Ed Chancellor: Why Dubai’s debacle does matter
Interesting piece, from one of my favorite writers and author of Devil Take The Hindmost.
CLick Here: Ed Chancellor: Why Dubai’s debacle does matter
Introduction (Via FT)
After an initial shock, conventional wisdom is downplaying Dubai’s mishaps. After all, the losses involved are tiny compared with trillions of dollars of red ink spilled over the past couple of years. Analysts have been quick to point out that the emirate, with $50bn (£30bn, €33bn) of gross domestic product, is a small fry in the vast oceans of global finance. This is to miss an important point. Size is not always what matters. Dubai’s debacle demonstrates how loose liquidity conditions when combined with grandiose state-directed economic development produce a potentially toxic mixture.
Many commentators initially dismissed losses on subprime mortgages because of their relatively small share of the US mortgage market. Yet the subprime fiasco turned out to be significant because the irresponsible practices it revealed turned out to be commonplace.
Additional Excerpts
There is a country on the other side of Asia, whose currency is also pegged to the dollar. Although its economy is expanding rapidly, short-term interest rates are below 2 per cent and the money supply has grown by 30 per cent over the past year.
This country is experiencing a real estate boom. Reports tell of a newly constructed ghost city with dwellings for a million people. Speculators are reportedly snapping up luxury developments, which remain unoccupied long after completion. Despite a 20 per cent vacancy rate in the capital city, new skyscrapers are being planned.
Conclusion & Key Point:
In short, economic conditions in China have much in common with those that prevailed until recently in Dubai. The population of China is roughly a thousand times greater than the tiny emirate’s. For this reason alone, the lessons from Dubai should be heeded.
