x Abu Dhabi, UAE Thursday 20 July 2017

Avast, where the global economy is heading, there be dragons

As we sail into the mighty jaws of the Perfect Recession, you might want to strap yourself to something sturdy, if you can find it.

Stormy seas, aye. As we sail into the mighty jaws of the Perfect Recession, you might want to strap yourself to something sturdy, if you can find it. With Kuwait bailing out a wayward bank and Saudi moving to the aid of its weakest borrowers, it appears the storm is upon us here in the Gulf. Normally, turbulent waters would argue for taking safe haven in US Treasuries, but a look in the wheelhouse finds none other than Uncle Sam flailing at the helm, cursing the heavens and watching for water spouts. It does appear that Sam and Ben (Bernanke) have managed to keep the economic vessel from capsizing entirely, but their course leads us straight through a dead calm. Unemployment is the only remaining growth industry and pundits are crammed into the crow's nest trying to belt out the gloomiest warning of what lies ahead. With money as tight as it is around the world and America in need of hundreds of billions to finance its own bailouts, the price of US debt will undoubtedly fall and keep yields from falling as much as economic conditions might otherwise dictate. If you're like me, you're feeling a might seasick by now - mixed nautical metaphors and falling markets really don't mix. By one estimate, $50 trillion has been lost in stocks and properties in this financial crisis. That's likely to put a fairly large cramp into global lifestyles, to the tune of, oh, say, $2-3 trillion a year, according to China economist Andy Xie. We appear to be on the verge of what a growing number of pundits feel is an emerging markets crisis, in which the vacuum of Western liquidity freezes credit and growth comes to a standstill. That explains why the dollar is still rising even though this whole thing started in the US: where would you rather wait out this thing, in a fascinating but volatile developing economy where rule of law is still something people talk about, or in the US? As a result, central banks from India to Brazil and Russia have been spending billions trying to defend their currencies, making the same mistake the Bank of Thailand did in the summer of 1997, losing billions before it finally surrendered and let the Thai baht go into a free-fall and calling in the IMF. Added to this the billions of dollars emerging market authorities are using to shore up liquidity in their banking systems, some now warn that the IMF doesn't have enough money to bail them out the way it did Asia a decade ago. The consequences: look to Pakistan, where a failing political system has turned the country into a haven for militants, inviting attacks by the US military inAfghanistan. Pakistan has become Laos to Afghanistan's Vietnam. This will have to be part of the bailout talks hosted next month in Abu Dhabi between "the friends of Pakistan," one of which is the US. One certain way to derail growth is to raise taxes. The time to diversify government revenue was during the boom times, not as residents are staring into a financial abyss. Consumption is undoubtedly going to suffer in the near future. Adding a tax to the brakes will only hasten a slowdown and delay recovery. warnold@thenational.ae