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June 2010

Searchlight Feature - 14th June 2010

Debt & Politics

We all have our own views of politicians and, perhaps too frequently, we deride them as being incompetent, dishonest, self-serving and so on. The truth is that they are people much like ourselves who for reasons, probably best kept to themselves, have a huge desire for political power. Whatever their motivation they are creatures of their own time with hopes and aspirations which make sense in their own context. Age, background, education and events all influence how they see the world and themselves. Today there are those who are aware of the two World Wars of the 20th century. However, increasingly, and especially in Europe, the political class has known only peace; there have been wars but they have been elsewhere and this makes a big difference to a politician's view on the relative importance of defence as against anything else, such as welfare. This preamble is to remind us that our views of the world and our values are heavily influenced by our own experience. Logic and learning may lead us to modify our views somewhat but even the most logical of us cannot avoid the past. (There are, of course, those who rebel against all that their background stands for and "change sides" or points of view. This only goes to show that you cannot escape the past).

We have been wondering if the concepts of budget deficit and national and corporate debt are subject to these same influences. It is difficult for us today to recall the common sense approach of the British Prime Minister, Margaret Thatcher in the early 1980's. One of the reasons that she appealed to so many people was her belief that you could not and should not ignore the blindingly obvious concept that you cannot spend more than you earn (for long), and that borrowing allows you to have fun today at the expense of tomorrow.

More recently the matter of deficits has been a hot topic. Expansion of deficit can be deemed as dangerous because a) the money has to be repaid and b) borrowing comes with "restrictions" - there are conditions, lenders will bail out if you misbehave or default and so on. Quite what the restrictions are depends on whether one is looking at government, corporate or consumer debt. The upshot, however, is much the same in each case: the lenders will only lend if they are happy that they are protected. The more one borrows the worse one's credit rating and the higher rate of interest which will need to be repaid. And so on.

We object to the recent borrowing binge on what can be described as "rational expectation." Government officials seem to have developed a narrative to justify further borrowing and stimulus of the economy along the following grounds: the economy is very weak and the government must borrow and spend otherwise the pain will be catastrophic for the poor, the unemployed and the vulnerable of society. We believe that this style of narrative treats the general public as if they were idiots and it has inevitably been counterproductive. If the public and private sector both believe that everything is truly awful and things can only be fixed by additional government spending then this is a very negative message indeed as it will serve as a reminder that the extra spending can only, and indeed must, be followed by a prolonged period of repayment. However the public is simply not stupid enough to believe that the problems of the economy can simply be shored up by the accrual of further debt.

The reason for discussing this at this time is, of course, that the G20 Finance Ministers met last weekend in Korea and decided that government stimulus spending must stop. In April they had said that it must go on until recovery was certain. Now, in early June, they feel that such fiscal expansion must stop because of investors' fears for government finances. Wow - what a complete turn-around: the G20 has jumped from a deep commitment to fiscal expansion (borrowing) to an equally deep commitment to deficit reduction (repayment of debt). The sense of infinite power, and the idea that borrowing can continue for as long as desired has simply vanished.

So what does this mean for Dubai??? Surely such a complete volte-face from the G20 must have repercussions and ramifications globally and in the UAE, and companies such as Dubai World must now surely have to follow suit and look to start tightening their belts and set about the business of repaying their debts??? We shall see...