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QUEST MEANS BUSINESS

President Obama Releases Proposed Federal Budget; China Becomes World's Second Biggest Economy; Future Cities: Helsinki

Aired February 14, 2011 - 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: Bring on the budget. President Obama calls it a down payment in fiscal control.

Egypt's military rulers tell protestors it is time to get to work.

And it is official China is the world's second biggest economy.

I'm Richard Quest. We have an hour together, the start of a new, and, yes, I mean business.

Good evening.

Our top story tonight, all about deficits and potentially, denial; Barack Obama has laid out his vision for starting to dig the U.S. economy out of its debt crisis. And so far things don't look terribly pretty. Have a look and we'll explain exactly what this is all about.

The White House says the budget could halve the U.S. deficit in two years and cut it by more than $1 trillion over the next decade, bringing it down from 10.6 percent of GDP today, to just over 5 percent of GDP in 2013. Now still an extraordinary amount of money.

And this is how they're going to do it. Two-thirds of the budget savings will come through deep spending cuts. And they will affect everything from summer students, school loans for students, to winter fuel payments for the poor, it will all be cut. In fact, half of all government agencies will see their budgets lowered on discretionary spending. Also, in the proposal, a five-year freeze on non-security social spending, and a two-year freeze on most federal workers salaries.

But, this is the core point, the federal budget deficit proposals don't address the three big, long-term problems, the three Ms, Medicare, Medicaid and the military. And this is just the beginning for the budget. It now goes to Congress. Months and months of negotiation will take place, because after all, it maybe the president's budget, but it is Congress that has the power of the purse, particularly the House of Representatives, and it will have to pass through the checks and balances.

Maggie Lake is in New York and joins me now.

The president hammered himself in, in many ways, didn't he, by what he wasn't prepared to cut versus what he was prepared to?

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: That's right. And it is not just, you know, an omission. They fully acknowledge this, Richard. And they say it is the difficulties of politics in Washington. And the budget director saying, listen, if we put out a really big bold proposal before we have bipartisan agreement, it is not going to move the process forward. It is going to set it back. And that is exactly what they didn't want to do.

So, they did today what Obama really set the stage for in the State of the Union. And you can see, there at a school in Baltimore, where he made the speech. Very much acting like a CEO, he's trying to cut deep in some areas and yet still spend and try to sort of-in areas that he thinks are important for America retaining its competitive edge. But he acknowledges very much that this is just the first step. Have a listen.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I'm also looking forward to working with members of both parties to take steps beyond this budget freeze, because cutting annual domestic spending won't be enough to meet our long-term fiscal challenges. As the bipartisan fiscal commission concluded, the only way to truly tackle our deficit is to cut excessive spending wherever we find it, in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes. So what we've done here is make a down payment.

(END VIDEO CLIP)

LAKE: So as I said, some, you know, proponents of the president would say this is sort of a smart approach, a rational approach, to at least start to make the cuts needed.

QUEST: Right.

LAKE: Others are slamming him for lack of leadership. Saying, listen, if you don't talk about Social Security, Medicaid, Medicare, the 40 percent of the budget, then you are not doing your job as the leader to get this discussion going, Richard.

QUEST: We're going to talk about the economic impacts in just a moment with Diane Swonk, in Chicago. But on the political front, Maggie, from your vantage point, are these the-do these even resemble anything like the proposed deep cuts of austerity?

LAKE: You know that is a loaded question, Richard, because it depends on who you talk to when you are talking about what austerity means. I will tell you this, the Republicans say that they are pushing for much deeper cuts, and the bipartisan commission, that the president himself just referenced, also had a much more aggressive plan. So from that perspective this doesn't look like the austerity that is going to be needed to sort of right the fiscal ship if you will, at least not yet.

QUEST: Maggie Lake who is in New York for us this evening. We are going to Chicago, where we find Diane Swonk, the chief economist at Mesirow Financial.

Diane, you heard the question to Maggie. I'm going to ask the same one to you. Is this austerity, or is this just tinkering that frankly doesn't address the budget deficit problem?

DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: If you don't address the elephant in the room, which is entitlement spending, you are not addressing the budget deficit over the long haul. And that is what no one, Republican nor Democrats, alike, wants to get on that third rail of American politics.

If we don't address it, though-now, with phased in cuts over time, well after 2012, we can move it out, we can have it phased in over 10 years, even 15 years. Ben Bernanke has underscored this. If we don't make that decision now it will be forced upon us in, as you already know in Europe, austerity-real austerity hurts a heck of a lot more if you postpone it.

QUEST: But you see the problem is that the bond market hasn't yet given and indication that either at the short, or the long end, that investors won't fund the deficit. So, until the market clobbers, maybe not as bad as Greece or as Portugal, why is there no incentive to make the move?

SWONK: You know, there is no incentive, there is no political will, without the bond market doing it. But clearly if we get to the point-we had a case, you remember, when we shut down government and we, in the 1990s, where we did have a spike in bond yields. And it was fairly dramatic and that ended up looking very poorly on the Republicans for shutting down government at the time. I think this is one of the things that we risk this year, is seeing a spike in rates, that is, you know, frankly, unwelcome at a time when U.S. recovery appears to be gaining momentum, but is still very fragile, most notably in housing.

So, we really-we have not seen it because frankly the dollar is the best of all alternatives out there, as a reserve currency. That said, it is very feasible in the next couple of years to see a lot of other alternatives in terms of investments.

QUEST: So, I realize that asking consensus is a bit like asking an impossible question. But is there-

(LAUGHTER)

QUEST: Yes, in the sense that the financial world ever does have a consensus, what would Wall Street, the financial community, like to see happen with the budget?

SWONK: I'm not sure Wall Street knows what it would like to see. But I know as an economist, what economists like see, is something with real teeth to it over the next 10 to 15 years. Not necessarily cutting the deficit quickly, radically, in the next year or two which is what many Republicans are offering up. But on the other side of it having real reforms that really do deal with some of these sacred cows on both sides of the aisle, certainly on the Democratic side, and real fundamental tax reform.

Wall Street, I think, is really ready for a simplification in the tax code. Really fundamental tax reform as well. Those things we're ready for. The American public, though, is not yet quite there.

QUEST: Now, that was my last question to you then. Do you think the American public, and maybe you've just answered that, but surely they must realize they can no longer-excuse me-continue spending. The government cannot spend. And ultimately, that is going to mean higher taxes or cuts in spending. Surely that is common sense.

SWONK: Well, it is common sense to you and I, but it is amazing to see the polls out there. I am just shocked when they talk about raising retirement age, 40 years down the pike, for 28-year-olds today, to 68, three years; making them safe a little more over 40 years. People were appalled at it. Twenty-eight year olds don't even think they're going to get Social Security. Let alone, most of them don't vote here. I mean, it really is ridiculous what we see.

What we see entitlement spending is defended by the most wealthiest of households. They don't realize that they are paying in less than what they are receiving. The messaging has got to change. The reality of what the message is. People still want their cake and eat it, too. This is America, after all. And that has not stopped.

QUEST: We thank you, for joining us this evening on QUEST MEANS BUSINESS. Lovely to see you as always, Diane Swonk, from Chicago.

The markets and you might be surprised, or maybe not. Look at that, a trillion-dollar budget comes out with a trillion dollar savings, and all that happens the Dow Jones industrial, off barely 10 points. A fraction of a percentage point, 12,263.

Which perhaps is the best indication that the market knows that the budget, as it is currently put forward, is most unlikely to actually take place.

Now, direction for major European markets.

(DESK BELL CHIMES)

And there were small gains in Frankfurt and smaller losses in Paris and Zurich. (UNINTELLIGIBLE) FTSE, in London, finished fairly flat. Those are the numbers on your screen. A bright start to the week that saw shares hit a 29-month high at one point. Mining shares did particularly well on the news that China has narrowed its trade surplus.

Nokia's shares continue their slide. And we'll talk more about Nokia's problems later in the program.

We're getting a glimpse of Egypt's economy in the post-Mubarak era. And it is not a pretty sight at the moment. John Defterios joins us, in a moment, to discuss what the protestors want now. And, frankly, how much damage is likely to happen before they get it.

(DESK BELL CHIMES)

(COMMERCIAL BREAK)

QUEST: President Mubarak may have gone, the unrest, though, continues in Egypt. This time problems with pay have broken out with the scuffles on the street. Hundreds of Egyptian police officers protested outside the interior ministry for a second day, on Monday. They are demanding higher salaries, shorter hours, and better benefits, and say they won't leave until their demands are met.

Staff at some of Egypt's banks have also joined in protests saying they want some top executives to be sacked.

Now, banks across the country remained closed on Monday. They will not reopen until Wednesday, at least. The stock market has been closed indefinitely. The military is telling people to get back to normal life.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE (through translator): The Supreme Council for the Armed Forces emphasizes that in order to achieve security and stability of the nation, and citizens, and to guarantee the continuation of protection in all of the country sectors (ph) call on the citizens and neighbor sectors to carry out their duties. Each one in his position with appreciation to all what you have endured for a long time.

(END VIDEO CLIP)

QUEST: John Defterios is with me.

John, Mubarak's gone. The protestors in Tahrir Square are less. They obviously have gone home. But now we have an entire new range of protestors.

JOHN DEFTERIOS, CNN ANCHOR, MARKETPLACE MIDDLE EAST: Absolutely. As you know, we have about five or six bank holidays here in the U.K. This was an unscheduled bank holiday in Egypt. The workers didn't show up and the government was forced to call a bank holiday. But it is not just the banking sector that was hit.

Richard, we're looking at oil workers, railway workers, bus workers, textile workers.

QUEST: What do they want?

DEFTERIOS: Steelworkers.

QUEST: What do they want?

DEFTERIOS: Right across the board. Well, they have kind of equated this call to protest and political freedom into a call to get more pay. And they are actually equating it to trying to get the funds back from the government, that perhaps have left the country, back into their pockets. So this is an incredible challenge for the military, which is trying to establish order over a short window of time, of two to six months. And now they're having to deal with protests right across the board.

It is quite interesting. Along with the sound byte we had there, that you ran, from the military, they put out a six point, basically announcement asking people to get back to work. The fifth point negatively impacting the national economy. They were hoping to grow about 5, 5.5 percent. They are going to be lucky to get 2.5, 3 percent. If everything gets back in order in the next two months.

QUEST: All right. So, the military is now in charge. The constitution has been suspended. Parliament has been dissolved, or all those processes are working through. But what more can the military do to get the economy moving again if these people won't go back to work? Because the last thing they want to do is launch violence.

DEFTERIOS: Well, that is a phenomenal point. And tucked into that statement, that I was referring to, this is a statement from them. We hope that everyone will work to create the necessary conditions. We hope-now the question is, and I spoke to a couple of businessmen tonight. They were saying, OK, at what point does the military use its strength to restore order and get people back to work? And that is the next key threshold.

And I think the other side of this, Richard, is that the military itself doesn't really want to give up power in a six month window. It controls about 15 percent of the economy. And not just in the classic way that we think about it, but manufacturing facilities, land plots, and the rest. I mean, how fast are they going to disperse this to the civil society? And that is another thing that another businessman told me tonight. How quickly can they make the transition, realistically- realistically how quickly can they make the transition?

QUEST: Which now begs the question, the military is in control. The economy is in trouble. The stock market is not opening for the foreseeable future. I am wondering how much damage is being done to this economy? The witch hunt that is now taking place against the former regime?

DEFTERIOS: Exactly. I mean, the way I understand it today, there are four or five ministers that have become, in a sense, the poster childs. They are looking for them. And, some of the people that reported to them, to try to get some of the funds back. So this is a witch hunt. Is that going to be including the courts here? What sort of trial is going to be held? Is this a trial from the public?

And going back to your other point, and something that we have talked about before, they have depended on tourism, about $13 billion a year, in terms of revenues. If that bounces back, even in six months' time, you are looking at $6 to $7 billion of revenues. And then, we kind of take for granted that the Suez Canal is going to continue operating. If you have the workers in that area, because Port Suez has been seeing the strikes, if that happens that is another $5 billion on the table as well.

QUEST: John Defterios, he'll be adding up the numbers in the days ahead. Many thanks.

Now here on QUEST MEANS BUSINESS we do like to dig deeper into our journalism. So, I'm going to show you how Helsinki is developing even deeper than you might imagine, deep underground.

(COMMERCIAL BREAK)

QUEST: A straightforward proposition, fewer people and no crowding. So what is Helsinki's problem? It sits on a peninsula, which means Finland's capitol is hemmed in by the sea. Now, while most cities spread out, or up, when they need to expand, Helsinki has another solution which makes it a true "Future City".

(BEGIN VIDEOTAPE)

QUEST (voice over): There is more to every city than meets the eye. In the case of Helsinki much of the hidden parts are beneath the surface. And this city's subterranean world is set to get much bigger. The Finish capital is the world's first city to develop an underground master plan.

(On camera): Helsinki has barriers that have restricted its growth. On the one side there are the existing buildings, but then you have the water. So, between the buildings and the harbor there really is only one place to go, down below.

(Voice over): That is exactly what they're doing. In efforts to avoid urban sprawl and maintain the low rise cityscape, Helsinki is taking advantage of its natural resources to expand.

(On camera): What makes underground Helsinki possible is this hard bedrock, that is shallow enough beneath the ground to be usable. It allows the city planners to create these huge infrastructures that, frankly, look like something out of the "Flintstones".

JUSSI PAJUNEN, MAYOR OF HELSINKI: It is a way of doing things that we put underground things which don't have to be seen. And it is a relatively inexpensive to build there. And why not use it?

QUEST (voice over): Today there are hundreds of underground facilities and many more are planned.

OLAVI VELTHEIM, DIRECTOR, HELSINKI TOWN PLANNING: You can see both the present states and the future states in the same picture. The gray parts are the existing parts, and the blue parts are the planned parts.

QUEST: This policy of putting industrial facilities beneath the surface helps free up land above ground for more profitable real estate development. Down below is the world's only fully-automated underground coal storage facility. Four enormous silos store enough coal for half of the city's annual consumption. And all that remains on the surface is a discreet coal shaft. Perhaps the most extensive use of the bedrock is within the city's district heating and cooling system; 60 kilometers of tunnels deep beneath the surface, heat and hot water to Helsinki.

JUHA SIPILA, PROJECT MANAGER, HELSINGIN ENERGIA: In most cities all the cables and pipes go underneath the asphalt, and for maintaining you need to break the asphalt and have digging mostly in between the cars, and the traffic. But in Helsinki we have a very good tunneling network, crisscrossing underneath the city. And we can supply all the cables and pipes from down in the tunnels and don't need to disturb the traffic.

QUEST: Wherever you are when temperatures drop or when cooling is needed, something stirs down below.

(On camera): The magnificent Uspenski Orthodox Cathedral is proof that no part of Helsinki remains untouched by the underground city. The old and the new coming together, whether it is the pipes providing the heat for the worshipers here, or the revolution going on down below in the cathedral's bomb shelter.

(Voice over): 30 meters beneath the surface two Finnish companies have joined forces and created the world's greenest data center of its time.

JARMO TUOVINEN, CEO ACADEMICA: Data centers are consuming at least 2 percent of the oil energy consumed in the world. It is growing fast thanks to Google and other guys.

QUEST: In most data centers just half of the energy consumed is used by the computers themselves. The rest is used to cool the computers down.

TUOVINEN: What's different with us, we are using seawater, which is cold, obviously, here in Finland, and that is a way how we cool if efficiently. We don't use electricity to cool them down. So, basically, we save a lot in electricity in that way and also energy. And what we are doing, we are actually taking the extra heat and putting that to district heating network, and warming Helsinki pumps (ph).

QUEST: The access heat leaves the data center through pipes, which carry it 70 meters down to the underground tunneling network that lies beneath Helsinki. From here, that heat continues its journey through the pipes and arrives at its final destination, heating people's homes, and water. Its journey travels through the world's largest heat pump of its kind. Of course, it is also underground.

UNIDENTIFIED MALE: Those cities who have this city system, they should definitely do that. To use all the excess heat, if they don't do it, they should do it.

QUEST: Hide the industrial bits you don't want to see deep underground. Reduce your carbon footprint and free up space on the surface, for the good life by the sea. It is hard to argue with this sort of "Future City".

(END VIDEOTAPE)

QUEST: Honestly, never seen anything like it. Coming from a society where we have always been told tunneling is prohibitively expensive, to see the way Helsinki digs their tunnels in that particular bedrock was a fascinating experience. "Future Cities" and there is more from Helsinki next week.

Shrinking paychecks and rising prices, it is a lethal combination that could push workers around the world to the brink of revolution. When we come back a new CNN series looks at the factors behind the growing economic imbalance, "The Price We Pay".

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS. This is CNN and here the news always comes first.

Unrest is cropping up in several countries in the Middle East and North Africa. Crowds calling for regime change in Yemen clash with government supporters for a fourth day, with rocks, sticks and even knives being used.

In Bahrain police and riot police were deployed during a so-called day of rage. The protestors there are mainly Shiite demanding political equality and better jobs.

Anti-government protests took place in Iran; tens of thousands of people on the streets of downtown Tehran, a couple of hundred protestors set fire to trash bins and threw rocks at security forces trying to disperse the crowds. Clashes were also reported outside Tehran University.

Barack Obama has sent his presidential 2012 budget plan to Capitol Hill; $3.7 trillion blueprint aims to reduce funding for 200 government programs. Republicans are gearing up for a fight they believe the plan doesn't do enough to reduce the U.S. federal budget deficit.

The Brazilian football star, Ronaldo, is calling it quits after 18 years on the pitch. He's 34 years old and says he's ending his contract with the San Paulo based Corinthians Club, due to injury and lack of fitness. Ronaldo also says he's dealing with thyroid disease. He became the all-time leading soccer scorer at the World Cup in 2006.

Tunisia and Egypt first -- two regimes that were hit hard by poverty and unemployment. And the spark that lit the tinderbox of revolt in both countries was soaring prices.

Today at CNN, we're launching a year long series that, over the course of the next few months, will address the topic of increasing importance and one that affects you and me -- the looming global supply and demand crisis and, indeed, what happens and what is means for the price of the things we buy.

We need to begin, though, explaining something about the very nature of inflation, the very aspects of the price change. And, of course, that leads us to commodities in the library. And three to bring to your attention tonight.

Cocoa -- cocoa is now trading at its highest price in a year. Large - - many reasons, not least of which, the largest exporter, the Ivory Coast, internationally recognized President Ouattara may extend the month-long cocoa export ban. He says he will extend the ban if Lauren Gbagbo, the -- the president who won't leave will -- does not leave power by the end of next week.

Now, the Ivory Coast produces about a third of the world's cocoa. When cocoa prices go up, that feeds through the entire food chain.

In a similar way, of course, sugar -- now, we know that sugar is trading at around 30 year highs. About a quarter of Australia's sugar crop was distraught -- was destroyed by the appalling cyclone and weather that they've been suffering from this year. North Queensland grows 90 percent of Australia's can crop. If sugar and Australia go hand in hand, as sugar prices to up, that, too feeds through the chain.

And coffee, where trading is near a 13-year high. Shortage of high quality beans, strong demand and even Colombia, the world's top producer, seeing a third of a year below harvest.

We've chosen these three because they make the point very clearly -- coffee, sugar, cocoa, the very raw materials, the very base of commodities that go into our foodstuffs around the world. It's not just the softs (ph). Reuters estimates that a broad basket of commodities rose more than 42 percent last year. The recent crisis only stalled the commodity price fight that began in 2008. The U.N. said food prices alone jumped 200 percent.

Is history repeating itself?

Jim Boulden now looks at how the economic ups and downs affect people the world over. It's the price we pay.

(BEGIN VIDEOTAPE)

JIM BOULDEN, CNN CORRESPONDENT (voice-over): Think back to July 2008, before Lehman Brothers, before interest rates were slashed, before the breathtaking economic crisis.

Crude oil was pushing toward a $147 a barrel. Transportation costs soared. Fuel strikes hit Britain. Speculators were blamed, as was the use of crops for biofuels.

(BEGIN VIDEO CLIP FROM "AMERICAN MORNING," APRIL 2008) JEFFREY SACHS, COLUMBIA UNIVERSITY: If you add it all together, demand is soaring, supply has been cut back, food has been diverted into the gas tank, which added up to a price explosion.

BOULDEN: And it wasn't just fuel in '08. Soybeans doubled over two years, wheat in just one year. Rice doubled in seven months. Food riots broke out in Haiti, in the Ivory Coast, in Bangladesh.

(BEGIN VIDEO CLIP FROM APRIL 15, 2008)

CONDOLEEZZA RICE, SECRETARY OF STATE: We clearly have twin problems. We have an energy problem and we have food problems. And there are some relationships between them.

BOULDEN: Add to that soaring metal prices thanks to the building boom from Spain to China. But by Christmas, 2008, stock markets had plunged, banks failed and house prices collapsed and oil had crashed to below $35 a barrel.

Now, three years on, oil on the U.S. market is hovering around $90, with the demand for oil again on the rise. Capacity will have to keep up. If not...

IAIN ARMSTRONG, BREWIN DOLPHIN: When that spare capacity figure starts to fall down, the longer-term speculators start to think, well, hold it a second, you know, maybe $80 to $85 to $90 a barrel isn't a long-term oil price and we've got in a situation of -- of our -- of $100 plus in the -- in the medium-term.

BOULDEN: Investors betting it is not too late to jump on other commodity trains. Last year's fires, this year's floods and a cold winter have been tough on residents and consumers, but not on commodity prices.

Still, 2011 is very different than 2008. Unemployment has soared. Governments are cutting public sector jobs, cutting social welfare payments, and, in many places, raising taxes.

What's not different, violence.

JACQUES DIOUF, DIRECTOR-GENERAL, FAO: We will see people protesting because poor people allocate more than 50 percent, sometimes even 70 percent, of their income for food. And if the prices double, naturally, you imagine the hardship on them.

BOULDEN: Prices -- the trigger, perhaps, for something much more profound.

Could Tunisia and Egypt just be the beginning?

Jim Boulden, CNN, London.

(END VIDEO TAPE)

QUEST: In the weeks ahead, of course, we'll be inviting you to engage and to join in our discussion on the price we pay, as we look at the everyday staples that come out of our pocket.

Now, we knew it was coming and now it is official -- China has overtaken Japan and become the world's second biggest economy. In a moment, this shifting balance of economic power in the Far East.

(COMMERCIAL BREAK)

QUEST: An official statistic -- China is now the world's second largest economy, overtaking Japan, pushing its Asian number down to number three in the list. Earlier today, GDP figures from Japan, well, there it is. That's the story that it tells. It reveals economic output was nearly $5.5 trillion in 2010, $400 billion less than China's number. And the Japanese economy shrank in Q4 due to weak consumer demand and a drop in exports.

For the year as a whole, the economy grew by nearly 4 percent, better than some had predicted.

It makes an interesting question -- why one quarter was down but the year overall was better than expected.

China's move into second place behind the U.S. had long been expected.

How long will these two Asian powerhouses adjust to the shifting balance of economic power?

China Kyung Lah went shopping in Tokyo to find out.

(BEGIN VIDEOTAPE)

KYUNG LAH, CNN CORRESPONDENT (voice-over): Step into Laox electronics store, and you can hear the shift of economic might in Asia. Chinese greets shoppers. Sales signs are in Chinese. Workers assist shoppers in Mandarin.

What's odd, we're in downtown Tokyo. But the people with the purchasing power here are not the Japanese.

(on camera): You don't have to tell this electronics store about the economic power shift in Asia. It's something they've seen for quite some time. When it comes to the number of paying customers, they see about 200 Japanese a day. Compare that with the number of Chinese -- 1,000 customers every single day.

LIN DONGDONG, LAOX TRANSLATOR: I am proud of China (UNINTELLIGIBLE).

LAH (voice-over): Says Lin Dongdong, a Chinese immigrant who's risen with the fortunes of his home country. He works for Laox as a translator, but plans to become a doctor. Today, he's helping out this Chinese tour group here in Tokyo to spend money.

"Japan was once like China," says Laox's store manager, referring to Japan's economic surge in the 1980s. "It's China's turn now."

China has blazed ahead, expanding its manufacturing sector and domestic infrastructure. At this pace, Japan's government estimates China will overtake the U.S. economy in just 15 years.

Japan, meanwhile, he's been stuck in two decades of stagnation and deflation amid indecisive economic policy making. It now faces a demographic tsunami -- the world's fastest aging population, one of the lowest birth rates and a debt to GDP ratio that's highest among developed nations.

That may be a snapshot of economic might, but economists warn it's not so black and white.

UNIDENTIFIED MALE: Japan's demographic tsunami, as it was termed, is very real and is going to stunt growth in that country for years to come. They need to get that situation under control.

But China also has a demographic tsunami of its own, to reuse that term, coming, as well. So this isn't just a one way bet on China versus Japan. Japan is not going away. I'm certainly not a raging bull on Japan, but this simple comparison has a lot of caveats.

LAH: "I know we became the world's number two economy," says this Chinese shopper, "but we still have very poor people and there's a gap between rich and poor. I hope China as a whole becomes a wealthy country like Japan."

"I envy China's hungry spirit," says Kaychi Yamamoto. He says what's missing most in Japan is passion and drive. "But I believe Japan still has potential. It will come back again."

Two Asian powers adjusting to a new economic world order.

Kyung Lah, CNN, Tokyo.

(END VIDEO TAPE)

QUEST: Now, Seijiro Takesha, the director of Mitsui International and the -- the statistic -- and we were -- you heard in that report, you saw it on the wall -- that statistic, China is now number two, will that worry the Japanese or is there an element of common sense about it, China is a great -- is a bigger country?

SEIJIRO TAKESHITA, DIRECTOR, MIZUHO INTERNATIONAL: No. Just as Britain experienced in 2005, Germany in 2007, it was obvious that Japan was going to be surpassed. I mean population-wise, there's 10 times more population in China and they're growing phase. They're like the Jap -- Japan in the '60s. They're exporting themselves into the growth era.

So, obviously, that's -- that's the thing. But Japan has to take a bit different methodology of growth.

QUEST: Ah, but you see, that's the interesting point, isn't it, because the -- it may be a numerical signal, but it does portend of something more serious, doesn't it, that China is growing in a particular way and Japan's growth, such as it is, is not sustainable at -- over longer terms?

TAKESHITA: What Japan had to do was not target China or look at China. In fact, Japan is benefiting from China. They're our biggest, you know, trade partners. If China does well, a lot of Japanese corporates do well.

The important thing is how the Japanese could have and should have copied a methodology, for example, from the Europeans, who've had the mature economies before Japan. I mean, for example, making transitions to domestic economy side or making new areas of growth...

QUEST: Well, you say that, but there's lots of European economies that are only doing it under the lash of the bond market now -- Greece, Spain, Portugal, not Ireland. They did -- Germany, obviously, is -- is one of them.

TAKESHITA: Yes, but Japan has the capability to make that transitional change...

QUEST: But why...

TAKESHITA: -- especially on the technology side. Unfortunately, all the money, as you know, the debt to GDP that we all often talk about, all these money were spent on some very low multiplier type of economy situation, in other words, something that would not create further growth nor jobs, but basically feeding the vested interests of those people who want to sustain the current conditions, which really isn't advancing at all, as you can see in the past two decades.

QUEST: But to -- to Mr. and Mrs. what -- whatever would be on the clap of omnibus (ph) in Tokyo...

TAKESHITA: Yes.

QUEST: -- or Sakkio or Kyoto...

TAKESHITA: Yes.

QUEST: -- they're not feeling the pain. They have a good standard of life. They may worry about pensions and Social Security 20 or 30 years down the road, but they're not seeing the cutbacks.

TAKESHITA: It's the slow pain. And, unfortunately, it might take time. And when they do realize, it's going to be too late. You know, let's face it...

QUEST: Why are you so sure that it is going to be too late?

TAKESHITA: Well, it is going to be too late by the time they realize...

QUEST: Yes...

TAKESHITA: -- because I think we're already two decades behind making that transition. And I think today's figure, as you just dictated, shows that we aren't doing our homework.

QUEST: a final point, we do need to just deal with the latest numbers, that fourth quarter down .3. It should have been down .6. So it was better than expected...

TAKESHITA: Yes.

QUEST: But should we worry that it was down?

TAKESHITA: No, not really. In fact, it was better than expected. In fact, considering a very, very strong summer and also these eco points -- these subsidies running out, I think it was not a bad quarter at all.

QUEST: So back to full growth in this quarter?

(LAUGHTER)

TAKESHITA: Better than expected. Quarterly earnings are very good. That's very encouraging.

QUEST: That just means they're building up bigger trenches of reserves.

TAKESHITA: Well, corporates -- yes, well, that's true...

QUEST: That's trillions...

TAKESHITA: You were...

QUEST: -- that are sitting there.

TAKESHITA: We are talking about -- we were talking about a much more long-term transition story...

QUEST: All right.

TAKESHITA: -- but it's good to have corporates...

QUEST: Right.

TAKESHITA: -- Japanese listed companies showing good earnings, a good, stable plateau.

QUEST: We thank you.

Many thanks.

Now, South Korea's biggest snowstorm of the century has buried several cities in the east of the country.

Guillermo is at the World Weather Center with more on that.

GUILLERMO ARDUINO, CNN METEOROLOGIST: Richard, you know, Seoul is OK. We were lucky. That's a big if. But look at what's going on and what was going on all across these cities in the east. You're going to see, this is a major snowstorms. I mean the amount of snow in this case, it's really bad.

And we are coming out of a period of extremely cold conditions.

So record lows that we had in the area. This is a pattern. The low is going to bring some snow in Japan, especially in the higher elevations. And now come the winds, especially into Korea. So we are going to see those temps that are like min -- minus eight right now are going to feel much colder. And look at Beijing, minus 10. Cold in Hong Kong, it's in the middle of the night.

But we are going to see those cold conditions prevailing.

While, in the United States, pretty nice. You know, if you are coming to the States, our viewers who are coming to the States in the next days, this is what we see, above average temps in the central parts of the country, normal overall. Except in New England, where we have colder conditions. But the pattern for the next two months or three months.

So if you're planning to come to the States in the next three months, this is what we are seeing -- above average temps like what we see right now here in the south and the central parts of the country, below average in Seattle, Portland, even in San Francisco. Equal chance all across the rest of the United States.

So it's not looking that bad at all, though the cold still prevails because we're in the dead of winter.

Now, in Europe, the cold stays in Russia all the way to the east. But look at what's going on in other sections. The winds are abating, especially in Britain. And so we are going to get some more rain showers. We see snow right now in Vienna and then in other places here, Sarajevo, for example, reporting some rain showers. Dusseldorf reporting rain showers, too, in Germany.

But we will see OK conditions. It's not cold anymore. It is mild. The winds are going away in Britain. So we may not see problems at the airports despite the fact that we still have some winds into Dublin and Copenhagen. But, hey it is much better.

The cold that we have seen before is now taking a little bit of a break. We're getting some rain in the west, the cold in the east everywhere else, especially in Italy. The weather is going to be fine.

As per the United States, we see some breezy conditions in New York and Atlanta and that's about it.

And, Richard, I'm curious, are you nice -- did you get nice weather in Italy when you were there?

QUEST: Rome this morning, Guillermo, was absolutely delightful.

ARDUINO: What did I tell you?

QUEST: It was -- it was -- it was beautiful.

ARDUINO: What did I tell you?

QUEST: And London today is a treat and a pleasure. I'm back in Rome next week, so just do your magic.

ARDUINO: OK.

QUEST: I have the necessary money...

ARDUINO: Are you happy...

QUEST: -- and (INAUDIBLE).

ARDUINO: -- with my forecasts for Rome finally or not?

The city and the weather.

QUEST: That's -- this is -- whoa, whoa, whoa, whoa, whoa, whoa. Let's see what you do next weekend before we start handing out the...

ARDUINO: All right.

QUEST: -- the accolades or plaudits.

ARDUINO: All right.

See you.

QUEST: Guillermo, many thanks, indeed.

ARDUINO: Thank you.

QUEST: Now, in about 12 minutes from now -- and I'm not talking about Guillermo -- he's a billionaire real estate mogul and he's a television star and Piers Morgan's one time boss.

Will Donald Trump add another title to his resume?

Find out, "PIERS MORGAN TONIGHT." It's just in about 10 minutes, after QUEST MEANS BUSINESS.

When we are back after the break, Barcelona is a gadget battleground at the moment. Rival mobile device makers are going head-to-head at the industry's biggest annual showcase, the World Mobile Congress.

(COMMERCIAL BREAK)

QUEST: Smartphones and tablet technology are front and center at this year's mobile trade show in Barcelona. The biggest buzz at the show, of course, is what Jim Boulden has sent us this report about.

(BEGIN VIDEOTAPE)

BOULDEN: With Smartphone sales soaring, of course, and the very popular Android system by Google all the buzz here in Barcelona, there's still a lot of talk about Nokia's decision last week to not go with Google Android's operating system for its mobile devices and instead getting in bed with Microsoft, with its Mobile 7 operating system.

But this week's Mobile World Congress in Barcelona was knocked off by Sony Ericsson with the unveiling of its PlayStation Phone.

BERT NORDBERG, CEO AND PRESIDENT, SONY ERICSSON: We give you the Xperia Play.

BOULDEN (on camera): Is this the killer app for you?

Is this what's going to put you back on the map?

NORDBERG: Yes, I think it's a -- it's a door opener to new customers. We -- we start the annual review on the 1st of April now last year.

BOULDEN: Yes.

NORDBERG: We have taken 40 percent market share in nine months and still counting. With think this will help us to get other models in to operate, also.

BOULDEN: With terms like 4G and augmented reality and ecosystems being bandied about here in Barcelona, for many consumers, it's about apps and BlackBerry announced a new travel app on Monday.

IAN BERMAN, WORLDMATE: This is where you search for the hotel. It knows where we're standing right now. And if I click here, you will get all of the hotels. It is a travel application that does everything from manage your itineraries to being able to find which of your colleagues are in town with you to actually booking that last second hotel.

BOULDEN: Another thing people here are talking about, of course, is the cloud. You can either see the word or the symbols everywhere.

We asked a few so-called experts what exactly is a mobile cloud.

UNIDENTIFIED MALE: It's a virtual way of storing stuff, kind of in the air, essentially, hence cloud, I guess.

UNIDENTIFIED FEMALE: That's a little surprising question, I guess. So cloud computing, to me, is the ability to have architecture and applications in a remote location that can be accessed from anywhere.

UNIDENTIFIED MALE: So what consumers get is they get access to a richer set of applications and services because the applications can build more effectively and more quickly and the average consumer gets much richer user experience out of those applications.

BOULDEN: Of course, in the end, shows like this are all about you, the consumer, spending more money on the newest, latest, fastest Smartphone or tablet, spending more money on downloading apps and getting ever higher data usage.

Jim Boulden, CNN, Barcelona.

(END VIDEO TAPE)

QUEST: And, of course, everyone is watching Nokia, having had its announcement with Microsoft. And Nokia's stock had another seriously tough day.

Look at the way the share price has reacted over the past few sessions. Go back to 10th of April and down it goes, that very sharp fall after the announcement. It slid more than 5 percent just today.

Nokia extended the losses in Helsinki trading. Some analysts have now cut their ratings on the stock. Nokia is the world's biggest mobile phone maker, but they've been slapped down consistently ever since, back on Friday, the -- the company announced its un -- its strategic tie-up with Microsoft and Microsoft Windows 7.

The mobile phone giant is adopting the Windows 7 operating system for all of its Smartphones in the future, part of that broad partnership with the U.S. software giant.

Investors seem to think Microsoft got the better part of the deal. Nokia is calling it a third ecosystem to go behind, of course, Apple and Android.

On Friday, I got the chance to speak to the head of Nokia, Stephen Elop, along with Microsoft's chief executive, Steve Ballmer.

Now, of course, because of events in Egypt and the breaking news there, we weren't able to bring that interview to you on Friday. But, frankly, everything we talked about on Friday is just as relevant today. For instance, asking Stephen Elop of Nokia what does he mean when he uses this phrase, ecosystem?

(BEGIN VIDEOTAPE)

STEPHEN ELOP, CEO, NOKIA: What I mean is that we must deliver the best user experiences to consumers. Today on your mobile device, that experience is not only the hardware or even the software on the device, it's also the services, whether that's entertainment, music, search, advertising, mapping, location-based services -- the whole collection of capabilities. It's all of those things working seamlessly together that define the user experience. And it is that to which we refer to as the ecosystem.

QUEST: And Steve Ballmer, we're seeing in Egypt, we've seen in -- we saw in Tunisia, we've seen a revolution taking place amongst people and technology is often driving this revolution.

Now, without being political, obviously, but you can see now, surely, the role that companies like yours and Nokia's and all the technologies are playing in this global revolution taking place.

STEVE BALLMER, CEO, MICROSOFT: The world is very transformed by that availability to express one's self, to hear what others are saying, to hear from the crowds in addition to -- to sort of the select few. And certainly speaking on behalf of Microsoft, we're happy to play a role in an industry that is so important and -- and so empowering for people.

ELOP: And if I may add to that, the mission of Nokia, for many years, has been able connecting people. And by that we don't mean just making phone calls happen. We mean connecting people with opportunity, their communities, the activism in their community, all of those things.

QUEST: Stephen Elop, the world is replete with companies which lost their way, became irrelevant and eventually disappeared. I'm not suggesting Nokia is in that category by any means. But it is upon your shoulders to turn this thing around.

Can you do it?

ELOP: Nokia has a proud, 145 year history. And at many points during that 145 years, Nokia has demonstrated that it's a great company, because great companies know how to recognize moments of disruption, they recognize the need to change at that time and they always come out stronger on the other side.

Just 15, 20 years ago, Nokia was barely a mobile phone company. It was into tires and toilet paper. Look at it today. We're at another such -- another moment. And we have in our DNA the ability to transform once again.

(END VIDEO TAPE)

QUEST: Two top chief execs, Steve Ballmer of Microsoft, Stephen Elop of Nokia.

Now our weekly segment, Q&A, returns on Thursday, full of vim and vigor. Q&A is Quest and Ali Velshi. And the object is you choose the topics and we give the answers. Ali and myself will battle it out to see whose explanation you like best.

And then, of course, there will be the little quiz for us to actually sort out what's what and who wins. It's at CNN.com/questmeansbusiness and send us your talking points.

I'll have the Profitable Moment after the break.

(COMMERCIAL BREAK)

QUEST: Tonight's Profitable Moment.

There's never been a more exciting time, perhaps, in the mobile phone digital business. Now, whether you are an iPhone lover or a Windows supporter or you go gaga over Android, anyone who's tried to use multiple devices using these different operating systems knows it's a real problem and a pain. My Palm, my BlackBerry, my iPad, my PC -- look, they all talk to each other in a sort of roundabout, convoluted, higgledy-piggledy, bit of an odd sort of way.

Now, to get the best, I should, of course, go with one operating system. And that's behind Nokia and Microsoft's announcement and why it's so significant.

Everything now surrounds the idea of using one ecosystem.

Except do I really want one system to do it all?

How much independence am I prepared to give up for maximum convenience?

With these latest announcements, I promise you, we're entering the next stage of a digital revolution and the battleground isn't how things work, it's how many things work that way.

And that's QUEST MEANS BUSINESS for us tonight.

I'm Richard Quest in London.

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

"PIERS MORGAN" after the headlines.

END