Batten down the hatches, here come the mercantilists

The dollar's decline continues, no doubt lending ammunition to those predicting a return to stagflation. Some now foresee that the global recession will accelerate the process that was already underway during the boom - the rapid shift of wealth from West to East, with all the political ramificiations that entails. One immediate, and not entirely welcome, side-effect will be a turn away from the free-market gospel of the Anglo-American model -whose faith in self-interest led to the cocaine-like addiction to leverage in the economy - and towards a more highly regulated mercantilist model like China's. The problem still remains, however, that in clamping down on global regulatory arbitrage, countries risk choking off their sources of development funding. Evidence, meanwhile, of how the Gulf is being hit by the full weight of the crisis continues to mount, with Saudi Arabia predicting a budget deficit next year, it's first since 2002. Kuwait is reviewing energy projects, expanding on a likely wave of cutbacks in petroleum investment that economists warn has set the stage for another painful spike in prices donw the road. And banks and brokerages in the UAE have begun joining developers in sloughing off jobs. Within the UAE, however, Abu Dhabi appears to be somewhat insulated, largely because it got such a late start to the global investment bubble. Property construction is still far behind demand and the airport continues to show higher traffic. If stagflation does indeed return, oil's decline will prove to have been overdone. [e-mail]