[Texgreen] Saudis may dump dollars, leading to collapse

[Roger Baker]

On Sep 20, 2007, at 2:22 PM, Craig Miller wrote:
> 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
>


Salon tends to say you are right about this writer drawing bad  
conclusions about Saudi link to the dollar see the bottom of this post.

  I do not understand the threat of a close link between US and Saudi  
interest rates. I only try to understand international finance and am  
certainly naive on some points. The US dollar is in bad shape right  
now, and we face the threats of both inflation and an economic slump.

Meanwhile,  it looks more and more like the Persian Gulf, which  
probably has most of the world's remaining oil, has now peaked in  
production. At least they are not increasing production recently  
despite the recent high oil prices, and world production is stagnant  
for years in spite of rapidly increasing prices. In other words the  
market is not behaving normally by expanding production in response  
to higher price; it looks like producers are hitting the wall.

Since China and the rest of the world are as addicted to oil as the  
USA, there is no difficulty finding willing buyers, even as the price  
rises.  Some buyers, like the USA, are so desperate for oil we  
actually invade countries like Iraq and try to steal oil and further  
dominate the whole region.

So we are far more dependent on Saudi Arabia than they are on us, so  
they they have every incentive to act like rational and independent  
agents by ceasing to do economic favors for the USA that strain their  
domestic Saudi economy, even if it pisses off the the US powers that be.

Here is root of the problem. The dollar is trying to fulfill the  
contradictory roles of preventing an economic crisis by using the  
federal reserve interest rate as the only tool. That one main tool is  
way out of date.

Not only does the dollar now need to play this domestic role, but  
nowadays the dollar also has to be trusted as a stable international  
currency, as THE standard reserve currency for world trade, despite  
the dollar being backed up backed up by nothing at all beyond US  
military might and historical tradition.

> 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.


This part of what I posted earlier does seem true. The fed is caught  
in an economic  policy trap that tends to lead to serious stagflation.

Bottom line: Why should foreigners keep lending about $2 billion per  
day to a seemingly bad credit risk like the United States, just so we  
can squander the money on foolish destructive addictions like driving  
SUVs?

-- Roger

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

> From Salon:
>



Is Saudi Arabia afraid of the dollar?
The once almighty greenback is losing supporters. How scared should  
we be?

Andrew Leonard

Sep. 20, 2007 | Ambrose Evans-Pritchard, the international business  
editor of the U.K.'s conservative-leaning Daily Telegraph, sure knows  
how to move markets. In early August, he sent a shiver through bond  
investors when he reported that China was planning to "drop the bomb  
on the American dollar" in retaliation against trade pressure from  
the United States.

This week, on Wednesday, he sent similar shock waves through  
international currency markets with his speculation that a Saudi  
decision not to lower interest rates in "lockstep" with the U.S.  
signaled that the kingdom was planning to remove the "peg" that keeps  
the value of the Saudi riyal in a fixed relationship to the U.S.  
dollar. This possibility unnerved traders enough to send the already  
weak dollar to a historic low against the euro.

I have noted previously that Evans-Pritchard's theories about Chinese  
intentions had some serious holes. His previous life as one of the  
more wacky anti-Clinton conspiracy theorists also does little to  
build confidence. And just as recently as a few days ago, Evans- 
Pritchard was spectacularly wrong when he suggested, in an article  
titled "Bernanke Will Prove Sterner Than Wall Street Thinks," that  
the Fed chairman might not be as quick to bail out the markets as  
investors were hoping.

One can even quibble with the key factual assertion in the first  
sentence of his analysis of the Saudi interest rate move.

     Saudi Arabia has refused to cut interest rates in lockstep with  
the U.S. Federal Reserve for the first time, signaling 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.

However, a Bloomberg News story quoted an advisor to Saudi Arabia's  
King Abdullah as saying that there were no plans to drop the peg, and  
noted:

     Saudi Arabia has not always followed the Fed's rate cuts, Monica  
Malik, chief economist at EFG-Hermes Holding said in a telephone  
interview from Dubai. It did not raise interest rates in 2006 along  
with the Fed to help revive its sagging stock market, she said.

None of this should be taken as an argument that the dollar isn't  
weak, and getting weaker, a trend that has incalculably huge  
consequences for the global economy. From an international  
perspective, the United States has been living on credit for years,  
with foreign investors acting as enablers through their insatiable  
appetite for U.S. Treasuries and other dollar-denominated investment  
vehicles.

There is a self-fulfilling prophecy aspect to the dollar's downward  
journey. A weak dollar pumps up the pressure on holders of dollar- 
denominated assets to diversify out of dollars, which only ends up  
making the dollar even more infirm. In that type of market, traders  
get increasingly nervous, to the point that even a sketchy piece of  
journalism by a historically unreliable narrator can make speculators  
all over the world push the sell button.

That's the scary part -- not what the Saudis might or might not do.