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.

International news wires are covered with a very interesting story – The EU will not bailout Eastern Europe.  I believe this quote sums up the view the powers of the EU have quite well:

“Saying that the situation is the same for all central and eastern European states, I don’t see that,” said Merkel, adding “you cannot compare” the dire situation in Hungary with that of other countries. 

Two thoughts come to mind with this statement, but I fully admit that my understanding the European Economic climate is limited to Germany, France, Poland and Hungary, so I may be missing key counterarguments.  

The first problem I see with the bail out on a case-by-case basis for Eastern European countries is much like the U.S. faces with banking and financial institutions.  When one situation pops up, you beat it down like a “whack-a-mole” but another one pops up in place of the original.  The governments of the EU end up trading one problem for another as the financial distress ripples from one country to another.  

What the U.S. needed to do at the outset of this crisis was establish a fund that addressed all the toxic debt in the financial system.  They failed to do so and each financial institution has become an endangered animal as a result.  The EU in the same position as the US, only months later and with the opportunity to do it right.  Instead of preventing the collapse of governments by proactive solutions, the EU elite will allow the smaller countries to suffer (and so will their people).

The second problem comes down to a matter of politics. What if the EU does not wish to see Eastern European countries succeed?  What if the European Union is looking for a reason to NOT admit additional Eastern European countries into the EU.  What better way to keep a county out because they do not qualify to join because of their economic status?

What if the EU is attempting to keep countries like the Ukraine, Belarus or Georgia out of the EU due to pressure from Russia?  

Think about this – Russia is against former Soviet Union countries from gaining further independence. As a result, Russia reminds the EU that the majority of energy resources the EU consumes comes from Russia.  The EU has strict policies on finical requirements in order to join the Union, and what better way to impede a countries entry into the Union than hitting their pocketbook.  

If the European Union truly feels each country needed help on a case by case basis, they risk creating a larger financial crisis, much like the U.S. intensified the situation by not creating a blanket solution.  On the other hand if this is a political move by Russia and the EU, it was created to break the back of smaller former soviet states which would allow Russia the opportunity to regain the territory.

It was just a matter of time before the protectionist tone the new U.S. administration and Congress set started to get the attention of other world powers.  The European Union has threatened to retaliate if the U.S. sticks to its guns on “Buying American” with the money provided by the next stimulus package.

That whole “None of the funds appropriated…may be used for a project for the construction…unless all of the iron and steel used in the project is produced in the United States” looks to be in major jeopardy (as it should be).  Look for any other language that restricts funding to Union only labor to be removed or altered. That same goes for any language restricting companies that can be recipients of such funds.

A trade are would not benefit any country; U.S. or otherwise.  

The American political system is sending a very dangerous message to the rest of the world, a “U.S. only” message that could easily be misconstrued as a sign that we are only concerned about U.S. interests only.

While we live in a global economy, and the United States needs to address U.S. concerns, our politicians need to be highly aware that other economies are hurting as well. While not looking to the U.S. to solve their problems, they are looking for signs that the free market is still alive (maybe not healthy, but alive…)

A trade war would only cause the recession/depression be prolonged and intensified, let’s just hope somone is paying attention.