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QUEST MEANS BUSINESS

China's Economic Boom Slows Down; France's Unions Extend Strike

Aired October 21, 2010 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Fast but not furious: China's economic boom seems to slow down.

France's unions extend their strike, the pension reform bill is due within days.

And Southwest Airlines chief exec tells us the economy is in a terrible state.

I'm Richard Quest. We have an hour together and I mean business.

Good evening.

China's Formula One economy seems perhaps to be slipping out of the fast lane. The rampant pace of expansion in China has moved down a gear or two. As Beijing applies the breaks and possibly slow economies elsewhere are also taking their toll. Let's look at the numbers. In the third quarter, the economy grew at an annual rate of 9.6 percent. Now that is super charged, if you compare it to what other economies in Western Europe and United States have enjoyed. It is rather sedate for the Chinese economy at 9.6.

Even as growth slows, things are getting more expensive. So China, perhaps adopting and following economic principles, fast growth, leading to higher inflation. September's number for annual inflation 3.6 percent. That is a worry and possibly one of the reasons why interest rates rose earlier this week. As you know, on Tuesday interest rates rose by a quarter of a percentage point. Now, the actual amount of the rise is not that significant. What is significant is it is the first time in three years that China has tightened the monetary policy in such an overt way in the past, the little tinkering it has done has usually been done through liquidity and by reserves.

So that is the overarching picture: growth, inflation and interest rates. John Vause was, until recently, our senior international correspondent in Beijing. John joins me now from the CNN Center.

John, that 9 percent growth, a slow down from the 11 percent, with your knowledge of Beijing and the government will they be worried?

JOHN VAUSE, CNN SR. INTERNATIONAL CORRESPONDENT: No, they'll be very, very pleased, Richard.

If you look at these numbers. This is what you call a beautiful set of numbers. There was a lot of concern earlier in the year whether or not Beijing could withdraw that massive stimulus package. You know, the $600- something billion, which they had injected into the economy, the trillion something plus dollars worth of bank lending, which the injected into the economy after the financial crisis. Whether or not they can slowly withdraw that, take the foot off the gas pedal, if you like, without crashing the economy. If you look at these numbers now, 11.9 percent, first quarter, 10.3 percent, second quarter, now 9.6 percent, this quarter, that is the ideal slowdown, which Beijing had wanted.

Some of the slowdown, according to Chinese officials today, was brought on by a crackdown in energy, intensive energy, you see a slowdown in steel and iron ore output. And with the economy slowing, along with the slowing in exports growth as well, that gives Beijing a little bit of wriggle room on the currency. A lot of criticism on China when it comes to the Renminbi, the U.S. wants that to be appreciated. The Chinese are saying now we can't.

QUEST: All right. John?

This inflation question?

VAUSE: Yes?

QUEST: At 3.6 percent, with a number that is potentially rising, that will surely be of some concern?

VAUSE: That is the one number which is not a beautiful number and that is the one number which will have the authorities in Beijing concerned. Their goal is for a 3 percent inflation rate. This is a 3.6 percent. Beijing starts getting worried when it goes over 4 percent. And the reason for that is, in a country like China you still have hundreds of millions of people who still don't own a lot of money. And so as a percentage of their wages, of their earnings, basics, like food, take up a lot of their earnings. So when that number goes up, the increase in food prices is around 8 percent. That makes up this entire increase in inflation. Anecdotally people there it is a lot more than 8 percent.

And the thing you have to keep in mind, Richard, go back to 1989, the reason for those protests in Tiananmen Square, it wasn't a pro-democracy movement, at least not at the beginning.

QUEST: OK?

VAUSE: It wasn't a student movement at the very beginning. It was a protest about inflation first, and then corruption.

QUEST: John Vause joining us from the CNN Center with the numbers and the perspective.

Barry Bosworth is a senior fellow at the Brookings Institution, where he holds the Robert V. Roosa Chair in International Economics. Also a former presidential advisor, Barry joins me now.

As we look at the numbers today, this gentle slowdown in the Chinese economy, but take that into the wider international sphere, we want China to grow fast. Are we content with its slowdown?

BARRY BOSWORTH, BROOKINGS INSTITUTION: I think this is good news. You can't want to see China grow too fast, so much so that it explodes in high inflation. They have acted promptly, I think, to head off some inflation pressures. Anything in the range of 8 to10 percent, real rates of growth, is very good from our perspective.

QUEST: In terms of China's involvement and role in the global economy now, we know that it is the second largest economy and the statistics keep rolling about how it is growing even larger. But is it still, as an economy, punching its weight? Is it doing what you would expect it to do, at this size?

BOSWORTH: I think it is still too closed on the trade side. It was running too big a surplus. It is too reliant on the global economy. I think they realize that danger. So, they have been moving, continually now, with some success to broaden and shift the focus towards the domestic economy. From our perspective though, they are still running a very large trade surplus. They are draining a lot of purchasing power out of a very weak global economy. So we would like to see them step up the pace of their imports. Particularly I guess, in the area of capital goods and things like that, where the United States is a significant producer.

QUEST: When we saw the Chinese agree to a very limited and moderate appreciation of the currency, in reality it went up by 1 or 2 percent. That was seen as a being a sop to the G8 which was meeting in the summer. Do you detect any indication that they will allow a more robust appreciation?

BOSWORTH: No, I don't think so. I don't think that it is reasonable to keep the focus on that. What we ought to care about in the case of China is the trade flows. We don't like this big ongoing trade surplus by Korea-I mean, by China. And we would like to see a more liberal import regime. Focusing on the exchange rate seems like kind of a waste of time. They get their back up, they refuse to move. And it is just not clear that the exchange rate does that much in the case of China.

QUEST: Well, I accept the evidence if you look back into the `80s and the `90s, where the devaluation of the dollar does suggest it doesn't have as much of an affect as some people would like-but-what I put to you is that it does set out a frame of mind. It does set a status as to what they believe in terms of, as you say, the opening up of trade. And on that point, there is still a long way to go.

BOSWORTH: I think that is right. There has been information coming out of China about the ability of the American and other foreign firms to compete freely inside the Chinese economy. That is not good news. The restrictions at an informal way on imports of capital goods, automobiles, and some areas like that. But those would be better things to focus on in the case of China than it is to always harp on this issue of their exchange rate. I think exchange rates are very important determinant of trades in advanced economies that are open, free markets, like the United States and probably Europe. It is just not clear in a developing country like China, with a lot of these price restrictions and other ones, in the domestic economy.

QUEST: Right.

BOSWORTH: They are focusing on the exchange rate is a very good way to try to get China to change.

QUEST: Barry Bosworth, many thanks, indeed, for joining us from Brookings Institution in Washington. We thank you for that.

Now, the battle over pension reforms in France may be moving towards a climax as the senate prepares for a vote. There is anger in the streets. There will be more strikes on the horizon. We'll be in Paris for the latest in a moment.

(COMMERCIAL BREAK)

QUEST: French unions are calling for two more days of protest against plans to raise the age of retirement. The bill, already cleared by France's lower house, has caused wide-ranging protests in recent weeks. Now police say 4,000 protestors took to the streets of Paris on Thursday. In the south demonstrators blocked Marseilles Provence Airport for more than three hours. Parts of the country are facing fuel shortages as workers at all 12 French refineries have walked off the job.

A senate vote on the bill could come as soon as tonight. Senators have to decide if they'll endorse the plan to raise the retirement age from 60 to 62.

Now as we have been reporting, France's main unions have called for two more days of strikes. They are protesting against the planned pension reform. Phil Black has sent us this video dairy. Where he assesses the mood on the streets of Paris.

(BEGIN VIDEOTAPE)

PHIL BLACK, CNN SR. INTERNATIONAL CORRESPONDENT: This is the latest, very public, very vocal display of anger on the streets of Paris over the government's plans to increase the retirement age by two years.

At this site here, you have about 4,000 protestors who have been marching through the city for several hours now. They have come, essentially, to the end of the line or what the police say is the end of the line for this protest group.

So far it has all been very peaceful, but it is getting increasingly rowdy as you can probably hear. Much of these people agree that some form of pension reform is necessary and the way that the government funds the pension system, what they object to very strongly are the government plans to make all workers essentially contribute to it by working harder and longer. They believe there must be another way, like the opposition party suggestions of increasing taxes on the wealthy.

UNIDENTIFIED FEMALE: It is a political solution. It is a political solution which he is saying the only economical solution, and it is not true. There are other economical solutions and it is just a political choice. And so the government is saying there is nothing else to do, when that is not true.

BLACK: The protest was mostly quiet, but towards the end some of them confronted the police a little too closely, some started to destroy property. And plain clothes police officers started to appear, make arrests. They used pepper spray to drive the crowd back. There have been calls by some union leaders and protest leaders for students across France to become more active in protesting the pension reforms. The government said it is a little worried about that. There is a long history of student protests in this country. It goes back decades. They do have something of a reputation for often turning violent. Today, for the most part, though, things were largely pretty quiet. Phil Black, CNN, Paris.

(END VIDEOTAPE)

QUEST: We need to look into this more detailed. Joining us live from London is Martin Wolf, the chief correspondent of the "Financial Times", a commentator. And from Paris, Christian Mallard, senior foreign policy analyst for TV3 in France.

Christian, let's start with you, in Paris, tonight. How bad will this situation deteriorate, if it does, if this law is passed?

CHRISTIAN MALLARD, SR. FOREIGN POLICY ANALYST, TV3 PARIS: Well, as you know, Richard, and you mentioned it very clearly, President Sarkozy decided to speed up what they call the unique (ph) vote by tomorrow and have this law passed, which is through legal means. Tonight when we have the reaction of the Secretary-General of the Socialist Party Madam Martine Aubrey saying that it is enough of the brutality used by the French government and President Sarkozy.

QUEST: Right.

MALLARD: She might complain for different reasons, sure, but at the same time I feel like saying, let's go back to history. In the past socialist President Mitterrand used the same kind of things when he had to pass some laws, which was contested by the people. So, it is clear, you put the right question, saying that the situation might deteriorate again because people are really made at the way things go.

QUEST: OK.

MALLARD: I don't mean that the people were against the reform but they disagree with the way President Sarkozy has been behaving.

QUEST: OK, Martin, at the "FT", I have been reading a lot of what you have been writing in recent days and in recent weeks. The speed with which leaders are getting to grips with their economic problems, is there something going on here? They know they have got to do it in a window of opportunity?

MARTIN WOLF, "FINANCIAL TIMES": Well, it varies very much by country, by the standards of what the British government is just trying to do, what is going on in France, from a policy point of view is incredibly small, and rather it is amazing at how the French people react.

In Britain, uniquely, we have an enormous fiscal program. It is clearly much the toughest of any big country. It is much the toughest of any country that has not had any sort of fiscal crisis. So, here they are trying to use the window of opportunity. Other countries are being forced by the markets, like Greece, Spain, Ireland, to adjust. And the rest, I think, adjusting in Europe, quite slowly. So there are-it is a three speed Europe, at least.

Christian, on that question, don't the people in France, as Martin has just said, realize that in many other countries the reforms are deeper and more brutal. And I mean, I'm not paraphrasing too badly when I say the French are getting off lightly?

MALLARD: No, you are totally right. Your question is straight to the point. The problem is we are a country of spoiled people, spoiled children. We have so many privileges which even don't exist in Great Britain, Germany, or Spain. When you look at the retirement age in Spain or Germany, which is 65, 67, Prime Minister Cameron, in Great Britain, decided to put it to 66. And you hear the French complaining, going 60 to 62.

QUEST: Right.

MALLARD: You feel like saying, what the hell is going on with the French people and the complexity of this country. And this is what is at stake right now. The French, there is one thing Richard, you have to bear in mind.

QUEST: Right?

MALLARD: It is not only people demonstrating in the street against the pension reform. But you have people who want to show they are fed up with Sarkozy.

QUEST: OK?

MALLARD: Some people are fed up with the economic crisis. So it is a mix of everything in this country.

QUEST: Well, Martin, in that scenario, in that scenario, in an economic context, Martin. How does Europe move forward into what one might describe as stage two or stage three of the global financial crisis, the slow recovery?

WOLF: Well, the answer, very briefly, they-everybody is moving at a different pace. And that, I think, means the crisis itself will move-will move. If the British are successful, if the Germans are successful in cutting their deficit further, if peripheral Europe, you know, Spain and so forth, cut their deficit successfully. My own view is that we'll weaken the French economy quite considerably. Which incidentally had the smallest recession of all the big European countries, and I-and already has a very big deficit and an incredibly high spending ratio-I expect the next problem, serious problem to be actually in France.

QUEST: All right. Martin, at the "FT".

Christian, not particularly an optimistic thought there for the next problem in France. In a word, would you agree that that is the way it is going?

MALLARD: Yes, I totally agree with our British friend. I think we were in a very, quite positive situation amidst the recession, amidst the world economic crisis, and we are spoiling everything right now. I think everybody has to bear that in mind, as an observer, being above the political scrimmage, I think we are irresponsible in certain ways. We are not serious.

QUEST: Gentlemen, thank you very much for the frank views that you have expressed just now.

MALLARD: Thanks, Richard.

QUEST: Christian, in Paris, Martin, always lovely to see you on the program.

WOLF: OK, thank you.

QUEST: Many thanks indeed for joining us Martin Wolf at the "FT".

Time for me to update you on the various results that came out on the markets.

(DESK BELL CHIMES)

A clutch of impressive earnings helped most European markets have a positive day. Nokia jumped more than 6.25 percent after its Q3 beat analysts' expectations. But what do we think on the Q25?

The FTSE rose 0.50 percent, highest level in six months. Devon (ph) surged 7 percent on profits from online sales. Frankfurt and Paris were 1.3 percent, Danone surged 5 percent. Zurich stocks rose 0.54 percent, Credit Suisse bucked the trend with a very sharp drop, falling 4.5 percent.

Hey, let me tell you the U.S. Geological Survey has reported a powerful magnitude, 6.9 earthquake that has struck off Mexico's Baja California on Thursday.

In just a moment, I'll be going head to head with Ali Velshi. "Q&A", it is always dangerous to say I wiped the floor with him in a previous edition. What happens when we look at China and interest rates?

(DESK BELL CHIMES)

"Q&A" next.

(COMMERCIAL BREAK)

ALI VELSHI, CNN CORRESPONDENT: QUEST MEANS BUSINESS, and so do I. We are here together in the CNN NEWSROOM around the world.

Hello, Richard.

QUEST: Good Thursday to you, Ali.

Each Thursday Ali and I come to you to talk business, travel, innovation. And the important thing to remember nothing is off limits.

VELSHI: But we are still business geeks and this week we are tackling a little world finance, specifically China's decision on Tuesday to lower its interest rates for the first time in three years and the effect that it is having on the global economy.

Richard, I went first last week, so it is all yours. You have 60 seconds.

QUEST: OK, here we go, 60 seconds.

(DESK BELL CHIMES)

The rise in Chinese interest rates, put it in perspective, China has been growing at 11 percent and then 10 percent, and now, China, is growing at just 9 percent. Is that a catastrophe? You'd have thought so if you had heard the markets.

But remember, China is now the world's second largest economy. It is the largest exporter, 20 percent of its exports go to the United States. Remember one other thing, though, with China slowing down it becomes the Goldilocks economy, not too fast, not too slow.

The problem is we want China to be the instant economy. Rip it open, pour some stimulus in and enjoy what comes out. That would be too dangerous for China. It is not a sophisticated economy like Europe or the United States. It would be very dangerous if we assume that China can grow and behave like the rest of us. Let's be grateful that the Chinese oatmeal is Goldilocks.

(BUZZER SOUNDS)

VELSHI: That was excellent, Richard. Let me have a go at this, 60 seconds, right now. Let's start the clock.

(BELL RINGS)

To understand why China raising interest rates matters, you need to understand why interest rates anywhere matter. Now think of the economy as a car, or in this case a truck. If a country's central bank wants to make the economy, or this truck, go faster, it lowers interest rates. That encourages people and businesses to borrow and spend more on instant economies, like Richard has in his hand. And that creates demand, demand creates jobs.

What if you are China and your economy is racing ahead in the fast lane at an annual rate of 9.6 percent. That is a little too fast. So how do you hit the breaks on an economy? Well, you raise interest rates, that discourages borrowing, it encourages saving. And it reduces demand. That is why China raised its interest rates this week and the world is worried that it might actually work. The truck might slow down. China is not only the world's fastest growing economy, it is the second largest economy in the world. It is actually helping keep other economies afloat, so until the U.S. and Western Europe get back on their feet, they are not all that keen on China taking action to slow things down on its side.

(BUZZER SOUNDS)

QUEST: Sorry, are you finished?

VELSHI: I'm done.

QUEST: Right, thank you. Now, let's at this point, now go head to head. I think we-I'm not sure if we both actually agreed on the Goldilocks scenario. I think my oatmeal beats your truck. But The Voice, will now really-

VELSHI: We'll separate the men from the boys now, Voice?

THE VOICE: All right. Now Ali, very close to un-friending you.

(LAUGHTER)

So, guys, here is one to get you on the board early.

Which of these country's central banks, like the Federal Reserve, has the lowest main lending rate right now? Is it A., U.S.; B., Japan; C., Canada; or D., Brazil?

(BELLS CHIME)

VELSHI: Oh, I think Richard got that one first. Go for it, Richard.

QUEST: I'm going to go for Japan.

(BELL CHIMES)

THE VOICE: Exactly correct. The Bank of Japan has their interest rates at zero.

Of these, Brazil is the highest at more than 10 percent.

All right, my delightful money mavens, No. 2. Now, we all know that China and the United States are the world's largest economies. But when it comes to GDP, which of these countries ranks third? A., Japan; B., German; C., U.K.-

(BELL CHIMES)

Don't ring until I'm done. D., India? Answer.

(BELLS CHIME)

VELSHI: Oh, come on! I had that. Go ahead, Richard.

THE VOICE: Ali?

VELSHI: All right. I get to answer this?

THE VOICE: Ali, go.

VELSHI: Japan.

THE VOICE: Exactly correct. Again, it is Japan. I am simply trying to make it easy for you anchor people.

VELSHI: I'm on the board. Finally, I'm on the board.

THE VOICE: Yes.

QUEST: Well, if you cheat, you'll get on the board.

(LAUGHTER)

THE VOICE: You are doing well.

VELSHI: I just used your answer, Richard. I just said Japan, I copied what you did and I got it right.

THE VOICE: Japan's GDP is $4.3 trillion, India ranks fourth overall.

No. 3, OK, guys one last chance, not to embarrass your respective homelands. Which of these countries has the lowest unemployment rate right now? A., China; B.; U.S.; C., Canada; D., Japan?

(BELL CHIMES)

(DESK BELL CHIMES)

THE VOICE: Ali.

VELSHI: Canada!

QUEST: No! No!

(BUZZER SOUNDS)

THE VOICE: Oh, not true. Quest?

QUEST: Well, first of all I won't argue that I was dinging harder than anyone.

THE VOICE: Do you have an answer, Mr. Quest?

QUEST: Yes, of course, I have an answer! It is Japan.

(BUZZER SOUNDS)

QUEST: Oooh!

THE VOICE: Wrong.

VELSHI: Do we get to keep on going?

THE VOICE: It's China.

QUEST: It's China!

THE VOICE: Yes.

VELSHI: No?

THE VOICE: China's official unemployment rate is less than half the 9.6 percent in the United States, however, because of their large population the still have more people unemployed than the other three countries combined. So we have a tie.

VELSHI: All right. I like when it ends that way.

THE VOICE: Good bye.

VELSHI: Thank you, Voice.

QUEST: Thank you, that will do it for this week. Remember each week we are here Thursdays on QUEST MEANS BUSINESS, at 1800 GMT.

VELSHI: And in the CNN NEWSROOM 2:00 p.m. Eastern. Keep the topics coming these questions are answers to your questions. These are answers to your questions. Send your answers to our blog, CNN.com/QMB, or CNN.com/Ali. Tell us each week what you want us to compete to answer.

Richard, see you next week.

QUEST: See you next week.

(DESK BELL CHIMES)

In just a moment, why Keynes was right and how printing money is like pushing on a wet noodle. Robert Reich, the former U.S. Labor secretary tells us his recipe for recovery. QUEST MEANS BUSINESS in a moment.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.

This is CNN. And on this network, the news always comes first.

And the breaking news tonight, the U.S. Geological Survey has reported a powerful magnitude 6.9 earthquake has struck off Mexico's Baja, California. It was centered in the Gulf of California. The Pacific Tsunami Center says the quake has not triggered a tsunami, but could cause local waves.

Fresh protests and fresh efforts to fast track France's controversial pension reform law. Senators have adopted new rules that will allow them to zip through more than 1,000 amendments by grouping them together instead of voting them individually. The final vote could come as early as tomorrow. More than a million people demonstrated against plans to raise the pension age to 62.

At least 10 people have been killed when an improvised explosive device blew up on a bus in the Philippines islands of Mindanao. Thirty other people were wounded. Nine of them were seriously hurt. Police say it may have been the work of a faction of a militant Islamic group which carries out such attacks for money.

A court in Brussels has sentenced a woman to 30 years in prison for killing a rival in a love triangle by slashing the straps of the victim's parachute. Prosecutors wanted a life sentence for the schoolteacher El Clottemans in the murder of Els Van Doren. She plunged to her death while skydiving four years ago.

Moscow has a new mayor, but voters didn't elect Sergei Sobyanin. He was hand-picked by his former boss, the Russian president, Vladimir Putin, and then rubber-stamped by Moscow's legislature. President Dmitry Medvedev fired the previous mayor last month after nearly two decades on the job.

Now back to our economic agenda and the battle that rages large at the moment over whether fiscal policy from governments trumps monetary policy from central banks.

Robert Reich served as the U.S. Labor secretary under Bill Clinton. He's an academic, a playwright and an author. His latest book is called "Aftershock: The Next Economy and America's Future," dealing with the causes and the aftermath of the meltdown.

When I spoke to him, he told me that not only were we seeing a second phase of the great financial crisis, but our policies are actually making situations worse.

(BEGIN VIDEOTAPE)

ROBERT REICH, PROFESSOR OF PUBLIC POLICY, UNIVERSITY OF CALIFORNIA AT BERKELEY: I completely understand why critics like Greece we do want to and need to clean up their books. But when Germany and France and also Britain all embrace austerity measures at the same time and at the same time that the private sector, that is, consumers and businesses, are deleveraging -- they're -- that is, they're coming out from under a huge pile of debt, they are not spending very much. They cannot and will not spend much.

QUEST: Right.

REICH: Well, you are inviting a double dip or certainly a very anemic recovery.

QUEST: That seems to be on the cards. But the ordinary man on the Clapham omnibus says, well, hang on. I have -- I have Robert Reich telling me no, I don't need to cut the deficit so badly, but I've got other politicians telling me we need to cut or we're all going to hell in a hand basket.

Where is the -- the middle ground in all of this?

REICH: Well, the middle ground in all of this is -- is when our economies show very, very imminent signs of growing at a rate and a pace that they grew before the Great Recession. There is a danger of embracing austerity measures before we achieve rapid growth again.

Britain should have learned this long ago. The United States learned it long ago. John Maynard Keynes, the great British economist, told us and explained why this is necessary.

John Maynard Keynes has been exhumed. You know, for years, we were worried mostly about inflation. Now, appropriately, we are worried, as we were worried in the '30s, '40s, '50s and '60s...

QUEST: Right.

REICH: -- about deflation and about recession. And that's why Keynes' ideas and instruction to us is so relevant today. And yet we're turning our backs on Keynes.

QUEST: But as you look within the United States, for example, to mid- term elections and still a high budget difficult and still stimulus spending and more quantitative easing probably to come, at some point, professor, surely the U.S. is also going to have to cut back on the deficit.

REICH: Yes, at some point. But remember, the key issue is not the deficit per se. It's the ratio of the debt to GDP -- the ratio of the debt to the entire national economy. If we grow our economies quickly again -- get back on the track of rapid growth, then the deficit and debt shrink as a percentage of the total national economy.

But if we don't, those deficits and those debts, which are cumulative deficits, are going to continue to grow.

That's why the denominator of that equation -- debt, that is -- that is, economic growth -- is so critically important.

QUEST: Right.

Are you confident in President Obama and his economic team's ability to navigate the second or third -- whichever way we look at it -- and potentially more dangerous crisis of confidence?

REICH: Well, I -- I'm certainly confident in President Obama's understanding of the problem. I think that he and his team do know what needs to be done. They have not said specifically a second stimulus, but I can read between the lines. I think that many of his advisers, who I do know and talked with, who would like there to be a second stimulus in the United States, understand that as the private sector and consumers refuse and are unable to spend enough, government has got to be the spender of last resort, as Keynes so appropriately told us.

But the problem you see in the United States is that we are seeing a Republican resurgence. And Republicans, Tea Partiers and others are saying the problem is that the government is too big.

QUEST: Right.

REICH: Well, that kind of reasoning could cause even more economic aftershock than we have right now.

QUEST: Can you -- finally, can you ever remember a time in recent economic -- maybe eight -- maybe in the '80s -- when mone -- the rise of monetarism gave a philosophical debate. But with that exception in recent times, this fiscal versus monetary battle, with economists taking sides, is really quite something new.

REICH: What we are seeing right now is not exactly the triumph of monetarism, but because fiscal policy, because the Congress and the president cannot get their acts together to provide any kind of relief for the jobless and a jobs program of the sort that we need, much of the onus is being transferred to the Federal Reserve Board, our central bank, that has to engage in flooding the economy with more and more money in the hopes that that will stimulate consumer spending.

Unfortunately, that is really pushing on a wet noodle. It's going -- not going to have enough influence if there's not enough demand at the other end of it.

(END VIDEO TAPE)

QUEST: Robert Reich talking to me earlier.

Now, we're taking a look at earnings next. Southwest Airlines chief exec Gary Kelly tells us why his airline is profitable again.

And forget the S&P 500, we have the balloons and the Q25.

(COMMERCIAL BREAK)

QUEST: Southwest Airlines is back in the black. It's beaten expectations, a $205 million Q3 profit. The U.S. carrier lost $60 million the same period of 2009. But we shouldn't be too concerned about that. A loss from Southwest the first in many quarters, with the time -- it was a small loss compared to other people's thumping great big losses.

But last month, Southwest has agreed -- agreed to buy AirTran for $1.4 billion. Southwest says it's hedging its oil at $90 to $105 a barrel for 2011 and 2012. That's more than the actual market rate at the moment, which gives you an idea of where the chief exec thinks it's going to go.

But the airline's CEO, Gary Kelly, told CNNMoney -- CNNMoney's Poppy Harlow why he believes that's going to be the right hedge.

(BEGIN VIDEOTAPE)

GARY KELLY, CEO, SOUTHWEST AIRLINES: We definitely need to be protected and we need to be protected beyond those levels. I think there is a -- obviously, a real risk that energy prices will continue to climb, and particularly if the dollar weakens here in the near term.

So I wish they would stay here in the 80s or drop into the 70s and -- and -- and maintain that stability, but we've -- we'll need to have the protection in place in case prices go higher.

POPPY HARLOW, ANCHOR, CNNMONEY.COM: How big is your concern, Gary, that we'll see a run-up in energy prices once we see a significant turn in the economy and if we have that dollar weakness?

KELLY: Oh, it's going to happen. I mean there's -- my -- my concern is -- is absolute. And there's no question in my mind that we'll see higher energy costs. I think then it just becomes a question of how high is high. And we don't know. And that's, of course, why we have hedging in place.

But I would be very concerned if the economy, in fact, does start growing. It's not -- you know, the economy is in terrible shape right now and we're not creating any jobs at all in this country.

So -- in fact, we're proud at Southwest that we are -- we're bucking that trend. We will be growing. We will be adding airplanes. We will be creating jobs...

HARLOW: What -- what are those hiring plans...

KELLY: -- (INAUDIBLE).

HARLOW: -- looking out one year from now?

I mean is it significant hiring we'll see by your company?

KELLY: I hope so. In other words, it's all -- the -- the stimulus for Southwest is the acquisition of AirTran. That's what creates the opportunities for us to expand. It creates -- it gives us the profits that we need to justify making investments in more aircraft.

So I would hope that we can, over the next five to seven years, add maybe 50 to 100 aircraft. And we have about 60 -- 60 employees per aircraft.

So I think we have a significant number of jobs that we can create over the next five to 10 years, as a consequence, really, of the AirTran acquisition.

HARLOW: And just finally back on that note, you saying the economy is in terrible shape.

What are you seeing from your customers, from customers, from leisure travelers to business travelers?

Who is willing to spend, who isn't willing to spend, because, obviously, a record third quarter for you. Something is going right. People are spending.

KELLY: It's really two different perspectives. One is the macroeconomic view and then the other is the view that we have here at Southwest Airlines, which is much better than -- than the broad view.

We're a low fare leader in America. We don't charge for bag fees. We don't charge when you change your flight. So there are many, many new customers coming of to Southwest Airlines because they know they get a better deal.

And -- and we actually have a -- a much better outlook than what we see in the broader economy. In the broader economy, there are plenty of companies out there that still have frozen head count and are not hiring. They've frozen salaries and they're managing almost on a month to month basis.

So just the fact that the economy is not creating jobs is -- is obviously an enormous issue for the administration and for the Fed. And we've seen a return of business travelers, in particular, but we haven't seen the return to previous levels.

So while business travel is up from 2009, it's nowhere near what it was in 2008 or 2007.

So the economy still has a long way to go, in my opinion.

(END VIDEO TAPE)

QUEST: The chief exec of Southwest, one of the companies included in our exclusive Q25 earning season index. Now, this is the index that will help you make sense of what is happening in the earnings at the moment. We give green balloons to companies whose earnings show strong positive trends and decent numbers -- it's trend and numbers. Reds to those who disappoint. It is not enough simply to make your numbers or beat expectations. There are certain criteria.

We're calling it the tough love Q25 this time around -- the tough love edition. If you get four of the five, you get an automatic.

Three of the five -- well, there we have a debate.

Maggie Lake is in New York -- Maggie, let's start with Southwest.

There's no debate in terms of which color they get, is there?

MAGGIE LAKE, CNN CORRESPONDENT: No. They -- they got five out of five, Richard. And -- and I think it (ph) -- the only other one that managed to do that, I think, was Apple, because they really had a stellar performance. Absolutely a green.

QUEST: All right, that is a green balloon at -- for that.

Caterpillar another one that, on the question of revenue growth, profit growth, profit growth QOQ, positive forecast and all the -- what they said -- Maggie.

LAKE: Yes, another one, five out of five. We're really starting to get some momentum. We were a little bit worried no one was going to be able to do this in the beginning, in the tough love edition.

The thing that was interesting for Caterpillar about me, Richard. We know they've been doing very well in the emerging markets. Once again, that's where the strength was.

But this time, they also said equipment orders rose sharply in North America and Europe, previously weak spots. That's good not only for Caterpillar, but it might be a good early sign in terms of recovery for the global economy for those hard hit areas.

QUEST: That's the significance of the Caterpillar balloon, isn't it...

LAKE: Yes.

QUEST: -- because when you're in the recession, when we were coming out of it, you and I kept talking about if Caterpillar is doing badly, then that's bad news for everybody else.

LAKE: Right. And -- and -- and now we see they're turning. And, of course, when companies are buying equipment, the hope is the next thing they do is actually hire people.

QUEST: Right.

LAKE: So we'll have to watch that one. It could be a good early indicator.

QUEST: We had a debate over McDonald's. If you look at the numbers, McDonald's revenue growth, it met -- or closely enough. Profit growth QOQ positive about future; hiring and comments.

So three oh -- three of five moved it toward the green balloon. So we went into debate -- Maggie, I...

LAKE: Yes, we...

QUEST: -- I think...

LAKE: Yes, we did.

QUEST: I felt it got the green.

LAKE: I -- I think so. I mean they came really, really close on the revenue. And not only that, Richard, you know, one of the things you want to see is strength in management. And they do well with their cheaper products. But they're also innovating. They did really well with some new products they rolled out, some movies. And that's what you want to see with the company. That's a good indicator of future -- of the future and doing well and staying on top of your rivals.

So I think McDonald's gets a green.

QUEST: All right, let's go through the European ones. I'm going to hand out balloons for the companies on this side of the Atlantic. You got all the greens. I'm afraid -- I'm going to save some time. I'm going to quickly say GlaxoSmithKline, which basically was five. No revenue growth piece (ph) and no profit growth, no -- oops.

(LAUGHTER)

QUEST: Well, that was a -- that was invariably going to happen at one point and I'm not about to go and retrieve it.

Credit Suisse also gets a red balloon.

Why are we giving Credit Suisse a red -- Maggie?

LAKE: Yes, once again, this is -- we know it's a tough environment, we know trading volumes were down. But you still, you know, they did worse than some of their competitors.

And, again, you know, it's tough for everybody, but some people manage to offset more. Credit Suisse really didn't. So I think they've got to get a red.

You know, they did OK with some of the -- their private wealth management, some of the areas where they're strong.

But overall, I think Morgan Stanley, on this side, was the only one who did worse. So they're falling behind their peers.

QUEST: All right, that was nearly a YouTube moment there when I jumped up to the get the balloon, but you didn't get to see that. The balloon is now elegantly on the stand.

Finally, Nokia. Nokia's shares were up 6 percent today because their numbers looked good. But when Maggie and I looked at their numbers, even with a new CEO, even with a -- beating expectations, Maggie, why did we decide a red?

LAKE: Listen, it can -- Nokia is still a dominant player and there's reason to be hopeful with this new CEO. But you don't get a green for promises or for the hope that something happens.

Nokia late to the Smartphone party. It's extremely competitive and it's moving fast. And you just have the feeling that Nokia is falling behind.

QUEST: Right.

LAKE: They're losing market share, the bottom line. So I don't think you can give them a green.

QUEST: We didn't. We gave them a red.

Maggie is in New York.

Many thanks for that.

Eight plays six (ph) -- exactly where you might expect it to be in the economy at the moment.

In just a moment, the latest on that quake in the Pacific, as well as your weather forecast.

QUEST MEANS BUSINESS.

Good evening.

(COMMERCIAL BREAK)

QUEST: A powerful earthquake has struck in the Gulf of California. The latest information we need to have the meteorologist Pedram Javaheri at the CNN International Weather Center.

Damage, tsunami, how bad, aftershocks?

What can you tell me?

PEDRAM JAVAHERI, CNN METEOROLOGIST: Yes, it looks like, right now, no tsunami alerts have been issued for that region, Richard, and that's the good news. We know it was a 6.9. And the USGS has it at 10 kilometers deep. But the concern with that is a lot of times, when the USGS is unsure of the depth, they give it a standard 10 kilometers deep.

But based on the shake map intensities they provide, it looks like light intensity, as far as shaking, to moderate, at best. So, certainly, that's the good -- good news as far as that is concerned.

But another area of interest that I want to talk about and that being Typhoon Megi. We've been tracking this for so long. And right now, a very gorgeous, very symmetrical storm system out there in the South China Sea. And the outer bands of it producing heavy rainfall in portions of Southern Taiwan. And this storm system is certainly something to take serious over the next 24 to 48 hours, because it's a very slow moving storm system.

So as it sits there, not only does it provide intensity issues here, but also giving you concerns for large, destructive waves, rip currents possible right there around Taiwan, the Taiwan Straits, Hong Kong are certainly going to see a lot of concerns. If you're a mariner out there, if your travel plans are taking you out there, it's something to keep in mind over the next couple of days.

And now just some video coming out of the areas within Taiwan. I'll show you some of the images of a car dealership there in Taiwan, just in the past 24 hours, with the moisture associated with a storm that's hundreds of kilometers away, but again, just sending waves of heavy rainfall that part of the world.

So something to follow here over the weekend. We think landfall some time, say, late Friday night, early Saturday morning possible with this. It could come in with winds about 150 to 175 kilometers per hour. And, again, going to be a serious storm. It has already produced heavy rainfall and the forecast looks rather soggy, as well.

But let's do zoom out the perspective for you. Take a look at this. Not only do we have Megi, we have Giri in the Bay of Bengal to produce heavy rainfall in Eastern India, Bangladesh. We certainly could see a lot of rain associated with this. And yet another storm system in line. That's Tropical Depression 16, also in line to perhaps move westward and bring us some heavy rainfall either toward the northern areas of the Philippines but the models want to begin to guide it a little farther north. So something to follow here.

But I'll quickly show you what's been happening over Europe. Very cold temperatures. If you're out there, you know what I'm talking about here. We have a lot of cool, northerly flow in that region. Cool temperatures, clear skies -- the recipe for a chilly start on Friday morning. The air mass going to shift farther east, but it certainly feels more like December out there, Richard, with temperatures a good four to eight degrees below the norm.

And if you've got travel plans, Amsterdam, keep that in mind. Some showers in there through the afternoon hours by Friday. But overall, it looks like just the cold stuff to deal with the next couple of days -- Richard.

QUEST: All right, many thanks.

I -- I -- never mind telling me it feels like I can tell you it feels like December. It was a bit bright, I would say.

Anyway, many thanks.

JAVAHERI: OK.

QUEST: I'll see you again tomorrow.

We talked a lot about China during this program. When we come back in a moment, a Profitable Moment about why China's economic growth is just about right.

(COMMERCIAL BREAK)

QUEST: Tonight's Profitable Moment.

So my instant Chinese oatmeal economy might not have made the point as brilliantly as some would like. But the Goldilocks scenario is certainly true for the Chinese.

The numbers coming from China at the moment, showing a slowdown in growth, have been greeted with alarm in some quarters.

Ridiculously, there are worries that the Middle Kingdom engine of growth is sputtering and it's seen as bad news for countries that rely on double digit economic growth -- 11 percent, 10 percent, and now down at 9.6.

But I venture to suggest, as I argued -- successfully, I think -- in Q&A, this is exactly what is needed -- a gentle slowdown that will ensure longer, sustainable growth in the future.

Face it, much better that China should take the froth off the top with a bit of tightening now than suddenly find itself the victim of boom and bust like the rest of us did. Too much nonsense is spoken about the Chinese slowdown. It's moderate, it's reasonable and, in the long-term, it serves us some good.

And that's QUEST MEANS BUSINESS for tonight.

I'm Richard Quest in London.

Whatever you're up to in the hours ahead, as always, I do hope it's profitable.

"WORLD ONE" starts now.

END