The Dow reached 10,501 when Dubai's bankruptcy was averted by a $10 billion bailout from the United Arab Emirates, which is governed by its strongest oil-rich city-state, Abu Dhabi. Investors were relieved that the government stood behind loans made to Dubai World, a government-owned company. On November 25, the Dubai government said it would not guarantee the debt, sending world markets into panic.
Abu Dhabi joins a long list of governments forced to cover the debts of the businesses in their country to prevent wide-scale economic panic. In Abu Dhabi's case, it needed to prevent a credit downgrade of its own debt.
However, government bailouts transfer risk from CEO's to taxpayers. It shows the economic power of global corporations, which become too big to fail. These bailouts are necessary in the short-term to prevent further economic disruption, which will hurt taxpayers. In the long-term, it is just transferring risk from businesses to governments. In time, these countries could also become bankrupt, like Iceland.
What This Means for You
Increased uncertainty in global financial markets will continue to affect you in the next few years in unexpected ways. One of the best hedges against uncertainty is flexibility. For your investments, stay diversified, and avoid putting too much of your investments in any one asset class. For your job, it means having more than one stream of income. For more on how to do this, see The Freelance Economy.
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