Filed under: Economics
I’m sure there’s a lot I’m not getting here, but I’m baffled by the idea that large numbers of investors would be shocked and panicked at a Dubai World default, and that this poses a risk of a new Great Depression. Kevin Drum cites John Judis’s piece from a few days ago (“You have to remember that the Great Depression only became ‘great,’ that is, global, when an obscure Austrian bank went under in 1931, and set off a massive financial explosion around Europe.”), and spins out the current analogy:
The nightmare scenario is that something like Dubai World panics investors and sends them fleeing back to quality; Eastern Europe can’t roll over its debt; Brazil goes kaboom as hot money suddenly stops flowing; Western European banks start to fail; etc. You can fill in the rest.
This is certainly a nightmare, but here’s the difference between Dubai and other emerging economies like, say, Brazil: Dubai doesn’t have a real economy. Dubai doesn’t produce anything. Not even oil. The entire Dubai experiment was, as Paul Krugman put it the other day, a huge CRE play. The one thing Dubai actually has is a very successful port management company, Dubai Ports World, and that has been separated from the rest of Dubai World for the purposes of the restructuring because it’s still a healthy company.
It was always clear that Dubai was a crazy instantiation of fantasy money run wild, and that if any polity ought to have been leveled by the GFC, it was Dubai. For that matter, the news of Dubai’s implosion has been streaming out since the beginning of this year — tales of empty malls, luxury hotels cracking and subsiding into the Gulf, unemployed expats living out of their cars and desperately hunting for makeshift employment to avoid debtors’ prison because they’ve defaulted on their condo payments. So why would global investors respond to the rather predictable bankruptcy of Dubai World by disinvesting in the healthy, growing economies of the developing world where half the world’s products are actually made these days? I realize that global investors are, as a herd (rather than individually), as stupid as wildebeest. But how stupid does a wildebeest have to be to panic at the sight of a housecat? If Dubai World really does touch off a new flight to quality and definitively crash the global economy — if global investors really are that incapable of distinguishing between a make-believe economy like Dubai and a real economy like Brazil — it seems like a very conclusive argument for strong capital controls.
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