The US sneezes and Dubai catches a cold!

Last week, when most Americans were busy eating turkeys, the world was hit with news that Dubai, one of the seven emirates in the UAE, now seems to be defaulting on its debt, rattling global markets. This photo feature in the NY Times presents a dark, but interesting picture of the situation.

Dubai had invested tens of billions of dollars in real estate, construction and other activities in a bid to lessen its dependence on oil exports. Diversification is not a bad way to hedge risk, financially speaking. But as they are now learning, dependence on real estate and construction, financed by inflationary credit is not really hedging. Wait a minute! Didn't the US already prove that to the world?

True, but a big difference is the strengths of the two economies - while the US economy is built on a strong foundation of innovation, financial endurance, technological brilliance and entrepreneurial spirit for more than a century, Dubai's is primarily that of an oil merchant, with a spattering of other businesses trying to take shelter in its tax-friendly shores. Dubai has merely exploited natural resources and has been importing talent from abroad with little skills and knowledge-transfer to drive its economy. In other words, the US can catch a cold, close a few banks, foreclose a few homes and survive the swine flu, but Dubai might not.

Also, given its heavy dependence on the US and Europe, this should not have been a surprise at all. Alas, the learning probably came too late for the Arabs.

It is difficult to say with certainty at this point what the repercussions will be. The most likely scenario is that the damage will be largely limited to the Arab Middle East as most of Dubai's dealings are made according to the principles of Islamic finance (which non-Muslims have limited stakes in) and that the repercussions for the rest of the world will be limited. However, a small risk exists that the problems will spread through indirect mechanisms to the rest of the world - definitely India and Pakistan whose expatriates have flooded the Gulf for years.

But, given Dubai's control over the oil supply of the World, it is only a matter of time before a bail-out package arrives from Washington DC, funded by the taxpayers of the US, for a lifetime supply of cheap oil - from Obama with love!

Kapitalism

When Obama made his now famous quote - "Let's spread the wealth", he was branded a communist by the McCain campaign. Later that night McCain voted in favor of a 750 billion relief package, as part of which the government bought significant equity in ailing banks. You might dismiss the development as a drastic measure that is needed in drastic times, but it is hard to ignore the fact that the the world's most prominent practitioner of capitalism has steered away from the very essence of free market ideologies, whether or not it openly acknowledges it.

The debate between free market vs. state control has been raging since the times of Adam Smith and wars have been fought on it. But one look at the two countries involved in the Cold War, conveys a paradigm shift in their market beliefs. While communism collapsed in the erstwhile Soviet Union and Russia has since become the cradle of capitalistic debauchery, the US has opened the iron curtain to communism, if not openly embracing it. In fact, the current economic crisis has been so devastating that once-cherished assumptions about the superiority of the U.S. economic model are now in doubt. Talks are also underway regarding a 25 billion relief package for the Big 3.

Call it industrial policy, or use the euphemism of "public-private partnership." But as America emerges from the rubble of the credit bubble and soberly confronts the task of building a strong, sustainable economy, the new credo will likely be "whatever works." The lawmakers of the country have slowly realized that this is not the time for ideologies, but desperate decisions, but subconsciously they also have to accept that no perfect theory can be practical. The middle ground, which America often refuses to take, is often the right answer. As the saying goes - it doesn't matter if the cat is black or white, as long as it catches the mice.

Thank You

I want to thank every person who has visited my blog in the last 3 months. The number of visits has crossed 1,000 as of 10/3/2007 and the site has logged its 300th unique visitor (No, it is not me clicking away to make up the numbers; I have excluded my IP addresses from all counters). While visitors from the US and India contribute 50% of the visits, followed by Australia, Canada and UK (25%), it has been very encouraging to see visitors from countries like Poland, Russia, Cyprus, Lithuania and Romania logging a significant number of visits. The site has also achieved significantly high organic rankings (as high as #3) on high traffic keywords on Google. The highest # unique visitors on a single day so far has been 35, recorded on 9/27; apparently Google likes people blogging about it.

Happy Reading!

Sincerely,
Naga