Dubai Defaults, sends markets reeling - NCCG.ORG Ning Network Archive 2008-10

by Dr. Stephen E.Jones
11/28/2009

Remember back in 1998 when Russia defaulted on its debts? It brought
down Long Term Capital Management, the American hedge fund, and Alan
Greenspan had to jump to save the American economy from collapse. That
was 1998, not 2008.

It all goes to show how interconnected the world economies have
become. Every country is tied to everyone else, and so if one goes
down, they all go down. It is a perfect set up for the world-wide
collapse of Mystery Babylon.

Yesterday, Dubai effectively defaulted on its $80 billion debt load.
This caused stock markets world wide to drop considerably over fears
that this would stop any economic recovery.

This also has political implications, because Dubai is Iran's main
business access to the world, a way to get around economic sanctions
by going through a third party.

Of all the states of the United Arab Emirates federation, Dubai has
maintained the closest ties to Iran. Indeed, as international pressure
has built on Iran over the past decade, Dubai has prospered from those
ties. It provides critical banking and trade links for Iran, often
serving as the go-between for European or Asian companies and
financial firms that want to do business with Iran without violating
international sanctions. . . .

The US and Abu Dhabi are hoping to use Dubai’s financial troubles as a
way of finally severing the close ties to Iran. For years, Dubai has
enjoyed the benefits of walking the line between its military and
economic alliance with the US and economic benefits from banking and
trade ties to Iran. The price of a bailout from Abu Dhabi may be
having to finally choose to give up the Iran connection.

http://www.businessinsider.com/the-geopolitics-of-the-dubai-debt-cr...

If the US government tries to use the situation to pressure Dubai to
sever its economic relationship with Iran, the economic consequences
could be fatal to Dubai, which is already struggling. If business with
Iran is cut off, many corporations around the world will lose a lot
more money, and this will only make the economic condition worse.

While American companies are reported to have less stake in Dubai, the
world economy is so interlocked that it will certainly have an
indirect effect on everyone. Remember how the collapse of LTCM nearly
set off a chain reaction with the potential of destroying the entire
American economy in 1998. That's the power of financial institutions
that are "too big to fail." The truth is that they are too big to fail
without taking down everyone with them. And the more fragile the world
economy, the less it takes to bring everyone down.

So I have wondered when we would see the next domino fall. It was only
a matter of time before some small nation somewhere defaulted. Because
Dubai is interconnected with Iran, the US government and others may
interfere with any bailout plan without political conditions. This may
set up a game of economic "chicken," and any delay would only make
matters worse.

In Britain, government officials are being forced to admit that the
problem is far worse than they had previously admitted. They claim
ignorance, of course, and that the "new data" has now changed their
minds, but the fact is that the pertinent data has always been
available for all to see. It was simply ignored as the "recovery" was
hyped in hopes that wishful thinking would inspire confidence and
"make it happen."

The problem is that the bailout money to Wall Street has shifted a
trillion dollars from Main Street to Wall Stret. That means the poor
have a harder time buying bread, while the wealthy resume their
investment strategies. This is deflationary for Main Street, but
inflationary to Wall Street, much like a two-tiered economic system.

Meanwhile, big banks are not lending to small business, because they
need to save money. What do they do with it? They invest it in
financial deals and in Treasury bonds to finance the government's
bailout program. So the money gets sucked out of the Main Street
economy, only to get stuck in a merry-go-round, revolving between the
government and the big banks.

That's what they call a 'recovery program."

The banks are certainly not going to lend money to Main Street,
because Main Street is short on cash, and their properties are going
down in value. Customers find themselves with less money to shop, so
bankruptcies are way up. This makes banks nervous, so they make fewer
loans. This is how an economic "death spiral" starts.

Meanwhile, Dubai is the place to watch. The government made its
default announcement on the eve of a long holiday week end, so you can
be sure that there will be many emergency meetings before the markets
open again.

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