Time to panic again! Or, on second thought …

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So I was too busy smashing potatoes (with shallots, butter and cream), falling asleep in front of the TV with the Giants-Broncos game on, and other such important matters Thursday to pay attention to the global market freakout occasioned by Dubai World’s announcement that it was going to stop paying its debt bills for six months. (Dubai World is the investment arm of the Dubai government; if you want to catch up on the story, read FT Alphaville).

As of this morning, things are already calming down a bit. Some Asian markets were down sharply overnight, and U.S. stock markets started the day 2% down. But European markets, which took the brunt of the hit yesterday, are up on the day. And while there’s certainly been a bit of a rush to safety in debt markets today (with investors buying the likes of U.S. Treasuries and selling emerging market debt), it is so far not indiscriminate and of pretty modest proportions.

Anyway, I was about to write a list of the different spins one could put on the Dubai troubles, then I saw on my RSS reader that Krugman had beaten me to it. His taxonomy sounds about right, so:

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

Krugman thinks it’s a combination of No. 2 and No. 3 (sorry, left that out when I first wrote the post).  Obviously he’s going to downplay interpretation No. 1, because he’s been calling for more government borrowing and spending to fight unemployment in the U.S. But that doesn’t mean he’s wrong.

Meanwhile, we can all watch how world markets react to the Dubai news. A return to the indiscriminate panic of last fall would be really bad. A move toward a more skeptical attitude toward risky assets, in which investors feel compelled to do more work to sort out the dodgy from the relatively safe, would be a really healthy development. So far I think we’re getting the second reaction.

I should add that another important side-effect of the whole Dubai mess is that it has allowed Felix Salmon to use the word Anstaltslast again.