero for so long, will talk. This summer, Singer said that the rise in the U.S. markets was based on fake money from the Fed and that it was not sustainable.

Davos is known for its high-powered panel discussions. The highest wattage finance conversation will come on Thursday and will likely focus on what could happen when the Fed begins to raise interest rates. That panel will include Goldman Sachs Chief Operating Officer Gary Cohn; Ray Dalio, who manages the largest hedge fund in the world; Harvard professor and former Treasury Secretary Larry Summers; and Christine Lagarde, who is head of the International Monetary Fund.

On Thursday afternoon, Microsoft CEO Satya Nedella will debate the future of tech with Facebook’s Sheryl Sandberg and Google’s Eric Schmidt. Also talking will be Yahoo’s Marissa Mayer. But perhaps the hottest tech ticket at Davos, given the state of China’s economy, is to hear Alibaba’s CEO Jack Ma, who will be speaking Friday morning. In September, the Chinese online retail giant raised $26 billion on the New York Stock Exchange, in the biggest IPO in U.S. history.

Income inequality is a perennial topic at the World Economic Forum. But the discussion of inequality at Davos tends to be impersonal and focus on rich nations versus poor nations. But influential research group Oxfam has attempted to make the issue more personal this year. On Monday, the charity Oxfam released a report targeted at the World Economic Forum that said the world’s wealthiest 1% are close to owning as much wealth as the rest of the globe combined. Davos gets its share of that 1%. Also, President Obama’s State of the Union Address on Tuesday will likely focus on income inequality, which could make it a larger part of the discussion at Davos.

Also, given the recent attacks in Paris, terrorism is likely to be a topic of conversation in Davos. French President Francois Hollande will address the conference on Friday.

U.S. officials have been somewhat absent in recent years at Davos, but they are slated to return this year. Secretary of State John Kerry, who was criticized for not participating in demonstrations against terrorism in France, will address the conference on Friday. U.S. Treasury Secretary Jack Lew is also slated to be at Davos, but he is not scheduled to publicly address conference attendees. Other U.S. officials or politicians on the attendance list include Penny Pritzker, the Secretary of Commerce; and Darrell Issa, the congressman from California. Former U.S. House of Representatives Majority Leader Eric Cantor will also be at Davos, but this year as an investment banker, for boutique firm Moelis & Co.

For the first time, the World Economic Forum will hold a discussion of gay and lesbian rights on its official program. But likely to get as much buzz as the panel is the fact that it won’t take place until Saturday, when many of the conference’s rich and powerful have already decamped or have headed to the ski slopes.

So it goes in Davos.

This article originally appeared on Fortune.com.

TIME Economy

Americans Are Happier About the Economy Than They’ve Been in a Decade

The economic upswing is also boosting Obama

Steady growth is bolstering the American public’s confidence in the economy, according to a new poll that shows people are more optimistic than they have been in 11 years. It’s good news for President Barack Obama as he prepares to give his State of the Union address on Tuesday night.

About 45% Americans said they are satisfied with the state of the economy, a level unseen since January 2004, according to a Wall Street Journal/NBC poll. “For the first time, we have numbers that kind of bust out of the Great Recession Era,” said Bill McInturff, a Republican pollster who worked on the survey.

Only 49% of Americans said the country was in a state of decline, the lowest level since on the question since 1991. The poll of 800 adults found that the national mood is being bolstered by dropping fuel prices, increased employment, and economic growth.

Obama’s overall approval rating has also risen to 46%, and 49% of Americans now approve of his handling of the economy—the highest level since he won reelection in 2012. But Congress’ approval ratings remain at an abysmal 16%

“Throughout most of 2014, Barack Obama had a stiff wind in his face,” said Peter Hart, a Democratic pollster who worked on the survey. “He starts 2015 with a slight breeze at his back.”

[WSJ]

 

MONEY Economy

The Doom and Gloom of Deflation Hasn’t Reached Our Shores—Yet

Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015
Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015. AAA Michigan said that the average cost of self-serve unleaded gasoline in the state was $1.97 a gallon, the first time the price has fallen below $2 a gallon since March 2009 and down 9 cents since the beginning of the week. David N. Goodman—AP

A new government report shows that prices are clearly falling, mostly due to sinking energy prices. Even so, this could keep the Fed from hiking rates for months.

You might think that falling consumer prices would be met with cheers on Wall Street, especially in the all-important holiday shopping season.

But when a new government report released on Friday showed that consumer prices in December had declined by the largest amount in six years, there was a bit of a gasp on Wall Street.

The Labor Department reported that the Consumer Price Index, perhaps the most widely followed measure of U.S. inflation, sank 0.4% in December, after dropping 0.3% in November.

This data clearly shows there is no inflation in this economy.

Yet it’s still too soon to say if there’s deflation — a quagmire that Europe is currently stuck in, where prices keep falling to the point where consumers postpone purchases, further weakening the economy.

Why?

For starters, over the past 12 months, prices in general have inched up 0.8%. While that’s the lowest yearly rate since 2009, it’s still positive.

More importantly, plummeting gasoline prices were the real culprit that drove CPI down in December and November, notes Michael Montgomery, U.S. economist for I.H.S. In fact, last month’s 9.4% decline in gas prices accounted for the entirety of the 0.4% decline in CPI, he said.

And keep in mind that several key categories of spending did rise in December, including food, electricity, and housing costs.

Overall, so-called core CPI — which strips out volatile energy and food costs — was flat last month and rose 0.1% in November.

This helps explains why Americans regard falling prices as a blessing so far — not a curse.

Consumer confidence, as measured by the University of Michigan’s consumer sentiment index, jumped to a reading of 98.2 this month, the highest point since January 2004.

But economists expect the deflation concerns to linger, as gas prices have sunk even faster this month than in December.

Already, there’s talk that the Federal Reserve might hold off raising interest rates this year because the global slowdown in general and Europe’s deflation specifically are keeping inflation at bay here at home.

This chatter—and concern—will grow if January’s CPI figures show even more falling prices.

MONEY Economy

Swiss Currency Has Shot Up 15% So Far Today. Here’s Why That Matters

A Swiss coin is seen beneath a euro banknote on Januay 15, 2015 in Lausanne. In a shock announcement on January 15, Switzerland's central bank said it was ending a three-year bid to artificially hold down the value of the Swiss franc against the euro, in a move that immediately sent the safe haven currency soaring. Fabrice Coffrini—AFP/Getty Images

Chaos in the currency market is a sign of deep problems for Europe—and the whole global economy.

The global economy got a lot more interesting today, and maybe a little more scary, when the Swiss National Bank ended its commitment to a fixed exchange rate between the Swiss Franc and the euro.

Currency markets went into a frenzy. The Swiss franc immediately rose 30% in value against the euro, mirrored by a spike in its U.S. dollar value. Some of those gains have pulled back, with the currency up about 15% at midday. That’s still a huge move.

Okay, so it’s been a big day for currency traders—and anyone planning on a ski trip to the Alps. But what’s this mean for me?

The wildness in the market underscores the big economic story of the moment: Europe’s slide toward a recession. In a globally connected economy, weak demand in Europe could weigh on the recovery in the U.S.

So what exactly happened?

Swiss francs rose because the Swiss central bank removed an artificial cap on the price of an asset people really, really want right now. The import of the story is less about the sudden price change today than about why people want to trade their euros for francs in the first place.

Switzerland isn’t a part of the eurozone, the group of countries that share the euro as a currency. Swiss assets denominated in Swiss francs have long been considered a safe haven—a parking spot for investors around the globe when they are feeling jittery.

The eurozone has given people a lot be jittery about. In the wake of the Greek debt crisis at the beginning of the decade, investors jumped into francs, strengthening the currency against others. The problem with that for the Swiss is that it makes the goods produced by Swiss companies more expensive to export. So the Swiss National Bank (that’s like their Federal Reserve) capped the value of a franc at 1.20 per euro.

It also decided to start charging negative interest rates, meaning investors in effect have to pay a fee to park their money in a Swiss bank. That’s another way of fighting currency overvaluation. Today, at the same time as it cut the currency peg, the Swiss bank lowered the short-term interest rate from -0.25% to -0.75%. That is, they raised the penalty for stashing money there. Even so, the rally in francs shows there remains a lot of demand for doing just that.

Why did the Swiss cut the exchange rate peg?

The surprise move comes as Mario Draghi, president of the European Central Bank, is considering new measures to stimulate the eurozone economy. Many investors expect the ECB will take a page from the U.S. Federal Reserve and start buying long-term debt to push down long-term interest rates, a strategy known as quantitative easing.

A euro QE is broadly expected to bring down the value of the euro compared to the U.S. dollar. The Swiss, it seems, didn’t want to tie the value of its own currency so closely to the policy makers at the ECB.

“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in a statement. “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”

Pity Swiss watchmakers, though. Their timepieces just became more expensive for foreigners to buy.

TIME Economy

Americans View Obama’s Economic Impact More Favorably

More Americans think the economy is improving

President Obama’s job approval rating is improving, a new survey reported .

The Pew Research Center survey, which polled 1,504 adults between Jan. 7-11, reports that Obama’s job approval rating is five points higher than it was in December, at 42%. Pew says his ratings are on the up and up thanks to views among Americans that the economy is improving (somewhat). Overall, Americans who believe the economy is doing well increased 11% since Obama’s 2014 State of the Union.

Among those surveyed, 27% say economic conditions are good or excellent–which at first glance might seem low but is actually 16% higher than last year. Thirty-one percent say they expect the economy to be better rather than worse in a year from now. A year ago, only 17% thought this to be true.

The survey shows that for the first time in five years 38% of those surveyed say Obama’s economic policies have made conditions better. Twenty-eight percent say he’s made them worse and 30% say there’s been no effect. Sixty-six percent of Americans say the economy is recovering, but not strongly. Only 16% say the economy is growing strongly, though the report’s authors note that this is a growing population.

TIME Economy

5 Global Risks You Should Care About Right Now

From Left: Ian Bremmer President and Founder of Eurasia Group, Nouriel Roubini, Chairman and Co-Founder of Roubini Global Economics and Rana Foroohar, Assistant Managing Editor at TIME speak on global politics and the economy at the Time & Life Building in New York City on Jan. 13, 2015. (Adam Glanzman for TIME)
From Left: Ian Bremmer President and Founder of Eurasia Group, Nouriel Roubini, Chairman and Co-Founder of Roubini Global Economics and Rana Foroohar, Assistant Managing Editor at TIME speak on global politics and the economy at the Time & Life Building in New York City on Jan. 13, 2015. Adam Glanzman for TIME

From Russia and China back to America

Ian Bremmer, the head of Eurasia Group, and Nouriel Roubini, the founder of Roubini Global Economics, are two of the world’s preeminent risk forecasters. They joined me Tuesday morning at the offices of Time Inc. for our yearly look ahead about what you should—and shouldn’t—worry about in the geopolitical and economic landscape for 2015.

Here are my top 5 takeaways from the conversation:

Russia is being underplayed as a major political risk, especially for Europe

Yes, we’ve all followed the conflict in the Ukraine. But according to Bremmer, there’s a good chance that petro-autocrat Vladimir Putin will become even more dangerous and unpredictable as oil prices plummet, stirring up more trouble abroad (possibly in other border states) in order to keep attention at home off the total collapse in the Russian economy. The European Union-United States divide over how best to handle Russia and Putin also underscores a transatlantic relationship that is becoming even more polarized.

America is becoming more unilateral, but not in the ways that you might think

Economically and politically, the U.S. is decoupling from the rest of the world. As Roubini pointed out, America is the one bright spot on the global economic map this year, with a solid recovery that could well have it growing faster than many emerging markets. On the other hand, there’s also a sense that the U.S. is withdrawing politically from the rest of the world, heightened by President Barack Obama’s absence this week from the Paris anti-terrorism rally (Bremmer believes this was a public relations blunder, not purposeful). That’s not the right way to think of it, says Bremmer. “The U.S. is projecting power through an arsenal of disparate mechanisms that allow is more easily to act alone,” including everything from drones to economic statecraft including more freezing of assets of problematic nations (think Russia or Iran), a strategy that Bremmer dubs “the weaponization of finance.”

Low oil prices won’t last forever

Both Roubini and Bremmer feel that the conventional wisdom about the Saudis keeping the pumps going and depressing prices in order to stick it to rivals Iran and Russia is wrong. “This is about economics,” says Roubini, who believes that the Saudis are simply trying to push competitors (including U.S/ shale producers) out of the market and that they’ll start pumping more oil once the marketplace is clear. While the impact for American homegrown shale could be bad in the short term, it will be outweighed by the consumer effect of lower prices (witness gas falling below two bucks a gallon in some parts of the country).

China is still a big mystery

It’s slowing economically, that’s for sure. But is President Xi Jinping’s massive consolidation of power a sign that the country is about to undergo pro-market reforms of the type that it hasn’t seen since the days of Deng (something that China watchers hope will vault the country into the middle-income bracket and help it create more jobs)? Or is it rather a sign that China is going back to the scary days of Mao, when dissent of any kind could land you in jail or worse? Bremmer is hopeful that China can make the middle market leap and maintain social stability. Roubini (like me) is less bullish, and feels that the country’s economic model is still based on cheap labor and cheap capital (it’s worth noting it takes four dollars of debt to create every dollar of growth in China these days, which is not good). Both agree that 2015 will be a crucial pivot year for China.

Bifurcation, polarization, inequality and volatility are the buzzwords for 2015

Politically and economically, old alliances are fracturing and new ones are being formed. Sectarian conflict in the Middle East and North Africa region will get worse before it gets better, Europe is headed toward a scary deflationary debt spiral that’s galvanizing far-right politics (witness Marine Le Pen’s rise in France), and China’s slowdown and the fall in oil prices is rejiggering the geopolitical landscape. Markets will be skittish this year—so fasten your seatbelts.

TIME energy

Oil Surplus Grows Even as Prices Plummet

Getty Images

All the major oil producers may increase output this year

When the world gives you too much oil, drill for more.

That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.

That’s the conclusion of Adam Longson, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5.

All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today.

This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” its report said. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.”

One more sign is that Iraq’s production is at its highest level in more than three decades, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating.

“We already have an ample supply of oil, and on top of that we see this increase from Iraq and Russia,” Michael Hewson, analyst at CMC Markets, a British financial derivatives dealer, told The Wall Street Journal. “The momentum clearly continues to be bearish for oil.”

But wait, there’s more, according to the Morgan Stanley analysis. It says to expect increased production at several oil fields in Brazil, Canada, the United States and in West Africa. And, according to Hewson, there’s no sign of increased demand, according to reports of anemic economies in China and Europe.

And then there’s the environment. The governments of many countries – including the world’s two hungriest fossil fuel consumers, China and the United States – are striving to meet various targets for lower greenhouse gas emissions. This new green approach is responsible for “anemic global growth” in demand for oil and an “upsurge in competing supply,” said David Hufton, the CEO of the broker PVM.

“[It] is very plain for all to see that oil supply growth exceeds oil demand growth and from a producer point of view, this imbalance has to be rectified,” Hufton told the Financial Times.

Carsten Fritsch, a senior oil and commodities analyst at Commerzbank in Frankfurt, agreed. “The easiest path for oil is down,” he told Reuters. “Almost all market news and the fundamental backdrop are negative, and it is difficult to see much upside at the moment.”

This post originally appeared on OilPrice.com.

Read more from Oilprice.com:

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser