Monday, September 17, 2007

The Skyscraper Indicator And The Global Economic Boom

This week we see the United Arab Emirates announcing the world's tallest building, the Burj Dubai. I've watched from afar in astonishment as Dubai builds and builds and builds. Build it and they will come? Real estate mania beyond comparison; man made islands, underwater hotels, building after building for a city of only 1.5 million people. The numbers are staggering. Dubai is building enough office space for half of the world to relocate there. All in a region of volatility and government directed spending as opposed to investment based on market demands. Sound familiar? Sounds like China which ironically is also polishing off its latest skyscraper, a 101 story building. A sign of irrational exuberance? If Dubai is building anything, it's a huge mess in my estimation. A better use for its oil profits would have been education, civil rights reforms, market based reforms and democratic institutions. In other words, investments leading to sustainable growth and increased stability. Not more cement ponds.

The Skyscraper indicator is an obscure and anecdotal indicator coined post the 1929 crash. Before the Great Depression the U.S. had started construction on the Empire State Building, the Chrysler Building and a few others at the peak of the U.S.'s irrational exuberance.

This data point has led economic peaks since in many countries including Malaysia, Taiwan and even the United Arab Emirates. Middle Eastern markets are already experiencing their stock market crashes or the first phase of them as we talked about last year. And while not the tallest buildings, real estate booms also preceded massive busts in Thailand and Japan. What does this mean for the global real estate boom seen in Russia, Europe, China, the U.S., Australia, Asia, the Middle East, etc?

While the indicator is interesting and a potential sign of irrational expectations of a given economy at a point in time, what I find most interesting is the unprecedented amount of massive new structures around the globe that has been erected over the last ten years as well as what is being planned on a go forward basis. And where are many concentrated? Asia. Does this point to a decade long rounding peak for the global economy or a hiatus from the perceived "unstoppable" globalization? Or does this point to the rise of Asia and the demise of Europe, the U.S. and western culture? Or does it really mean anything? Time will tell but I would point out that while the indicator is anecdotal in nature, there is some validity to be concerned about the global economic build out as I have discussed for more obvious reasons.

Exchange rate dynamics and high commodity prices are surely not sustainable wealth creators. Why this is so difficult for people to understand is beyond me. Human nature 101; why do today what you can put off till tomorrow? Repressive regime 101; why give people true free market and democratic reforms when you can give them just enough of an illusion?

This begs a question. Does temporary wealth created under unsustainable circumstances historically lead to liberalization and democratic reform? Or does democratic reform and liberalization lead to sustainable economic growth? Any historians, psychologists or sociologists reading this? I'm quite confident of the answer for a man eminently more wise than us shared the answer over two thousand years ago.

"I tell you that virtue is not given by money, but that from virtue comes money and every other good of man, public as well as private."

Unless emerging economies undertake serious and lasting reforms, much of their wealth is simply perceived and likely temporary.
posted by TimingLogic at 8:20 AM

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