DAVOS - At nine in the morning, they settled down for their annual bout.

It has become a tradition. Every year they are the ones who begin the first discussion at the Davos Conference, which is devoted to projections for the year to come.

On the right sits the Davos bear, Steve Roach, the chief economist at Morgan Stanley. Bears in market jargon are pessimists.

On the left is the Davos bull, Prof. Jacob Frenkel, formerly the governor of the Bank of Israel, then the vice chairman of Merrill Lynch, and today the vice chairman at insurance giant AIG. Bulls in the argot are people who believe the markets will rise and the economy will grow. Frenkel has been fulfilling that role at Davos for quite some time. The question isn't only one of zoological affiliation, but whether one's forecasts come true or not.

Roach made headlines with his dire predictions of crisis and depression in the U.S., but actually, Frenkel's optimism was what won. America's economy recovered faster than expected from the stock markets' collapse and the wave of terrorism; within two years it was back to driving the global economy.

The slap of reality made Roach more cautious. Putting off his trademark pessimism for 2005, for the year 2004 he predicted rapid growth thanks to expansionary fiscal and monetary policy.

But on Tuesday, with 2005 having already begun, Roach waxed strident again. American consumers are an accident waiting to happen, he thundered. U.S. real estate prices are inflated and Americans are taking mortgages to buy DVDs from the Chinese. The Chinese sell the DVDs for dollars, which they invest right back in America, so the Americans can continue buying their DVDs. It is a vicious circle, Roach declared, and a dangerous way to run the world economy.

American consumers are relying on their assets, mainly residential real estate, which is a market clearly entering a bubble phase. The American consumer relying on these assets is the weakest link in the global economy, Roach explained.

The only question that remains open, he concluded, is when the music will stop.

He thinks he knows: when U.S. interest rates start climbing and the American consumer stops buying DVDs and starts saving.

And then Frenkel surprised the audience.

Shorn horns

Frenkel abandoned his traditional role as the Davos bull. He declined to predict American economic growth rates, or consumption habits. He settled for warning the world that the gargantuan American deficit is a threat to the entire global economy.

"The deficit itself is not the problem," he explained - the problem is that the American government is not doing anything about it.

The entire economic debate has been focused on the dollar's exchange rate, but the problem is not the exchange rate, it is the fundamental problems of the U.S. economy, mainly the low rate of savings.

When will the music stop? "The music of the global economy does not stop," Frenkel needled Roach, "it just changes." Today's engine can become tomorrow's caboose.

And what will be tomorrow's engine driving the world economy? Here is where Frenkel turns bullish again; thing is, it's for China. "I am highly optimistic about the Chinese economy," he said, saying it should continue to grow in 2005.

Roach was pleased as punch, saying how glad he was that for the first time, Frenkel agreed with him.

The one who wrapped up the debate was the Financial Times commentator, Martin Wolf, who said the year 2004 had been an amazing one, ending with the highest global economic growth in 30 years. But in the euphoria, nothing had been done to amend grave structural problems, he warned.

Many of the managers and economists clustering at Davos are concerned about exactly that. The time has come to address these structural problems, or the price to be paid will be heavy indeed.