Global Risks "Announced" for 2012 – Beware of What the Bigwigs Discussed in Davos!

"Just because you do not take an interest in politics does not mean politics will not take an interest in you!" ~ Pericles, 430 B.C.

Last week the bigwigs of politics and business were visiting in Davos, Switzerland, at the World Economic Forum (WEF), eagerly mingling and scheming under the WEF's slogan "commitment to improving the state of the world."

While much of what is said in Davos is not made public, a fair share of the topics and positions presented at the WEF are made available. However, most people are not that interested. Who cares what "they" talk about? It's just that − talk, talk and more talk...

Possibly, that is true. I agree that, probably, most of the deals struck in Davos have little to do with "improving the state of the world." They are supposedly more oriented toward improving "the state of a few wallets and treasuries." Furthermore, a good portion of those grand solutions presented in Davos are nothing but hot air − well, maybe not so hot at 1700 meters above sea level and minus 15 degrees Celsius... but only air nonetheless.

Irrespective of what you think of the WEF, over the past seven years, the Forum has published a report on Global Risks. This year's Global Risks 2012 Report is again worth reviewing, not so much because of its predictive power. Actually, the accuracy of the Reports forecasts has been lackluster. However, what makes the WEF's report an interesting read is that generally you will find that the "top risks" discussed in the report will in fact be prominent topics and policy themes over the coming year.

In that sense, the WEF's Risk Report is like an agenda of themes that WILL in fact get a good share of policy and media attention in 2012. What is the WEF? Its a forum for politicians and lobbyists. Therefore, we should take note of what these people have in mind for the upcoming year...

The Global Risks 2012 Video

The WEF's Global Risk Report warns of economic imbalances and social inequality, and how these risks could "revert the gains of globalization"...

The linked Global Risks 2012 Video presents the findings of a survey of 469 experts and industry leaders who worry that the world's institutions are ill-equipped to cope with today's interconnected, rapidly evolving risks [and rightfully so].

The findings of the survey fed into an analysis of three major risk cases: Seeds of Dystopia, Unsafe Safeguards and the Dark Side of Connectivity. Quite frankly, if the titles of these "risk cases" don't give you the shivers, possibly the video will.

By the way, a strange byline at the end of the video comes across as quite awkward: "This film is not authorized nor endorsed by the president, the First Lady or the White House." Now, why would it or should it be?! I leave any interpretations in your good hands / minds...

The Report – and its Top 10 Risks

In addition to the aforementioned "major risk cases", the actual Global Risks 2012 Report analyses the top risks in five categories – economic, environmental, geopolitical, societal and technological. Structured on a 10-year outlook, the survey captured the perceived impact, likelihood and interconnectedness of 50 prevalent global risks.

The figure I've included below lists the Report's Top 5 risks in terms of likelihood (Figure 4 of the Report). Then, next, take note of the Top 5 risks selected, in terms of likelihood, over the past 7 years.

A few things appear to stick out here: First of all, the Top 5 risks chosen in the Report, in terms of likelihood, have changed every year. It seems awkward that the risks elected as the most likely over the medium- to long-term future would change EVERY year.

Secondly, it is not noteworthy that the most likely risks elected by the report's "experts" are strongly influenced by the actual events and prominent media coverage in the preceding year. Possibly, the risks listed in the report are merely themes and topics that are popularly launched and discussed at the WEF and those that are most likely to find a political ear.

The Fundamental Risk, and the Cause, is nowhere to be found!

What I found most intriguing about the survey's results, which are supposedly based on the outlooks of 469 (??!) of the world's leading experts, is that although the Report recognizes the risk of a major systemic financial failure and of 'chronic' fiscal imbalances, both in terms of likelihood and impact (see Figure 5 of the report below), the fundamental risk and true cause is nowhere to be found!

What is the biggest risk today? What is the fundamental and true cause for the fiscal imbalances and for the risks of a major systemic financial failure today? It is the MONETARY IMBALANCES that governments and central banks around the world have created. They have continuously lowered interest rates over the past three decades. Financial risk and returns are now priced at zero. Cheap money has resulted in large-scale, unprecedented mis-allocation.

Likely Policy Responses – Ironically Contrarian to the Washington Consensus!

What do you think the political responses and economic policies to address these prominently published risks will be?

Severe income disparity: Will that be addressed with less bureaucracy, more freedom and better education? Or will it merely translate into more taxes for the wealthy and more (ineffective) state sponsored job creation and consumer confidence initiatives? Chronic fiscal imbalances: Do you think we will see a sincere tightening of belts? I don't think so.

The economic and financial issues, and yes, the risks of severe income disparity, are the result of government's intervention in the free markets and their politically driven lack of monetary discipline. The political response pattern to these "2012 risks," to the likes of income disparity (translate social unrest), chronic fiscal imbalances, extreme volatility in energy and agricultural prices, will be based on more quantitative easing and more government intervention. It will be more of what we need less of.

In this context, I am reminded of last week's excellent commentary by Sovereign Man's Simon Black, who is speaking at BFI's Inner Circle Briefing in the Bahamas:

"There is a delicious irony in the world of economic policy at the moment.

Back in 1997 and 1998 I had a ringside seat to the Asian financial crisis from my trading desk in Seoul. When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia's sick economies were to:

1. HIKE interest rates,

2. CUT government spending,

3. Further deregulate, liberalize, and open their economies to foreign investment to attract capital;

4. And let their zombie banks FAIL.

Though they experienced brutal recessions after swallowing this tough medicine, the two countries which carried out these policies to the fullest extent, South Korea and Indonesia, are today among the most successful and dynamic economies in Asia, and the WORLD."

What you can expect in policy responses is the very contrary. Over the coming years, we will instead see more quantitative easing, more government spending and debt, more regulations, more protectionism, exchange controls and a lot of bailouts of banks.

These are precisely the ingredients needed to further increase the risks of severe income disparity, chronic financial imbalances, extreme volatility in energy and agricultural prices and yes, the risk of a major systemic financial crisis. So in the end, maybe those 469 experts really know what they are doing. Maybe their risk forecasts are not so bad after all.

When the Biggest Risk Is What "They" Will Call the Solution...

In the end, with all the uncertainties and risks discussed in Davos, it all comes down to one thing: Money. Paper Money. And we expect there will be plenty of that!

In the cartoon above, Ms. Merkel says to Mr. Schwab (founder of the WEF): "Great, all the snow this year!" Mr. Schwab responds: "That's not snow, it's European debt paper!"

There are truly a few things that are certain in life...

Frank Suess is CEO and Chairman of BFI Capital Group. To subscribe to BFI's weekly Mountain Vision Update, in which this column appeared, click here.