Dubai Background

Dubai is one of 7 Emirates that make up the United Arab Emirates. Abu Dhabi, with huge energy reserves and a sovereign wealth fund thought to be worth $630 billion, is the richest of them. Its banks are major creditors of Dubai and its companies, but news that they are no longer willing to keep buying or refinancing the debt of Dubai’s major companies shocked the global markets.

Dubai and U.S. Housing Speculators Play the Same Game

Dubai has very few energy resources and raises little money via income tax due to its competitive tax policies. The state has consistently run deficits and the Emirate’s growth has therefore been funded via the money markets.

A huge property-led boom saw money pile into infrastructure and construction projects (sound familiar?). Similiar to being on the cover of Sports Illustrated, building the world’s tallest building has always been viewed by investors as a sign that a local economy is about to head south.

Dubai World, the most indebted of Dubai’s state-sponsored companies, owes $60 billion of which $22 billion must be refinanced by 2011.

Worries About Impact Of Dubai Crisis Generate Substantial Selling Pressure

The U.S. stock market opened sharply lower (down roughly -3%) on Friday, November 27, 2009 in a reaction to the financial crisis in Dubai. The downward momentum comes after Dubai World asked to postpone payment on some of its $60 billion in debt. Worries about a default by the city-state have raised significant concerns about the impact on banks.

The markets closed down roughly -1.5%.

Mark Minervini Comment on Dubai Sell Off

I view short term turmoil in countries and nations outside the U.S. as a long term positive for U.S. stock and bond markets. Similar to the Asia crisis in the late 1990′s, these foreign calamities highlight the relative safety of the U.S. and bolster U.S. credibility. I made this same comment during the Asian crisis, which turned out to have the same effect.

A Counterintuitive Scribe
I will leave you with one counterintuitive comment by James Hillman from his book, Kinds of Power: A Guide to Its Intelligent Uses:

“Wherever we see an increase we feel its weight. All the numbers going up no longer portray the optimistic spirit, but instead indicate monstrosities, epidemics, ugliness, future disaster, extinction. Growth has taken on a cancerous tinge. To use the word now sends a message of potential danger, whether the growth be in debt, the population, the underemployed, the homeless, the dimension of cities, the size of government, the particles in the air, the tax rate, the cost of living, the cholesterol count, even the rising numbers on the bathroom scale. Going up now means decline. What was before the measure of progress has become a sign of
problems.”

You might be thinking that this was written to describe the current economic challenges, however his book was written in 1995. Did the world recover, indeed. Will the U.S. and global growth recover this time around…indeed.

And all assets have a monetary value which can vary from 0$ to infinity. Maybe not in most definitions of the money supply but in the broadest sense of the definition of money, all assets are money.

That 1$ bill in your pocket is definitely money. No argument there. But it’s also debt. It’s an IOU. So you’re a creditor. Somebody owes you 1$ worth of goods or services. What you’ll get for that dollar is another issue. You believe it’s a buck, maybe someone out there won’t want to touch it when you want to use it. But in your head you call that money until you can’t use it anymore.

Same thing for banks holding the debt. That debt is an IOU. They’re creditors just like you. And they also call it money until they are forced to write it down.

i don’t think any one is arguing that credit creation does not create money- but you touched on why it doesn’t easily work in reverse-

the money from a loan can be used to purchase an illiquid depreciating asset such a furniture- and sure the furniture store got their $- but the borrower- the one who owes the debt which was used to buy the furniture- cannot easily pay that debt back w/ his asset- because it is illiquid and is only worth a fraction of its original value-

if the borrower defaults- the bank eats the loss- so the debt is not backed by money- but backed by an illiquid asset w/ little value-

reality- the debt was really backed by the borrower’s earned income and his ability and willingness to repay the loan

I read that report a while back and I thought it was moot. It’s the old debate of what came firts, the chicken or the egg. Today’s reserves are probably close to 0. So the banks can make loans without deposits.

When textbooks talk about deposits being first in line, it’s more of an example. You have to go to basics when you are explaining it!

The money supply is usually calculated as a total of liquid assets.

For example, if someone borrows 1000$ and puts in in a demand deposit, this will be considered money. If another borrows 1000$ to buy a house, this will not be considered money.

But when you are looking at money creation, 2000$ of money was created.

I guess it’s all semantics once again.

is that a fair enough statement?

lets clear this up.

The private sector has no net financial assets, all liabilities are matched against assets. sums to zero.

The banks create assets and liabilities.

A non bank may create a new financial asset by relending bank liabilities, however this is also matched by a new financial liability. Still sums to zero. Only thing has changed is total amount of liabilities and assets.

the government can create base money which is a government liability and therefore represents a financial asset in the private sector not matched by private sector liability.

onlt the government can provide the private sector with NET financial assets.

“Go to the Fed’s website. The definition of money creation is black on white. In case you don’t trust the Fed, go to the bank of Canada. If you don’t trust them it’s in all economics books.”

You’re on a roll danm. Now you have written the funniest thing I’ve read today….”If you don’t trust them it’s in all economic books.”

Yeah, economics books and central banks have been really hitting it out of the park with their understanding of such matters.

There may be an alternate view on money supply. I strongly recommend that you get through this essay on “credit based money supply”…this guy many not have all the answers, but it’s certainly an explanation that does better than the neo-classical models that have become “group think” within central banks and economics textbooks….

Spoiler Alert: Money gets created in ways not described on the Fed’s Website.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Peace.