While the world was caught off guard by the news that Dubai is on the verge of defaulting on their debt, Sheikh Ahmed bin Saeed al-Maktoum, a family member of the Dubai’s ruling class, noted the decision to announce was carefully planned. I have no doubt the decision was planned; however, what does not add up to me is this quote:

“unprecedented growth, in Dubai and across the (United Arab Emirates), over the past decade has helped lay the foundation for what is now a broad-based sustainable economy beyond just natural resources.”

Is the United Arab Emirates truly in a position to continue growing beyond their involvement in natural resources? I would be hard pressed to believe such a statement.

The unprecedented growth in the UAE was based on energy, all other industries were offshoots. Why do you think the UAE is pushing for higher energy prices? The revenues from energy production fund government operations, and without that revenue the governments of the UAE will constrict – if not collapse.

A potential saving grace for Dubai may be their big brother, Abu Dhabi.  This write up by Northern Trust bank suggests Abu Dhabi may help the country restructure debt in exchange for assets such as Emirates airlines. As John Galt points out, someone sold a large amount of gold at the open of the markets after the Dubai news – was Dubai trying to raise funds, or was Abu Dhabi getting ready to assist? A rescue move by Abu Dhabi move would make sense on a number of levels – both business and cultural.

The real question that should be asked is this: Are any other governments facing default and would would be their “big brother” providing a rescue?

If Dubai does default, the credit markets will slow yet again, especially into emerging markets.  Such an event will put even more pressure on smaller governments facing debt issues due to the global economic depression. But what about other other governments, what about the “stable” countries such as the United States, United Kingdom, the European Union and Japan?

The sovereign debt worldwide has increased roughly $15.3 trillion dollars between 2007 and 2010, and the majority of the debt was placed squarely on the books of the countries above. If the United Kingdom or Japan were to default a number of countries may be able to assist, but if the United States where to lapse on debt there is no one with a bigger checkbook that could come to the rescue.

The future remains to be seen but if it can happen to Dubai – a country that was the jewel of the UAE – it can happen to anyone. Over the next year we may understand that the term “too big to fail” is indeed false.

Dubai, the skyscraper building United Arab Emirates shangri-la has essentially defaulted on their debt.  The country asked creditors for a “standstill” on debt payments for the next 6 months as the country attempts to get a hold on their economic situation.  If Dubai does not manage to pay their debt, renegotiate their terms or find a way to satisfy their creditors the country will trigger the biggest government default since Argentina’s collapse in 2001.

How did Dubai end up facing a collapse?

It starts with the roughly $80 Billion Sheikh Mohammed Bin Rashid Al Maktoum, Dubai’s ruler, borrowed in an attempted to turn the Emirate into an economic and tourist mecca. Add in an economic collapse that triggered devaluation in real estate prices of close to 50%, as well as a massive cut in energy prices (yep, they still need profits from oil), and you have the perfect conditions for economic Armageddon.

And that is exactly what the country is facing, but how does this impact the rest of the world?

There is no question about it, the economic “recovery” that the U.S. and world governments are publicizing is thin at best, and an all out fraud at worst.  If Dubai does end up defaulting the banking system is going to face roughly $40 Billion in liabilities.  While the main exposure is within banks in the EU, such a large hit would constrict the credit market even more as banks and financial institutions will not want to continue risking exposure with lending practices.

For three months now I have consistently pointed out the economic risks the world faces. All one needs to do is put the pieces together, from bankruptcies of large US financial institutions to the defaulting of governments, it is clear the world economy is very sick.

The world is not going to come to an end in some giant bang, no.  What is happening, and will continue to take place, is the slow crumble of the economic system. Much like a frog in a pot of water that begins to boiling, people will not notice what is going on around them until it is too late. Look for more events to take place over the next several months and be prepared for a very hard mid-to-late 2010 if the economic conditions continue on their current path.

Yet another busy day leads to be missing out on the events of the world, let us jump in on a few things that came out today..

Treasure thinks Congress will raise the U.S. Debt Ceiling

Just stop!  Really.

The debt levels in the United States are growing to the point where they will become unsupportable by the Government.  Literally.  The CBO has already reported that, in a few short years (8-ish) the Government may be in a position where paying interest on the debt outstanding will be impossible.

Translation – the country will be bankrupt.

Someone needs to remind Geithner (and Congress) why the debt ceiling is in place.

One more thought on Swine Flu and the Ukraine

Yesterday I had written about the Ukrainian Swine Flu response – it seemed a bit drastic to me for roughly 4% of the population. What I had thought about but didn’t express was, due to the economic conditions of the country,  the Ukraine doesn’t have necessarily have the technology, education and/or to treat and react to an unknown outbreak let alone the swine flu.

Thanks for taking me to task on that.

And this is sad – U.S. Army Suicides reach a new high

The aftermath of the Vietnam war wasn’t the political change, it was the thousands of troops that ended up with untreated mental illness and substance abuse issues.  After putting their lives on the line for a war that, in a number of cases, they did not believe in their government simply left them to fight for themselves when returning to the ‘real world’.

When I see that the Army Suicide rate is higher than the general population I have to wonder if the government is not providing the support the troops deserve – regardless of the active status of the person.

Really, just call it the Titanic

This is one of those stories you read and simply say – “Oh, you know, this isn’t going to end well.”

The largest cruise ship in the world, the 16-deck Oasis of the Seas, found a port of call  in Ft. Lauderdale today.  I know we live in a world of excess but, really, this ship is 40% larger than any other ship on the high seas today.

While I haven’t heard anyone say the ship is unsinkable, with a capacity for 6,300 passengers and 2,100 crew this is almost like a bad made for TV moving waiting to happen.

First India, now NASA

In case you missed it, NASA has confirmed they have found large amounts of water beneath the Moon’s surface.  The first report issued by the Indian space agency stated water was “locked in the soil” and would come and go during the course of a day.  It is interesting to see NASA specifically say beneath…

Without a doubt life is out there, I’m just waiting for the day when NASA (or another space agency) finds life off earth.  I’m not saying aliens, just the very basic definition of life.

Last evening I was reading my RSS subscriptions, commenting on some threads about the Feds decision to lower interest rates, and I really started to think about the US (and world) economies. Ultimately, the question “is another depression on the way” came to mind yet again…  So I decided to put some things down on paper (and then into the blog) in order to assess the question.

• The speed of current deep recession

The US went from a shallow recession, with low unemployment, to one of the worst financial crises since 1929 in a matter of weeks.  Yes, the events were in the building for months, if not years, but it all came apart in roughly 4 to 6 weeks…. and no one was prepared for how quickly it happened.  

• Credit is hard to come by

The credit industry is contracting, and contracting fast.  Credit Card companies are cutting limits of superior borrowers, for some it’s hard to get a mortgage, companies – solid companies – cannot find funding even though they have revenue to cover their costs, and banks are not lending to each other.  Basically, spending is crawling because the pool of money has shrunk

• Oil is down today, but…

The price of energy (oil, specifically) was on a wild ride the last 4 years, up to almost $150 this past summer and down to $40 the past week.  However, due to limited supplies and production, oil will start to rise over the next year once the economies of the world begin to stabilize, causing pressure on economic growth once again.

• Debt is overwhelming…

The government is so far in debt, it will never be repaid, and our financial institutions are in the same boat . Essentially, we are spending money today that we don’t have in order to solve a problem.  In doing so, however, we may be creating a bigger problem down the road.  

Oh, yea, and the consumer is so far into debt that they have no money and cannot obtain credit (see #2).  If the consumer cannot spend, how will the economy recover?

• Unemployment is on the rise…

Going from historic lows to levels not seen in about 20 years, unemployment will play a big fact in any the economy’s recovery.  If it continues to rise, problems will persists.

• Mortgage meltdown, real estate bubble…

Huge over production of housing, mortgages to anyone and everyone that had a heartbeat and property values inflated beyond true value…. it plays into everything.  Spending, debt, credit…. and if this does not stabilize, how will the credit markets stabilize?

There were initial thoughts…  I do believe the economy is dangerously close to moving into another depression.  While I do not believe any depression will mirror the Great Depression, it is strikingly like the Long Depression on 1873.

Without a doubt, the actions taken by the government will provide some type of recover in the market – I just doubt if it will be a sustained recovery.

Oh, and another random thought… 

I am slightly concerned about how the stock market has been acting the last two weeks.  It is back to trading upward on negative news.  The economic situation has not changed, so why the movement towards the positive?  

Either a bottom has been found or a suckers rally is taking place…. I just hope it is a bottom.

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points – Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) – 0.20 – down 94.4%
AIG (AIG) – down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) – 17.83 – down 13.44%
Morgan Stanley (MS) – 34.16 – down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…