The Debacle in Dubai

November 27, 2009

I was a guest on two shows, BBC News' "World News Today" and Fox Business News' "Cavuto," where I discussed the fallout from news that Dubai will delay repayments on $60 billion of debt from its investment company, Dubai World (videos embedded below).

As I see it, the turmoil that has occurred in global markets over the past 48 hours essentially confirms that investors in risky asset classes have not made allowances for surprises -- or even predictable events. In fact, it seems pretty clear that during the past nine months or so, many people have (again) come to believe they can achieve high returns with little or no risk.

Dubai's effective default also shines a light on another concern that economists, policymakers, and permabulls have largely pooh-poohed: the scale of and, especially recently, the rapid rise in public sector debt loads and the long, dark shadow these obligations cast over the economic and financial landscape.

Not surprisingly, as with the subprime crisis, clueless "strategists" are already suggesting that because of the sums involved (the ones we know about, at least) and the relatively small number of banks that are directly affected, the fallout will be limited -- remember the 2007 buzzword, "contained"? -- and that recent developments will be shrugged off. Yeah, right.

But in reality, the Dubai debacle underscores the fact that many consumer, corporate, and public sector balance sheets around the world remain impaired or overextended, despite -- or because of -- the rescues, bailouts, stimulus programs, and monetary easings that have occurred so far. In the end, this state of affairs represents a major barrier to any sort of meaningful recovery.