Archive for November 30th, 2009

Thoughts on Dubai

A little over a year ago, I had coffee with a friend of mine who had just returned from a trip to Dubai.  Honestly, the place sounded like Atlantic City on steroids.  A few blocks off the main drag, you were back to squat brick buildings, and the general poverty that has afflicted the place for generations.  It had a booming tourist trade, and yes, you could buy a drink, but no particular reason to be a financial center, and thus no real economic reason for being so massive.  At some level, every economic miracle involves salesmanship and exaggeration, but at heart, there has to be something to exaggerate, otherwise the whole enterprise really is folly.

Now, with Dubai looking a lot like Fannie and Freddie, only without the government bailout, we’ll see exactly how much of this was real, after all.

Still, even though this isn’t exactly sovereign debt, it has a lot of the characteristics of sovereign debt, especially in a place where there’s still not a whole lot of difference between the sovereign and the country.  And it points out a real potential problem with the massive growth of sovereign debt, including state pension funds in this country – the concentration of decision-making, as opposed to its dispersion.

Markets work because buy and sell decisions are made by hundreds, thousands, even millions of actors.  (The number of issues on trade is actually much less important.  The early Dutch stock market worked remarkably well, despite there being only one stock to trade: the Dutch East India Company.)  But state and national resources dwarf what any individual can put together.  Decisions by a relatively few number of actors can now move not only individual stocks, but entire markets.  The danger of both massive mispricing and actual manipulation should be obvious.  Moreover, there may be times when, like any other investor, the fund wants to flee for the exits, and you can bet the rules will be rigged to make sure they can.  And you can’t.

Of course, state actors will see this form of economic warfare as a failure.  Much better to use the threat of such action to get what they want, by degrees.  And since state actors are likely to see their investments in political, rather than financial or economic terms, the incentive exists to rig entire markets for the benefit of chosen domestic allies, or, in the case of overseas investments, a country’s given interest vis-a-vis the issues of the day.

None of this is good for markets or economies, which rely of economic decisions being made primarily for economic purposes, not political ones.

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