Nearly free but hardly easy

Markets: Everyone knows money is not a panacea. Cash cannot cure broken hearts, and all that. But the news from Dubai and the foreign exchange markets shows that ample supplies of money can’t even solve all financial problems.

Credit may still be tight for many borrowers, but the world’s governments and central banks are spreading around plentiful supplies of cheap funds. Policy interest rates are about as low as possible, and government deficits, which put additional cash into the financial system, are giddily high in most of the world.

This multilateral and multi-pronged stimulus has buoyed many markets — from commodities to Asian real estate, equities, credit, and government bonds. Without it, bank losses would be higher and the recession would presumably have been deeper and longer. No one has thought of a better way to deal with the popped credit bubble.

But the money flood cannot smooth down every mountain of foolish debt. In Dubai, oil revenues from the neighbourhood and credit from the world were supposed to pay for the construction of a financial hub. The cash has now run out.

On Wednesday afternoon, the emirate’s largest holding company, Dubai World, asked creditors for a standstill on payments on $60 billion or so of debts. A thorough restructuring may be the best way forward for Dubai, but investors were shocked. The spread on the emirate’s sovereign credit default swaps widened by one percentage point and European stock markets dropped two percent on Thursday morning.

Dubai’s problems are a relic from the past. The future is also a worry — no one is sure what happens to markets and economies when the stimulus is withdrawn. The price of gold is soaring in large part because investors are buying the yellow metal as insurance against monetary calamity.

The monetary support is also causing troubling side effects in the present. Low dollar interest rates and the fear of future inflation are pushing the greenback down. On Thursday, it fell below 87 yen, the lowest value since 1995. There is talk of trade disruptions and government intervention.