Once every few years a country makes a decision that leaves the global financial community scratching its collective head and reminds the world why US debt continues to be greedily devoured even in times of miniscule yields. One need look no further than Dubai for the 2009 edition of this phenomenon.
What is perhaps most interesting about the city state's decision to postpone debt payments on two sovereign-controlled corporations is the shocked reaction of investors. Unfortunately, like the pricking of an asset bubble or a down cycle in the economy, history tells us that occasional defaults on sovereign debt are inevitable. Of course, this is not to say that foreign investment or attempting to gain the best return possible are not good strategies. Indeed quite the opposite is true. However, it does highlight the risk/return equation, which indicates that investors in Dubai have a right to be disappointed, but should not be shocked. At the same time and on the other side of the coin, it highlights how the US is able to continue to fund gargantuan projects, including multiple wars, while providing next to no return to investors. To wit, it has never defaulted on a debt payment since Hamilton's First Bank of the United States was created for the very purpose of avoiding doing so.
In the end, therefore, those who invest in the US, like those who invest in Dubai, may be disappointed, and occasionally angry, at least when calculating returns. However, days like this remind them that these returns help them avoid being shocked, and serve the rest of the world a needed reminder of the risk/return equation. This can be a tough lesson, but like lessons regarding asset bubbles and economic cycles, it is one seldom learned.
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