Fareed Zakaria GPS – CNN 07-22-12

Salient to Investors:

Fareed Zakaria said:

  • Outsourcing jobs to ensure a company’s survival is acceptable and is how you run a business.
  • America needs and already has a tax and regulatory structure that creates strong incentives for private businesses to flourish. The great shift in the U.S. economy over the past 30 years has been a decline in investment in human and physical capital and not an increase in taxes and regulation.
  • The World Economic Forum Global Competitiveness Report ranks the US fifth in the world and first among large economies. America has become more business friendly over the last thirty years, but spends much less as a percent of GDP on infrastructure, R&D, education, and training, than it did in the 1960s, 70s and 80s.  The World Economic Forum ranks U.S. infrastructure 24th in the world, versus second in 2001. In 2009, the OECD ranked America 14th in college graduates, versus first in the 1970s.
  • The single biggest threat to the world economy is the European crisis.
  • Cities going bankrupt is not much different from companies going bankrupt. Cities cannot go Chapter 11 but can go Chapter 9. Declaring bankruptcy brings benefits – agreement has to be reached, no matter how painful. Recent bankruptcies are not about low taxes or high spending on city services but about pensions. California’s pension-related costs rose 20-fold in the decade since 1999, an unsustainable trend almost everywhere in America.  Pew research found that the gap between state assets and their obligations for public sector retirement benefits is $1.38 trillion – up nine percent in 2010 and likely to keep rising until these obligations are renegotiated. To keep up with burgeoning pensions, states and cities are slashing services and feeding into the unemployment problem. State and local governments have 445,000 fewer workers today than in 2007, 231,000 fewer excluding teachers.

Steve Rattner said private equity is a perfectly legitimate business whose goal is to make money, but not in practice to create jobs.

Harvard’s Niall Ferguson said a Greek exit from the euro hasn’t happened yet because it is much harder to do than leaving an exchange rate mechanism or a gold standard. Most money today is in bank accounts, so a Greek exit would cause pandemonium throughout Europe; and disrupt the entire European banking system because the question would rise of which country is next.

Ferguson said the big problem would be what to do with outstanding debts – does it suddenly go from being a euro debt into being a drachma debt and at what rate? Debtors who owe money in euros inside Greece would benefit because suddenly those debts would be worth much less, but creditors would face a disaster. It would be hugely disruptive in terms of relationships between creditors and debtors. Would money that Greeks owe to other Europeans stay in euros or become drachmas?  Last month we started to see people moving their money out of Spanish banks and into German banks, but not yet a fully fledged bank run. The monetary union is still hanging together because the cost of dismantling it is incredibly high.

Ferguson said the macro-economic outlook is not great for President Obama. The U.S. and world economy is slowing down. Nothing is going to happen in Europe that’s going to improve matters before November. Europeans take very long summer holidays so not much will happen before Labor Day, though the uncertainty will linger during the summer. The U.S. is heading towards the fiscal cliff regardless of the European crisis.

View the full episode at http://globalpublicsquare.blogs.cnn.com/ or read the full transcript at http://transcripts.cnn.com/TRANSCRIPTS/fzgps.html