Sebastian Mallaby: A bad omen in Dubai

Posted by Kendall Harmon

The threat of sovereign defaults, disowned state-company debts and continuing commercial real estate troubles comes amid a recovery that is extraordinarily precarious. It is based on fiscal stimulus from governments, but government debt ensures that this game has to stop at some point. It is based on the printing of money by central banks, but a combination of political backlash and inflation fears will eventually close down this game also. To rescue the global economy, governments have exacerbated the flaws responsible for making the system weak. China has too much export capacity; it is building more. China has an undervalued currency; it is weakening further. Meanwhile, the United States has a low national savings rate and is home to financial behemoths that are "too big to fail." But the U.S. government has been forced to add to the public debt and broker consolidation in the banking business.

Given these troubles, Dubai should have been a wake-up call. Instead, global stock markets have risen since last weekend. We are witnessing the sort of rally that chart-watching traders know well: the kind where investors shrug off most bad news, so you might as well jump on the bandwagon. When this mentality sets in, prices inevitably rise too far. At the end of the trend there is usually a bubble.

Read it all.

Filed under: * Economics, Politics • Economy • * International News & Commentary • Middle East

5 Comments
Posted December 4, 2009 at 7:47 am [Printer Friendly] [Print w/ comments]



1. Intercessor wrote:

The threat of a global economic Depression has never gone away or receded. The Gov’t spin it is just prolonging the inevitable until real job growth and debt relief are actually taking place.
Intercessor

December 4, 10:03 am | [comment link]
2. Phil wrote:

The Dubai debacle isn’t surprising.  For the last decade or so, the government/quasi-government has been building up cities from scratch, including creating massive, artificial islands in the gulf, raising huge skyscraper after huge skyscraper, and subsidizing massive companies into creation from scratch, such as Dubai Aerospace Enterprise.  Not exactly demand-led, unless millions of sophisticated office workers appeared at some point ex nihilo in the UAE that we don’t know about.

Like the ridiculous home prices in the U.S. ca 2003-2008, it should have been obvious this was headed for a bad end.  It’s an enduring mystery to me how speculative bubbles of this level of absurdity can continue to happen.

December 4, 10:36 am | [comment link]
3. Pageantmaster wrote:

Of course it is not Dubai that has a problem so much as Britain.  It was our banks who invested in major enterprises, believing that the ruling family would not allow them to fail.  The Dubaians have been quite canny and let other people back their grand plans.  Oh well, more taxpayer money I suppose.
http://dealbook.blogs.nytimes.com/2009/11/30/british-banks-may-feel-most-pain-if-dubai-defaults/

One trusts that this is one bad investment the Church of England has not made…..................................................have we?

December 4, 10:46 am | [comment link]
4. Chris wrote:

“It’s an enduring mystery to me how speculative bubbles of this level of absurdity can continue to happen.”  hubris, Phil, hubris.

A friend of mine was in Dubai this week and he said it reminded him of LA.  Hmmmm…..

December 4, 12:02 pm | [comment link]
5. Sick & Tired of Nuance wrote:

Say, that’s a neat trick.  Borrow huge amounts of money, build palatial cities in the dessert (along with all the infrastructure to support them) and then default on the debt.  It must be nice to be a government.  I hear that California has given that same trick a whirl.  Hmm, I wonder if Dubai is “too big to fail”?  Perhaps the US taxpayers should bail them out, too.  Why not, we have given debt certificates…er, I mean dollars, to everyone else; why not bail out Dubai along the way?  Think of all the good will that would generate on the Muslim “street”.  They would have to love us then!

December 5, 10:48 am | [comment link]
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