We're in the money, come on my honey, let's lend it, spend it, send it rolling along," sang the film starlet Ginger Rogers back in 1933. "Oh, yes we're in the money, you bet we're in the money, we've got a lot of what it takes to get along!" In fact, the US was not in the money, nor indeed was the rest of the world. The global economy was in the grip of the Great Depression and economists warn that we may be in for more than a Fred Astaire and Ginger revival if things do not get better quickly. The world is in the midst of a financial sandstorm that is ripping up enormous swathes of wealth.
You may be asking yourself, what the heck do America's golden oldies or its bygone economic cycles have to do with me? For starters, emerging markets in Asia and the Gulf still rely on a steady stream of export income from the West, and demand for those exports is dwindling fast as the economies of the US, Europe and Japan slip into recession. Fast-growing emerging markets have achieved a significant level of trade and investment between them to help offset the loss of those exports to the West. But not enough to keep from suffering a body blow to growth.
The problem is that when it comes to spending, no one can spend like an American. Asians have known hard times and so typically save up just in case. Chinese, for example, save up to half their income. Americans save virtually nothing and spend everything. Mortgages forced them to save against their inclination, and so the US was able to borrow against the equity in its homes. Who did they borrow from? Developing economies, which lent the US the money with which it bought their products, from Japanese cars to Taiwanese computers, Chinese toys and, of course, oil - lots and lots of oil.
That's all unravelling, thanks to a final explosion of credit to America's least creditworthy borrowers. Now Americans want smaller cars and less gas to drive them. Perhaps worse, though, is that over the years developing economies were so busy saving that they never managed to build up their own debt markets. Instead, companies in emerging markets tended to rely on banks to channel deposits to them in the form of bank loans, or if they wanted to sell bonds or stocks, hired western banks to sell them in global markets.
That worked out all right as long as it lasted: big Wall Street banks had more experience, could take on bigger deals and global markets were big enough that even small borrowers in risky markets could find investors willing to give them money. As Ginger sang, Americans spent it, lent it and sent it rolling along. Now emerging markets have another problem: big western banks are folding, global markets are imploding and international investors are running for the hills. So while developing economies still have huge piles of savings, they don't have the means to mobilise it as efficiently.
"What's missing is the tools and financial infrastructure," said Ziad Makkawi, the chairman and chief executive of Dubai's Algebra Capital. "You can't have sustained economic growth without a well functioning debt market." The Gulf, for example, has oodles of cash, lots of it locked up in central banks and sovereign wealth funds, with even more sitting in bank accounts all over the world held by wealthy Gulf Arabs. And Dubai has made great progress on the markets front with the Dubai International Financial Centre, drawing an estimated 10,000 bankers from around the globe who have raised the bar for corporate governance and investor sophistication.
But that's just Dubai. Without a viable capital market to match that money with profitable ventures, funding throughout the Gulf is bound to become more difficult. The Gulf has hundreds of billions of dollars in planned infrastructure projects, but Mr Makkawi warns: "we'll be struggling to finance even half the planned infrastructure." Banks in the region are already reining in credit. That means a lot of the more extravagant projects will go by the wayside. Economists say that would be healthy. But so, too, might needed developments, like the US$50 billion (Dh183.66bn) in projects needed to keep the GCC from suffering partial blackouts.
And that's in the affluent Gulf. "The events of September could be a tipping point for many developing countries," the World Bank president Robert Zoellick warned this week. "A drop in exports, as well as capital inflow, will trigger a fall-off in investments. Deceleration of growth and deteriorating financing conditions, combined with monetary tightening, will trigger business failures and possibly banking emergencies."
Funding was already drying up around the region before the latest avalanche of bank failures. Syndicated loans dropped 15 per cent across the Middle East in the first nine months of this year compared with last year, according to Thomson Reuters. Syndicated loans rose 73 per cent in the UAE, but project financing fell 57 per cent, part of an 18.6 per cent decline in project financing across the Middle East.
On the bright side, this shortfall of financial intermediation represents an opportunity for cash-rich investors and bankers eager to break into markets once dominated by big foreign banks. But some economists warn that much of the emerging world's wealth could be lost in the maelstrom. "It has destroyed a significant part, if not all, of the equity of the financial system of the world," said Richard Duncan, who advised the International Monetary Fund during the Asian financial crisis in 1998, and who predicted much of the current mess in his 2003 book The Dollar Crisis.
Much of the world's financial system would have to be nationalised, Mr Duncan said, as derivative losses wiped trillions of dollars off the global economy. After a period of falling prices as economies contracted, the cost of the bailout would likely rekindle inflation, he said, eroding even more of emerging Asia's savings than have already been lost in the markets' downdraft. Let's hope things look a bit brighter next week. In the meantime, here's a bit of philosophy from the Depression-era songbook, courtesy of Vaudevillian Ray Henderson: "The sweet things in life, to you were just loaned, so how can you lose what you've never owned? Life is just a bowl of cherries, so live and laugh at it all."
warnold@thenational.ae