There’s an old adage that only a fool builds a house upon sand. We could modernize this by saying it’s foolish to build a skyscraper upon a bubble of credit. Indeed, looking at the history of financial crises over the past hundred and fifty years, building heights offer a rather good indicator of economic excess.
Let’s look at the record. The first skyscraper to rise above 100 meters, the now demolished Manhattan Life Insurance Building in New York, was built in the middle of the 1890s depression. The first to surpass 200 meters, the Met Life Building in New York, was completed just a year after the banking panic of 1907. The Chrysler and the Empire State Buildings (respectively 282 and 381 meters) were completed in the early 1930s. The World Trade Center (417 meters) was built in 1972 and the Sears Tower in Chicago (442 meters) in 1974, in the middle of the first oil shock. The Petronas Towers in Kuala Lumpur (451 meters) was completed in 1998, a year after the Asian financial crisis. There’s plenty of evidence for what economists would call a positive correlation between tall buildings and bubbles.
Thus, Dubai’s recent race to skies should have warned us of a possible crisis. The Burj Dubai, topped out in January 2009, soars to 818 meters (2684 feet), by far the tallest structure ever built. But even this giant would have been dwarfed by another planned super-tall building in Dubai, over a kilometer in height, the Nakheel Tower. This dream has been put on hold for the time being.
After triggering an initial wave of panic throughout financial markets worldwide last week, things have returned to normal and equity markets continue to rally. So we can say that the liquidity-induced market pickup this year may have withstood its first real test. But the Dubai incident also shows how frayed the nerves of market participants still are.
While the default of the government-backed investment company Dubai World does not equate to a default by the government of Dubai, it does serve as a chilling reminder that debt has its limits. Even with no tall building as an emblem, we must acknowledge that the skyrocketing amounts government debt worldwide are also built upon the sands of credit and are simply not sustainable over the long haul.
And if we take the skyscraper indicator seriously, there is good reason to remain rather cautious and alert. According to skyscraperpage.com, sixteen buildings over 400 meters in height are currently under construction worldwide, fifteen of them in emerging markets and almost half of those in China alone.
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