Paul Krugman sums up the possibilities:
I agree with Professor Krugman--it's hard to see this presaging a sovereign debt default by, say, the United States. On the other hand, emerging markets are subjects to runs on their currencies, and debt, and I'm not so sanguine that we won't see effects there. We might get a split in sovereign debt prices, with developing world debt being shunned by investors who have suddenly remembered what a risk premium is, while US debt and that of other developed countries becomes more valuable. A positive movement in US bond prices agrees with that theory.First, there's the view that this is the beginning of many sovereign defaults, and that we're now seeing the end of the ability of governments to use deficit spending to fight the slump. That's the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.
Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.
Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.
At the moment, I'm leaning to a combination of two and three. For what it's worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn't raised expectations of default.
Which is not to say that this won't hurt us. The global economy is not really robust enough to stand up to repeated blows. Presumably that's why stock indices are off on worries about what follows.
"I agree with Professor Krugman--it's hard to see this presaging a sovereign debt default by, say, the United States."
Of course not. Dubai World is a Muslim sukuk. It cannot print money. It has to earn money.
The Federal Reserve most certainly can print money. It is doing so at this moment (by purchasing itself US issued T-bills that nobody else wants).
Ergo ... it is impossible for the United States to ever default.
(by purchasing itself US issued T-bills that nobody else wants
Yeh, no one wants them that's why they yield 0.02%.
They yield .02% only because of Fed purchasing - which artificially creates demand. That is the entire point.
The Fed is purchasing T-bills because there is not enough demand in the debt markets to finance the pace of US government spending.
More of it has to do with a flight to quality.
If so many people want to buy US debt, then why is the Fed printing money (creating inflation) to buy it?
Fed printing money (creating inflation) to buy it?
The BOJ has been printing money for 20 years now and it hasn't triggered any appreciable inflation.
If inflation is no problem, then why forgo taxes and finance all of the federal budget by having the fed buy t-bills.
If inflation is no problem, then why forgo taxes and finance all of the federal budget by having the fed buy t-bills.
In a deflationary environment that would be perfectly sensible.
Prices fell by 25% from 1928 to 1933 - suspending taxation and just printing money in 1930- 31 might, and very likely would have, stopped the depression in its tracks.
jmo3: Good idea, actually.
Megan: The dirham is pegged to the dollar. Therefore, Dubai has dollar obligations which it cannot meet if it does not have sufficient money in its bank account.
All US Govt obligations are in US$. When they were issued, they were bought with extant dollars. Meeting them merely involves reversing the initial transaction. The US Govt is a monopoly issuer of the US$, therefore CANNOT default.
Is it too much to ask that you get the first thing correct in talking about this issue?
I have to second jmo3 here. If we'd had Friedmanists back then the Great Depression might have been remembered as a fairly typical recession.
The US Govt is a monopoly issuer of the US$, therefore CANNOT default.
Well, in theory we could refuse to pay. Extremely unlikely, of course, but maybe someone could concoct a barely conceivable scenario in which revenues fall off a cliff and default seems preferably to hyperinflation.
True, as far as it goes - but the price of gold represents a flight to quality, too, and I'm not sure I'm happy about that.
The Fed has printed money for a long time, this is true, but surely we can differentiate between the pace 10 years ago versus today.
Plus, the "baby boom" boogeyman is becoming less and less hypothetical.
The same generation that borrowed to fund ineffective "social programs" now will vote to borrow to fund the retirement that they themselves were too cheap to fully fund, thus throwing me and my children under the bus for their own selfish desires.
I don't see a pretty ending here.
Isn't the real problem that our banks - in the USA and in Europe - still have not enough capital to absorb the write-downs that are likely to come from other places after Dubai? If the banks had enough capital, the markets could be expected to take a Dubai sized disturbance in their stride.
Our famous 'stress tests' really only established that US banks had enough capital to get by rebuilding balance sheets in a slow but reasonably orderly recovery, with few nasty surprises. Dubai has reminded us that the last assumption was and is odds-on to be unrealistic.
I'm not sure they established more than political cover, plus buying time while regulators figured out how to spin things.
"Emerging markets" is a little too broad a term if it is going to be used to describe both over-levered little principalities such as Dubai, and a real country such as Brazil, which is running primary budget surpluses, and whose biggest financial worry at the moment is slowing down inflows of foreign investment.
Dubai received a large amount of the TARP bailout funds ... WOW we could takeover and do some nation building without a war ... what a concept.
This is much ado about nothing. It augurs nothing for emerging markets in general. There will probably be a very short price movement in emerging market bonds, as nothing more than a trading effect. I'm sure there are algorithms that are poised to jump on "market inefficiencies" -- i.e. when the price movements of highly correlated bonds suddenly diverge.
But after a week or so, it will be seen that Dubai's troubles have little to do with Singapore or Brazil or Turkey, and things will go back to normal.
Stock markets were down out of fear that this represents yet more bad debt on bank balance sheets.
My opinion is that Dubai asked for the extension until May to give them time to beg Abu Dhabi to bail them out. And Abu Dhabi will end up bailing them out. But first they want Dubai to sweat. In the end, Abu Dhabi needs Dubai and it knows it.
Admittedly, though, I am not particularly well informed about the internal politics of the UAE, so this is a lot of speculation mixed with a little bit of information.
Who carries the debt? 80 billion or so?
Derek
Mostly European banks, I think. Not sure.
If they were smart, they'd hold onto it instead of writing it off. Like I said, I think Dubai will eventually get the money from Abu Dhabi. This is just the equivalent of Dubai getting grounded.
There is a lot of room for pain between devaluation and default. Surely the US will not default in the next ten years, but in the next fifty? Certainly. Fifty years may seam like an eternity, but many of us will be alive to see our country finally degenerate into a developing nation. What decadence will the liberals deride us for then?
OK, Nostradamus. Got it. Disaster will strike in 50 years, and it will be the liberals' fault. For all we know, we might all be slaughtered by Skylab by then.
But conservatives have been predicting doom and destruction from liberal policies for generations. First, unions. Then the minimum wage. Then the New Deal. The Medicare. Then Clinton. Hasn't been true before, and it won't be true now.
I have to agree with Krugman here.
I'm not sure this really means anything. I never understood why they thought they could make money doing what they were doing. It always seemed more like a status statement -- look what we can build! -- than a real investment.
i wonder if this will improve Sharjah's "standing" in things. Sharjah was always the "wild west" of the middle east. lots of shifty female russian 19 y/o "entertainers", lots of gun trading etc. It was always derided as the down-market, hick cousin w/ a bit too strong a libertarian bent for the hoighty-toighty to feel safe depositing their $$$.
Now, it's pretty clear guns and vice are countercyclical and their merchants are relitively immune to high finance oscilations. The enfent terrible as the new wunderkid? just a thought....
@muzzybelly,
Don't be so cavalier about it. All of the things you cite have played a role in finding ourselves where we are now.
When the final tally is in (whenever that may be), Roosevelt may be seen as nothing more than the father of big government.
Where we are now is the richest nation on the planet.
Things look bleak right now primarily because 1) two wars sapped our Treasury of about $1T and 2) a massive financial crisis essentially wiped out five years worth of growth (which was largely illusory, it turns out) in half a year.
I'm not one to blame the conservatives for everything that happened in the housing bubble. I'm in the "China helped caused it" camp. Regulatory arbitrage as in AIG isn't really attributable to liberals or conservatves, and has as much to do with cross-border effects as anything else. Deregulation played a massive role.
The New Deal, Medicare, Clinton tax policies, minimum wage . . . none of those things had anything at all to do with the financial crisis.
The Dollar economy was levered 50x in 2007 and the debt incurred then is now like a high water mark on the beach. Debt is like a force of nature. In a 10x levered economy there will never be enough economic activity to pay down the principal. Every foreigner who leaves their BMW at the airport and goes home is delevering this high water mark of Cheney World.
The Emirates did put up an impressive ad campaign in the San Francisco BART stations a few months ago. The gold palm trees should have been a "tell" on the desperate state of their finances.
One interesting question: will Halliburton now be moving its headquarters back from the future to the old "has been" USofA? Dallas is dull but then security in the Middle East can get a little uneven when the Indonesians and others are no longer getting paid.
If they had been allowed to take over management of our East Coast ports would they now be selling off the rights to our national security to the Chinese in order to raise cash? When ambitious foreigners try to buy our assets with leverage that is barely disguised bank fraud are we required to be culturally sensitive?
Finally, the timing was surely interesting. Reminded me of Societe General unwinding its $ blns equity loser on MLK Day or Iceland's bank fraud imploding over Labor Day weekend. American investors take vacation at their peril. London markets were open, though, and cleaned up on the desperate "stoploss" order flow. Banking as casino. Money flows from the weaker to the stronger hand. And London has a century more practice than New York at this international game.
If they had been allowed to take over management of our East Coast ports would they now be selling off the rights ...
The usa would be able to buy it back at a fraction of the price making a huge profit.
Just like a lot of those "family jewel" assets that were snapped up by the Japanese in the late 1980s, only to quietly return back home at 50 cents in the dollar.
When another country is on a foreign investment bender, only the stupid/paranoid let racism stop sales at what the locals know is way over the fundamental value.
You seem to be suggesting that that the management of our container ports in New York and New Jersey is essentially equivalent to owning Pebble Beach? Really? Only in the most trivial sense, I think. I would also say that the inability to manage money is pretty good indicator of a likely lack of competence in managing other kinds of risk. Allowing Dubai Ports World to take control of essential infrastructure, even with the expectation of realizing a 50% return in three years when it reverted back to us through the firm's incompetence strikes me as just the kind of investment genius that got Wall Street where it is right now. At Pebble Beach mismanagement would constitute letting the grass get too long. just sayin'.
-the stupid/paranoid racist.
Well, I was right: looks like Abu Dhabi did come to Dubai's rescue, per NYT. I'm surprised. I thought they'd make Dubai sweat for at least a few weeks, not just a couple of days.
But maybe the goal was only to shame them. I don't know UAE culture. But everyone who was predicting global catastrophe looks a little bit silly now, I think.
Watch for the pattern. Bad economic news of some kind will be announced on the first day of a long weekend, preventing panic selloffs in the market, and allowing a few days for the parties to come to some kind of agreement.
It wasn't Dubai debt. It was a frightened herd in the marketplace. Imagine on a working day everyone sending emails on their blackberries to one another that Dubai defaulted. It could produce something akin to a run.
Blame Canada.
Derek
"none of these things had anything at all to do with the financial crisis". They very much have to do with where we find ourselves. But, you're obviously an idealogue and, as such, a waste of time.