Why I'm (Cautiously) Optimistic About The Future

I admit that of late my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they're going to serve up a lot of economic pain.
But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. This week we look at why 2007 will not be the good old days we will yearn for in 20 years, after we briefly visit Dubai and the latest unemployment numbers.

While we in the US spent our Thursday eating turkey and watching football, the rest of the world's markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt.
This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?)
And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. Friday the US markets experienced their own sell-off, though not as deeply as the rest of the world.

As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US Treasuries, everything else went down.
Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?

To get an answer, let's look at some facts about Dubai. It is one of the Arab Emirates; but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing.
It is a small country, with a little under 1.5 million residents, but with less than 20% being natural citizens - the rest are expatriates. The gross domestic product is around US $50 billion.

(Note: I used this source, and then converted the currency. I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)

Dubai has become a byword for thinking large. The world's tallest building, underwater hotels, the largest manmade islands (plural), indoor snow skiing in the desert... For links to more information try this from Wikipedia:

The large-scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world, such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world's second tallest, and most expensive hotel, the Burj Al Arab.

UBS suggests that the $80-90 billion in debt may not include rather large off-balance-sheet debt (where have we seen that one?). So, a country with a GDP of $50 billion borrows $100 billion.
They build massive projects, which are now among the most expensive real estate in the world. The latest manmade island plans for one million people to buy property there. Seriously. Talk about Field of Dreams.

Then came the credit crunch. Property values dropped by as much as 50%. Sales, say the developers in understatements, have slowed.
Seems there was a lot of debt used to speculate on real estate, not to mention buying Barney's, Las Vegas casinos, banks, etc. And while US banks have little exposure, it seems England has about 50% or so of the debt, with the rest of Europe having the lion's share of the remainder.
Admittedly, the estimates seem to confuse the debt of Dubai with that of Abu Dhabi, so it is hard to know a reliable number, other than that European banks are the most exposed.

Thanks for the reply. I agree with you that pro-growth policies, reduction of the deficit and taxes, and energy exploitation are the only way to go. I’m not sure it would be enough, and I don’t know if we can even get those things, even if we win in 2012. But it’s all we can do.

Thanks for your ideas. I don't think our problem is related to not having a gold standard. I agree with you that a big part of the problem are these socialist programs from the New Deal and that they should be abolished. The problem has been 70 years in the making, and as much as I'd like to wave a wand and eliminate all the bad government programs, we will have to operate in 2012 with a small majority if we have one at all. It will take time and effort to reverse socialism, and we will need to be as persistent as socialists have been.

That said, without a LOT of fair market creativity in 2012, it won't matter whether we win or lose, the system will be in big trouble.

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