Windfalls and the Collapse of Dubai

The post didn't come out right when first posted. Paragraphs have been corrected, with apologies.

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It seems that the banking system of the United States got all better for the Thanksgiving holiday, because the FDIC did not close a single bank. Frankly, we wonder how the FDIC has managed to keep its reputation as high as it is, because this sort of politicisation is completely outrageous. As we understand it, the FDIC is tasked with protecting depositors of banks, not gauging the public mood for whether or not it should protect said depositors. This inaction is completely outrageous, in our humble opinion; we wish others were outraged, too. It does not make us feel confident that our banks aren't complete trash-heaps, and we wonder just how safe “[every] single penny of deposits” really is.

But at any rate, let us turn to world events. Dubai, we read, totters on the brink of default, and the rest of the world begins to panic about all the debt from the best skiing land the far side of the Rub' al Khali. Those little private islands aren't looking so hot as investments right about now, we'd hazard to guess; although, if we'd be permitted to moralise for a moment, they seem to us to be the logical conclusion of the insanity of suburban development. We honestly can think of nothing more ridiculously 'exclusive' than one's own, artificial island. The situation with Dubai is an interesting one, from a malinvestment point of view.

Let us be honest here: we fully expect anyone and everyone who invested in Dubai's madness will end up losing every single penny they ever invested. It will probably be a very fascinating blow-out to watch, but we'd like to take a look at how, exactly, this malinvestment probably came about. We are supporters of the notion of Peak Oil; i.e. the idea that the economically-extractable amount of oil in the world is finite, and will result in a permanent decrease in the availability of a potent energy source to fuel human economies. This is not a popular view, as we're sure you are aware; in fact, to even breath the words 'peak oil' in a sentence, and not immediately ridicule the concept as lunacy and defeatism, is to give suspect to one's character.

The popular discourse, as we understand it, is either permanently-increasing availability of cheap oil, or the latest stupidity called 'plateauing,' where oil reaches a level of production which can be maintained indefinitely. If it is taken as given that oil will never run out, then Dubai seems like a great investment, because the Emirate would forever become richer and richer; better invest now, before it gets even more expensive!

No one, it seems, stopped to question this notion of infinite oil before they leveraged themselves to the hilt to invest in Dubai. If, indeed, oil has peaked, which we believe it has, Dubai is probably going to be getting permanently poorer, at least in the long run. Hence, the grand malinvestment in Dubai, Dubai World, et al.

Dubai's madness – for really, what else could it be called, other than wilful insanity? – was facilitated by its endowment of oil. We'd like to present that oil as a windfall, for conceptual purposes; it was a one-time shot at something, granted by a quirk of geology and human development to the Emirate. They took that windfall and blew it on skiing in the desert and artificial islands shaped like palm trees; a grand gesture, we think, to the stupidity of humanity.

Norway, on the other hand, took their oil windfall and tried to use it for better purposes. As we understand it, they tried to use the vast wealth which came from the one-time exploitation of their oil to improve the quality of life for all Norwegians; something that Dubai has not done, and will never do. Quality of life in Norway will, we think, continue to be quite high, long after Dubai is perhaps consumed by sandstorms, or at least reduced to a ruin of its former self. The differences, we posit, between wise investment of a windfall, and a windfall-driven orgy of conspicuous consumption, will probably not be better evidenced than by these two nations.

The collapse of Dubai will likely serve as a model for future national collapses in the 2007 Depression. Those nations which have a windfall, and have already blown it, are probably going to go the way Dubai goes; namely, somewhere very dark and scary. It should serve as a stern warning to those nations which still have a windfall they're in the process of blowing, because it's not too late to change course. Smart investment of resource windfalls, such as oil, will be increasingly paramount in the future.

In this category, we're thinking of the resource-heavies of the world, and not the silly notion of BRIC which is presently flying around (Brasil, Russia, India, China); India and China, in our opinion, are going to blow out along the lines of Dubai. Instead, we'd like to present our pet notion of CARB: Canada, Australia, Russia, and Brasil. These four nations apparently enjoy fairly large resource endowments, which have not yet been economically exterminated; if husbanded, life in the 2007 Depression might not be quite so bad in CARB, as opposed to, say, Dubai.

The concept of CARB is one which we would prefer to address in a separate post, to avoid accusations of wind-baggery. Instead, and in closing, we'd like to point out the nation which has blown its resource windfall far more than Dubai could ever hope to accomplish.

Go on, guess. We dare you.

The New World was beyond a shot in the arm to the European economy, when it first began colonising the new continents; it was like speed, angel dust, crack, LSD, and crystal meth all rolled into one, injected directly into the brain. But before that granddaddy of all economic stimulus could be used for the benefit of European colonial powers, the United States came along and had the indecency to clam a vast swath of the New World for its own. From there, it proceeded to burn through the incredible, mind-boggling amount of wealth which was to be had, to build... umm... wait, we know this one. Oh yeah, suburbia, and the most expensive military the world has ever seen. Right, sorry.

Simply put, however bad Dubai will become, we will not be the least bit surprised if the U.S. ends up being far, far worse. It had a much bigger windfall, which it blew over about two hundred years and far too many pointless wars. The era of Warren Buffet's 'never bet against America,' we posit, is over. There is money to be made shorting the U.S. and investing elsewhere, not the other way around.

Is Globalisation at Risk?

One of our local 'dollar stores' sells some amazingly good pickled, roasted peppers from Turkey. Not only are they quite good, they are also quite inexpensive - costing far less than 'fresh' peppers at the grocery store (presumably grown somewhere on this continent). Although growing sweet peppers is possible in our Northerly latitude, it could hardly be construed as inexpensive when time and effort are taken into account.

Globalisation, has made its way to our heart via our stomach. Nothing in this world is ever unequivocally good, of course, but we think that having some access to the World's goods and culture generally enriches our lives and is a positive. We understand that this process has been everywhere disruptive, as well, but on balance it feels like progress.

Can globalisation fail? Is it an artifact of cheap energy? And if energy always gets more expensive from here on in, will globalisation decline? Our opinion is probably not. The advent of the Internet and peer-to-peer networks will provide opportunities for division of labour and broadening markets even as transportation costs become dearer. Some more localised production and distribution will gradually have a greater cost advantage if it is otherwise competitive, but as transportation is rarely a significant portion of costs, this is not likely to impede globalisation all that much.

Will the Depression kill globalisation? It certainly may set it back through trade financing problems, and through protectionist and autarkic public policies. However, as long as global exchange presents true efficiencies and opportunities for profit, those setbacks are likely to be temporary or geographically limited. If anything, the Depression will likely reinforce globalisation as marginal, less-efficient enterprises wind down.

There was an protest saw from a prior era: "Think globally, act locally." It is actually not bad advice under the current circumstances, though very far from the original intent. What are you doing to be globally competitive? What resources that you find in your immediate environment can you marshall to produce something for a globally-minded market? If you cannot come up with something, you may find the World passes you by.

Much of the Industrial era to date has consisted of efforts to make the Industrial way of life as much like the Agricultural as possible: the company or government as patronly employer for life; the financial investment dividend as reliable as land rent; and the bizarre experiment of Marxist Communism. These efforts have all failed, or are still in process of failing. What is emerging from the rubble is a much more dynamic and creative way of making one's way in the world.

Globalisation is really only at risk if humanity rises up to turn back the clock. Reactionary elements are now, as always, ever at work to stymie developments that threaten their turf. However it is certainly not in the best interest of the majority to embrace a reactionary world-view.

There are some ideas out there posing as progressive, voiced by intelligent people, which are actually reactionary: globalism is unequivocally bad; small towns are unequivocally good; all economy should be within mostly self-sufficient communities, etc. We know it often difficult to imagine a better and truly new tomorrow when trends in place have delivered so much disruption, but that imagining must be done if society is to avoid stagnation and decay.