[Texgreen] Saudis may dump dollars, leading to collapse

[Craig Miller]

I don't see how Mr. Evans goes from "Saudi Arabia has refused to cut interest
rates in lockstep with the  
US Federal Reserve for the first time" and that because of this then the
following must be true, "signaling that the oil-rich Gulf kingdom is preparing
to break the dollar currency peg".  I don't see how one causes the other.  What
am i missing?

The Saudi's have an enormous capital investment in this country.  AND
economically they do well by us.  They learned this in the '70s.  Things have
been hunky-dory for so long because they need us to fund all that they need to
be and to maintain their control.  The pusher needs the junkie.  They won't turn
on us until they are prepared to go all the way to sink us, and have another
adequate consumer secured for all they need to sell.  

Craig Miller




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---- On Thu, 20 Sep 2007, Roger Baker (rcbaker@eden.infohwy.com) wrote:

...As a close ally of the US, Riyadh has so far tried to stick to the  
peg, but the link is now destabilising its own economy.... The  
Federal Reserve, however, clearly calculates the risk of a sudden  
downturn is now so great that the it outweighs dangers of a dollar  
slide...

In other words, crank up the printing presses and maybe we can  
inflate our way out of this mess. -- Roger

                     
***********************************************************



Fears of dollar collapse as Saudis take fright

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:39am BST 20/09/2007

Saudi Arabia has refused to cut interest rates in lockstep with the  
US Federal Reserve for the first time, signalling that the oil-rich  
Gulf kingdom is preparing to break the dollar currency peg in a move  
that risks setting off a stampede out of the dollar across the Middle  
East.
# China threatens 'nuclear option' of dollar sales

Fears of dollar collapse as Saudis take fright
Ben Bernanke has placed the dollar in a dangerous situation, say  
analysts

"This is a very dangerous situation for the dollar," said Hans  
Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund,  
and the entire region has $3,500bn under management. They face an  
inflationary threat and do not want to import an interest rate policy  
set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate  
measures" to halt huge capital inflows into the country, but analysts  
say this policy is unsustainable and will inevitably lead to the  
collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the  
peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already  
caused a plunge in the world dollar index to a fifteen year low,  
touching with weakest level ever against the mighty euro at just  
under $1.40.

There is now a growing danger that global investors will start to  
shun the US bond markets. The latest US government data on foreign  
holdings released this week show a collapse in purchases of US bonds  
from $97bn to just $19bn in July, with outright net sales of US  
Treasuries.

The danger is that this could now accelerate as the yield gap between  
the United States and the rest of the world narrows rapidly, leaving  
America starved of foreign capital flows needed to cover its current  
account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of  
the long-term US debt markets, leaving the dollar dependent on short- 
term funding. Foreigners have funded 25pc to 30pc of America's credit  
and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying  
nicely, but why bear the risk in these dramatically changed  
circumstances? We think that a fall in dollar to $1.50 against the  
euro is not out of the question at all by the first quarter of 2008,"  
he said.

"This is nothing like the situation in 1998 when the crisis was in  
Asia, but the US was booming. This time the US itself is the  
problem," he said.

Mr Redeker said the biggest danger for the dollar is that falling US  
rates will at some point trigger a reversal yen "carry trade",  
causing massive flows from the US back to Japan.

Jim Rogers, the commodity king and former partner of George Soros,  
said the Federal Reserve was playing with fire by cutting rates so  
aggressively at a time when the dollar was already under pressure.

The risk is that flight from US bonds could push up the long-term  
yields that form the base price of credit for most mortgages, the  
driving the property market into even deeper crisis.

"If Ben Bernanke starts running those printing presses even faster  
than he's already doing, we are going to have a serious recession.  
The dollar's going to collapse, the bond market's going to collapse.  
There's going to be a lot of problems," he said.

The Federal Reserve, however, clearly calculates the risk of a sudden  
downturn is now so great that the it outweighs dangers of a dollar  
slide.

Former Fed chief Alan Greenspan said this week that house prices may  
fall by "double digits" as the subprime crisis bites harder,  
prompting households to cut back sharply on spending.

For Saudi Arabia, the dollar peg has clearly become a liability.  
Inflation has risen to 4pc and the M3 broad money supply is surging  
at 22pc.

The pressures are even worse in other parts of the Gulf. The United  
Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar  
it has reached 13pc.

Kuwait became the first of the oil sheikhdoms to break its dollar peg  
in May, a move that has begun to rein in rampant money supply
growth._______________________________________________
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