Of the many economies that gorged on debt in the boom years, Dubai stood out. In the space of a few years the emirate’s investment arm, Dubai World, racked up $59 billion in debt, borrowing to build lavish developments like a giant island shaped like a palm tree to entice celebrities like Brad Pitt, and to invest in glittery properties like the MGM Grand Casino in Las Vegas.
Now that the boom has gone bust, both in Dubai and in the United States, Dubai is stuck with a glut of real estate that no one wants to buy or rent. Creditors and markets had always assumed that when push came to shove, its oil-rich neighbor Abu Dhabi would bail out Dubai. But that assumption was called into question this week, and the resulting fear that Dubai might not be able to pay its bills sent a wave of uncertainty rippling through markets just as investors thought the worst of the global financial instability was over.I don't propose to investigate this in any detail, but I wanted to quickly suggest a likely framework for thinking about this. Whenever any genuine and important new trend appears, it's human nature for people to get overexcited about the possibilities, borrow too much money, bid prices up too high, and then crash. Think South Sea Bubble (prospect of trade with South America) in the 18th century, the Railroad boom in the 19th century, and the Dot-com bubble recently.
So it should surprise no-one that the new-but-ongoing era of high oil prices, which promises to make the Middle East a very wealthy and important region over coming decades (absent more war and revolution), should occasion a bubble or two. The fact that things got a little ahead of themselves does not mean the underlying trend is not important - just as trade with South America, railroads, and the Internet, all did prove extremely important trends over many decades.