Chrystia Freeland

Watch Carlyle Group co-founder David Rubenstein explain to Chrystia why there’s greater political risk in the United States than in the emerging markets; how he gets a better reception from Chinese Communist Party cadres in Beijing than his own members of Congress in Washington; how private-equity firms can help remedy the impending entitlement crisis; and how the procedure that enacts Congressional salary increases can be adopted to cut the deficit.

Posted by Peter Rudegeair.

The American blogosphere lit up this week with discussion of a report from the International Monetary Fund that, by some measures, the Chinese economy will be bigger than the U.S. economy by 2016.

It makes a great headline, but that story was, of course, old news: Given China’s size, and the speed with which it is growing, simple arithmetic tells you that its economy will one day be bigger than that of the United States. The only question is when.

The bigger surprise is the huge affection U.S. capitalists have for Communist China.

“When I go to China, I find more people in government who are interested in learning about the things that private equity can do to help an economy and help companies than you often do in Washington,” David Rubenstein, co-founder and managing director of Carlyle Group, one of the world’s largest private equity firms, said in an interview this week.

“Washington, for a number of reasons, is not as focused on the joys of private equity,” Rubenstein explained. “So very often, you have to defend yourself when you’re talking to a member of Congress.”

In contrast, he said, he gets a warm reception in the People’s Republic: “What they really think is that private equity firms have shown in the West that they know how to make companies more efficient, that they know how to make workers more efficient and managers more efficient and how to make companies more productive. And that’s something they want.”

The content of his remarks is conventional wisdom among U.S. business people today: it is a truth universally acknowledged that China – with its censorship, central plan and one-party state – is a better place to do business than the United States.

This has become such a familiar refrain that it is easy to lose sight of what a radical assertion it is. We used to think that capitalism and democracy went together; that was the premise behind much of the U.S.-led global nation-building effort of the past two decades. But it has become commonplace to hear the most successful American business people assert that the world’s great power that most explicitly rejects democracy – China – is also the most business-friendly.

This embrace of Chinese Communism shouldn’t be entirely surprising. The best business people are pragmatists. Deng Xiaoping famously said it didn’t matter whether a cat was black or white so long as it caught mice. Smart business people are likewise pretty indifferent to a regime’s ideology (and indeed its treatment of dissidents, journalists and other such niceties) as long as their deals can get done and their tax rates are lenient.

So long as you have a skill or a technology that the comrades have decided China needs, its authoritarian system can be welcoming indeed, and free of many of the delays and frustrations that getting things done in a democracy can entail.

It is easy to equate that effectiveness of execution with good government. But fans of authoritarian regimes, including well-run ones such as China, should never forget the agency problem that is their big structural flaw: For their systems to work, dictators need not only be smart; they must also act in the interests of the state, not of themselves. It doesn’t always work out that way.

Legendary fund manager George Soros recently made the provocative argument that one of China’s most contentious policies – its undervalued currency – is a fraught issue because it is wrapped up in the self-interest of its mandarins. He argued that the undervalued currency is “a form of transferring purchasing power – wealth – from the citizens to the government without imposing taxation.” This made the central government powerful and attracted the best talents to government because it was a way to become wealthy.

The problem now, Soros said, is that the national interest would be served by allowing the currency to appreciate, but the officials whose job it is to make that call are loath to give up the personal benefits of an undervalued exchange rate.

As we prepare for a world in which China is the largest economy, we should be on the lookout for moments like this, when the interests of the state and of its mandarins don’t coincide. And it might be worth remembering that democracy, for all its quarrelsome inefficiencies, has the great virtue of making the conflicts of interest between the state’s servants and the state itself transparent, and making it easy to kick the bums out when those conflicts become acute.

Economic policy isn’t just a domestic issue anymore. That is the conclusion we should draw from the market volatility this week, including the shift by Standard & Poor’s to a negative outlook for U.S. government debt, and the meeting last weekend of the International Monetary Fund and World Bank.

This is a familiar fact for smaller countries. The emerging market nations have long understood that judgments made on Wall Street or at the IMF headquarters in Washington often had more power to shape their economic policy than the proposals of their own ministers of finance and central bankers. More recently, that is a lesson that fiscally weak Western countries like Greece, Ireland and Portugal have been learning, too.

Now, as the relative power of the United States in the global economy declines, it is a fact of life that Americans need to get used to, too. That is one of the important messages of the S&P decision at the beginning of this week to put the United States on a negative outlook – essentially a warning that the ratings agency is no longer certain the United States will maintain its AAA rating.

There are a lot of reasons the S&P call should be taken with a grain of salt. For one thing, the ratings agencies hardly covered themselves with glory in the run-up to the financial crisis, and surely no longer deserve oracular status – if they ever did.

For another, the S&P warning wasn’t new news. With a 10.6 percent budget deficit last year and with gross national debt at 91.6 percent of gross domestic product, it has been obvious for some time that the United States’ public finances are a mess. Nor has that concern been limited to the wonks. The debt and deficit have become a Main Street issue – witness the rise of the Tea Party movement – and have dominated the political debate in Washington for the past six months.
But there is one good reason the S&P’s negative outlook attracted so many headlines. It was a reminder that U.S. economic policy was no longer just about debates in Washington or what plays in the Iowa caucuses. U.S. economic policy needs to pass muster with global markets and with foreign lenders, too.

That is an old story for every other country in the world. But the United States has been accustomed to being the world’s dominant economy and to owning the printing press of its reserve currency. Both are still true, but less so than before. Moreover, for all its size, the United States’ massive debt means it is already dependent on the confidence of foreign buyers of U.S. Treasury securities, including governments running massive surpluses, like China.

That means national economic decisions, like the level of government spending, or the rate of taxation, aren’t purely national issues any more. In the proud days of the so-called Washington Consensus after the collapse of the Berlin Wall and the triumph of Western capitalism, U.S. pundits and policy-makers got used to issuing edicts from Washington about how emerging markets should run their economies. The reverse is not yet true, but the S&P move is a sign that the United States will need to start thinking about how its economic policy moves play in Beijing and Dubai, as well as in the Beltway and New Hampshire.

It is not just the debt and deficit that are making economic policy a matter of international concern. As the IMF and World Bank meetings revealed, one of the consequences of globalization has been to give national economic decisions a more powerful international wallop.

This isn’t an entirely novel notion for the United States. U.S. complaints about China’s exchange-rate policy and its strategy of export-driven growth are a vivid example of the public’s conviction that one country’s domestic economic strategy is a legitimate – indeed central – issue for international debate.

Now the rest of the world is starting to take the same view of the United States. In Washington last week, the Brazilian finance minister, Guido Mantega, complained that the policies of the Federal Reserve, designed to help the United States recover from the gravest financial crisis since the Great Depression, were having unintended and malign consequences in other parts of the world.

Low interest rates in countries like the United States, Mr. Mantega warned, were the “primary trigger of many of today’s economic woes.”

“Domestic political constraints have been too easily invoked by reserve currency-issuing countries as a reason for adopting ultra-expansionary monetary policies,” he said in a statement to the IMF’s policy steering committee. “But this does not change the fact that these policies generate spillovers that have made life difficult for other countries.”

Mr. Mantega isn’t the only one who is worried. In a panel discussion at Bretton Woods I moderated a few weeks ago, Andres Velasco, the former finance minister of Chile, warned: “So, if you are Brazil today or if you are many of these countries in the rest of the world, you look out the window and what you see is a tremendous tsunami of wealth coming your way. And this, which once upon a time might have been welcomed, I view and many of the people in these countries view as a terrifying sight indeed. Why? Because this tsunami is going to make your politics very difficult, your life if you are a minister very unpleasant and your macro trade-offs very sharp indeed.”

When we think about the thorny questions in foreign policy, we think first about the rocky intervention in Libya or the agonizing war in Afghanistan. But the really big challenge in managing relations between nations is the problem pointed to by Mr. Velasco, Mr. Mantega and S.&P.: managing a world in which my domestic economic policy solution is your foreign economic tsunami.

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.

Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated.

The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

Here’s how Spence and Hlatshwayo put it: “The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities, domestically and abroad. Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate.”

Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: “Many goods and services are less expensive than they would be if the economy were walled off from the global economy, and the benefits of lower prices are widespread.” He also points to the positive impact of globalization on much of what we used to call the Third World, particularly in China and India: “Poverty reduction has been tremendous, and more is yet to come.”

Spence’s paper should be read alongside the work that David Autor, an economist at the Massachusetts Institute of Technology, has been doing on the impact of the technology revolution on U.S. jobs. In an echo of Spence, Autor finds that technology has had a “polarizing” impact on the U.S. work force – it has made people at the top more productive and better paid and hasn’t had much effect on the “hands-on” jobs at the bottom of the labor force. But opportunities and salaries in the middle have been hollowed out.

Taken together, here’s the big story Spence and Autor tell about the U.S. and world economies: Globalization and the technology revolution are increasing productivity and prosperity. But those rewards are unevenly shared – they are going to the people at the top in the United States, and enriching emerging economies over all. But the American middle class is losing out.

To Americans in the middle, it may seem surprising that it takes a Nobel laureate and sheaves of economic data to reach this unremarkable conclusion. But the analysis and its impeccable provenance matter, because this basic truth about how the world economy is working today is being ignored by most of the politicians in the United States and denied by many of its leading business people.

Consider a recent breakfast at the Council on Foreign Relations that I moderated. The speaker was Randall Stephenson, chief executive officer of AT&T. Mr. Stephenson enthused that the technology revolution was the most transformative shift in the world economy since the invention of the combustion engine and electrification, leading to a huge increase in “the velocity of commerce” and therefore in productivity.

One of the Council of Foreign Relations members in the audience that morning was Farooq Kathwari, CEO of Ethan Allen, the furniture manufacturer and retailer. Kathwari is a storybook American entrepreneur. He arrived in New York from Kashmir with $37 in his pocket and got his start in the retail trade selling goods sent to him from home by his grandfather.

Here’s the question he asked Stephenson: “Over the last 10 years, with the help of technology and other things, we today are doing about the same business with 50 per cent less people. We’re talking of jobs. I would just like to get your perspectives on this great technology. How is it going to over all affect the job markets in the next five years?”

Mr. Stephenson said not to worry. “While technology allows companies like yours to do more with less, I don’t think that necessarily means that there is less employment opportunities available. It’s just a redeployment of those employment opportunities. And those employees you have, my expectation was, with your productivity, their standard of living has actually gotten better.”

Spence’s work tells us that simply isn’t happening. “One possible response to these trends would be to assert that market outcomes, especially efficient ones, always make everyone better off in the long run,” he wrote. “That seems clearly incorrect and is supported by neither theory nor experience.”

Spence says that as he was doing his research, he was often asked what “market failure” was responsible for these outcomes: Where were the skewed incentives, flawed regulations or missing information that led to this poor result? That question, Spence says, misses the point. “Multinational companies,” he said, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So there is no market failure.”

This conclusion is a very big deal – Spence is telling us that global capitalism is working the way it should, but that the American middle class is losing out anyway. Since global capitalism is the best way we’ve come up with so far to run our economy, that creates quite a dilemma.

Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.

What are the lessons the world’s dictators are drawing from the uprisings in North Africa and the Middle East? The most obvious and the most depressing is to shoot first and ask questions later. As in Tiananmen in 1989, and Tehran in 2009, the lesson of Bahrain and Syria — at least so far — is that regimes that have the will and the political unity to crack down on protesters can stay in power. (That bitter conclusion, by the way, is one reason the battle in Libya is so important: if Col. Muammar el-Qaddafi’s brutal repression of his own people works, autocrats around the world will have more evidence of the efficacy of massacre.)

Robert B. Zoellick, the president of the World Bank, is urging us all to learn something quite different and more cheering from a political transformation he believes is as profound as the 1848 “springtime of nations.” In a powerful speech he delivered in Washington this week and in an interview afterward with me and my colleague Lesley Wroughton, Zoellick argued that even dictators must empower their citizens — or risk facing their wrath in their local Tahrir Squares.

“Let’s take it to the ground in the Middle East and North Africa,” Zoellick said. “If you’re a transition leader or somebody that is going to be trying to run for election in Tunisia or Egypt, doesn’t it make sense to try to figure out, ‘How can I engage these people that were in the street? How can I connect them to the development process?”’

Zoellick admitted that reaching out to the rebels might not be every autocrat’s immediate impulse: “Now, the first instinct for some might be, ‘I don’t want to cause any turmoil. So, in a sense, let’s go back to government-controlled systems.”’ But knee-jerk repression, he argued, was the wrong reaction — even from the point of view of an authoritarian ruler intent on staying in charge.

“The lesson is that it’s been very expensive, and it hasn’t really worked,” he said. “It certainly didn’t work in the socialism of Central and Eastern Europe. So, if that is a dead end, if the idea is that top-down development, getting the macroeconomic statistics right, that by itself doesn’t work, how do you move beyond what I referred to as partial modernization?”

If you believe in democracy as a just political system, as well as one that delivers good economic results, there is something more than a little dissatisfying about Zoellick’s suggestion that autocrats can save their bacon through “citizen participation” — a milquetoast phrase that offers, at least if you are a dictator, the seductive promise of all of the economic efficacy of democracy, without the pesky need to compete for political power.

Zoellick does not shy away from that possibility. “This observation applies regardless of one’s political system,” he said. “I gave examples from Mexico and Uganda and Senegal and China, all different political systems, to recognize how each in their own way have tried to figure out how to have better development by involving citizens.”

In his speech and interview, Zoellick singled out China — land of the imprisoned Nobel laureate and state-imposed family planning — as a model of “community-driven development.” “In China, ‘deliberative polling’ has been used in rural communities to consult on the price of water, or electricity, or the relocation of farmers,” he said in his speech. “Some Chinese officials have instituted polls to assess performance.”

At a time when Beijing is imprisoning its bravest dissidents with renewed zeal, it is stomach-churning to think of China as a star practitioner of citizen empowerment. But before you accuse Zoellick of appeasement, remember that he is the president of the World Bank, a multilateral institution with 187 member countries, many of whom think democracy is a dirty word. In that context, Zoellick’s speech is both subversive and really smart.

It is subversive because ideas like “citizen participation” — soft-edged as that term may sound to civilians — amount to an upraised fist when spoken by the head of the World Bank. And it is smart because Zoellick has figured out a way to connect something as political as civil society with the explicitly apolitical agenda of the World Bank.

“We’re in the business of trying to overcome poverty and create opportunity and growth on the economic side,” Zoellick said in the interview. “My own view, which I’ve stated, is that some issues that people might consider political — corruption, transparency, gender, citizen involvement — we’ve learned and are learning are an important part of the economic development process.”

Cunningly, Zoellick makes the connection between development and civil society in a way designed to sell that idea to the group of people — dictators — least likely these days to take a sunny view of vocal and engaged citizens.

Shooting protesters may work in the short term. But Zoellick’s argument is that even autocrats must find ways to listen to their people if they want their economies to grow, and hence their governments to be stable, in the longer run.

Read this way, Zoellick’s reference to China is particularly sly. The real threat to the idea of democracy isn’t posed by murderous tyrants like Colonel Qaddafi, or Bashar al-Assad of Syria. The truly dangerous example is that of China, with its robust growth and unapologetic suppression of political dissent. By praising Chinese apparatchiks for using polls to assess performance, Zoellick is arguing that even the world’s most effective authoritarian regime needs to democratize from within to prosper.

At 2:15 p.m. tomorrow, on Wednesday, April 6, Chrystia Freeland will interview World Bank President Robert Zoellick in Washington, D.C. In this video, Reuters Financial Blogger Felix Salmon and Reuters Editor-at-Large Chrystia Freeland discuss what they think the World Bank's role should be in the uprisings in the Middle East and in supporting countries run by dictatorships versus helping the poor in undeveloped countries.

Below are Mohamed El-Erian’s responses to questions asked by readers during the March 31 Reuters Newsmaker interview with Global Editor at Large Chrystia Freeland. An earlier set of questions and answers can be found here.

Would you give us your views on how Egypt shall grow economically and socially?

It is important to remember that Egypt is still in the midst of its revolution whose objective is greater democracy and individual freedoms. In the process, it is navigating a complex set of economic and social transitions, as well as a political one.

The economic component must deliver the conditions for sustained and inclusive economic growth, curtail rent seeking activities, and re-establish financial stability. Importantly, this speaks to both policies and institutions.

On the social front, Egypt needs to make urgent progress in reducing poverty, countering income and wealth inequalities, and enhancing the range of social services provided to the most vulnerable segments of society—particularly in the areas of health and education.

All this requires the critical and sustained implementation of a well-designed multi-year effort that has broad support among Egypt’s population. This can only happen in the context of political progress, including delivering on promises to lift emergency laws and to hold free and fair elections for parliament and the presidency.

What do you think about the next steps for Bank of Japan in the near term?

The immediate emphasis is on opening and maintaining emergency liquidity and credit windows in order to minimize the decline in economic activity.  Down the road, the BoJ will have important and difficult decisions to makes about the scale and scope of monetization of debt issued in connection with what is likely to be a large reconstruction program.

The U.S. is approaching the end of QE2. What do you think would have been a better option?

You are right, QE2 is now in its final phase. Moreover, absent major economic and political developments, it is unlikely that there will be a QE3.

The net impact of QE2 is yet to be established. Indeed, the benefits of the program have come with a set of still developing costs (what we call collateral damage) and risks (unintended consequences).

I do wonder whether the Fed would have opted for QE2 had it known that there would another set of fiscal stimulus measures at the end of 2010 (extension of all the Bush tax cuts, payroll tax cut, etc.)

Do you really feel the full faith and credit of the U.S. Government is at risk?

Yes but not immediately. It will erode over time if the U.S. fails to design and implement an appropriate medium-term fiscal adjustment program.

Conventional wisdom has it that the Internet is dumbing us down and making politics more partisan. Sound bites are more effective than substance. The punditocracy that shapes these truisms is, needless to say, pretty certain they apply most powerfully to people in the hinterland, especially those with a history of voting for the right.

That is why the election of Naheed Nenshi, a 39-year-old former business school professor, as mayor of Calgary, was a watershed event that should be of interest far beyond Canada, where he has already become a political superstar.

When Mr. Nenshi earned his upset victory last October, the first flutter of outside enthusiasm was about the fact that an Ismaili Muslim son of South Asian immigrants who moved to Canada from Tanzania had been chosen to lead the capital of the country’s conservative heartland.

The next wave of excitement was inspired by his campaign’s sophisticated use of social media to overturn Calgary’s old-boy political establishment. This Twitter revolution, with which we are now so familiar thanks to the oil states of North Africa, made a splash in the land of the blue-eyed sheiks thanks to clever tactics like a funny YouTube video of people struggling with Mr. Nenshi’s name.

But when I spoke to Mr. Nenshi recently in the elegant sandstone building that houses the mayor’s office, he told me that outsiders are missing the point. The real significance of his election, he said, is that it proves voters care deeply about big ideas and will elect the leaders who take the trouble to engage them. This is true, he insisted, even outside political and business centers such as New York, London or Toronto.

“We called it politics in full sentences,” said Mr. Nenshi, who has the energy and gregariousness of a born politician. “We called it the ‘better ideas’ campaign.” Those ideas were serious, and against the current of what many had assumed to be the cultural propensities of Calgarians. Mr. Nenshi is an evangelist of high-density living and of public transit, revolutionary notions in a city that is spread across as many acres as New York, but houses just a 10th as many people.

Calgarians love their cars – that’s how more than two-thirds of them get to work – and they are bullish on the oil industry that not only puts gas in their tanks but also is the lifeblood of their economy. Yet these same Calgarians embraced a geeky, Harvard-educated former McKinsey consultant, who loves technocratic solutions to urban problems such as “spot intensification” and containing sprawl by charging developers more to build on the outskirts of town.

Calgary is a “city of ideas,” Mr. Nenshi said. “Calgarians were really interested in having a conversation about the future of their city.” But the province of Alberta is the closest Canada comes to a one-party state, and until Mr. Nenshi and his pals came along, no one had really bothered to bring people in to that discussion.

This engagement with the community is the second important lesson of his win. In 1995, Robert Putnam told us that Americans had started to bowl alone. And many of us worry that the advances in technology in the subsequent 15 years have served mostly to alienate us further from our real-life neighbors as we retreat ever deeper into virtual communities of the like-minded.

What Mr. Nenshi found in Calgary was a passionate desire to be involved in the real, physical life of the city – and one that could be most effectively tapped by using cybertools. He said he adapted the classic marketing and political adage that you have to “go to people where they live” to the Internet Age. “One of the things we discussed is that a lot of people live online,” Mr. Nenshi said, including the 600,000 Calgarians, in a city of 1.3 million, who are on Facebook. “Social media was the tool that enabled our philosophy.”

He said that when he first moved back home to Calgary after professional stints in Toronto and New York, his East Coast friends were baffled: “The New York people and the Harvard people were like, ‘Naheed, why are you in the middle of the Canadian Prairies?’ ” But he thinks the “Four Seasons hotel tribe” of globe-trotting elites may be missing the fact that they inhabit a world that is rather provincial itself.

“This so-called borderless world has become more insular … I am very happy to let the Four Seasons tribe do their work on global prosperity,” Mr. Nenshi said. “I’ll do my work on local prosperity.”

Below are Mohamed El-Erian's responses to questions asked by readers during the March 31 Reuters Newsmaker interview with Global Editor at Large Chrystia Freeland.

Are the current "mixed signals" by the various markets similar to the ones you said were being transmitted before the financial crisis, and do you think that the current stock market trading activity signals caution, confidence or complacency? (from i8emallup)

The most striking aspect of the "mixed signals" is the contrast between corporate (bottom up) indicators and macro (top down) developments.

From a bottom-up perspective, the U.S. economy continues to heal after the cardiac arrest suffered during the global financial crisis. The healing process is most advanced among large multinationals as illustrated by their large profits and profit margins, as well as their significantly strengthened balance sheets. It is also being reflected in higher job creation.

At the macro level, however, the U.S. economy is facing current and future headwinds. The political system is yet to converge on a meaningful medium-term fiscal reform effort. There is uncertainty on what will happen once The Fed completes its QE2 program. And, like other countries around the world, the U.S. is dealing with the negative supply and demand shocks occasioned by the unrest in the Middle East and the tragic triple disasters in Japan.

The result is, therefore, a set of mixed signals that, so far, the markets has resolved decisively in favor of the bottom-up indicators.

In terms of historical comparisons, no this is not the same as those mixed signal that led to the abrupt 2008 market moves. The latter took place within the context of large, multi-year excesses in private sector leverage, credit creation and debt entitlement. As such, the risk and severity of the reversals were much, much higher back in 2008. Today, a meaningful part of this leverage has been shifted to the public balance sheets and, as such, the immediate vulnerability is less both in magnitude and immediate timing. If unaddressed, however, this vulnerability will grow.

Are the markets too complacent about potential risks to growth (disturbance in global production chains, fiscal tightening) and inflation (Japans expected demand for resources, continued strength in China, core EMU)? (From Michael D-R)

At this stage, the markets (and, judging from their last statement, the FOMC) are "looking through the disturbances you cite. The view is that they will be "transitory." Put another way, the markets are signaling that their impact will essentially be "temporary and reversible."

This view has support among some economists that draw a historical parallel with what happened after the 1995 Kobe earthquake. Due to a large reconstruction program (including fiscal outlays of some 2% of GDP), Japanese growth came back rapidly, and the economy experienced a "V" shaped recovery.

We would caution against this analytical short cut.

The recent disasters in Japan are two to three times as big as the Kobe earthquake. Their impact will linger due to the uncertainties with the nuclear reactors and the reduction in electricity generation.

Also, the Japanese economy is in a different place today compared to 1995, as is the world economy.

The country’s debt to GDP is about 205% compared to 85% in 1995. Its credit rating is AA- and not AAA. Plus it is operating in a global economy that is structurally weaker.

All this suggests that we should not rush to simply "look through" the impact of Japan’s tragic calamities. A more thorough analysis is warranted.

What percentage chance exists of default by G20 & G7 governments? (from Mark Melin)

We think that there is a meaningful chance that the most vulnerable economies in the Euro-zone (namely, Greece, Ireland and Portugal) may be forced to restructure their debt.

These countries face a large debt overhang and significant challenges to economic growth and employment promotion. Fiscal austerity on its own is unlikely to be sufficient to deal with the debt overhang and put these countries back on the path of high and sustainable growth.

As Chrystia threatened at the end of her interview with Mohamed El-Erian today, we’ve compiled all the questions our readers submitted via the Newsmaker blog and Twitter and e-mailed them to him. El-Erian will be flying to Europe tonight after he finishes up his business in New York, and while we do hope he gets a little sleep, we also hope he stays up long enough to answer all of your questions.  We’ll post his answers right here once we receive them.

Global Markets

Are the current “mixed signals” by the various markets similar to the ones you said were being transmitted before the financial crisis, and do you think that the current stock market trading activity signals caution, confidence or complacency? (from i8emallup)

Are the markets too complacent about potential risks to growth (disturbance in global production chains, fiscal tightening) and inflation (Japans expected demand for resourses, continued strength in China, core EMU)? (From Michael D-R)

What percentage chance exists of default by G20 & G7 governments? (from Mark Melin)

Middle East

How can the Middle East conquer corruption and power-abuse that has been inherited for generations? is there hope in the new “governments”? (From Lalla Nashta)

Would you give us your views on how Egypt shall grow economically and socially ?? (From mohamedino)

Japan

What do you think about the next steps for BOJ in the near term? (from Murad Halaiqa)

U.S. Economy

The US is approaching the end of QE2. What do you think would have been a better option? (question from GKhalifa)

Do you really feel the full faith and credit of the US Government is at risk? from (amj)

Why should the Fed permit large US banks to return the $1T in cash on their balance sheets to stockholders when several are technically insolvent now? (from triwealth)

Posted by Peter Rudegeair.