Home > Investment tips > Paul Krugman actually makes sense!

Paul Krugman actually makes sense!

When Krugman doesn’t make a prediction, when he doesn’t express an opinion, he actually writes succinctly.  Which worries me.  Because he clearly displays very strong abilities to synthesise  a lot of information in this short piece:

Dubai or not Dubai — that is the question. Dubai’s sorta-kinda default (a state-owned enterprise seeking a rescheduling of its debts) is, by itself, not that big of a deal. But who else looks like Dubai? What kind of omen is this for the next stage in the financial crisis?

As far as I can tell, there are three ways to look at it — three stories, if you like, about what Dubai means.

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

At the moment, I’m leaning to a combination of two and three. For what it’s worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn’t raised expectations of default.

Anyway, we continue to live in interesting times.

PK’s summary of the possible alternative “significances” of the Dubai “situation” (I hesitate to use the term “default”) is excellent.  I cannot improve on it.  So I’ll shut up and let you ponder: (a), (b), or (c)?

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Categories: Investment tips

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