Fears of Dollar Collapse as Saudis Take Fright
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.
When Bernanke drastically cut interest rates, on September 18th, ostensibly to support the American homeowner, but also to support the US mortgage industry (and what do you know it worked out pretty well for the stock market also), it sucked for the rest of the world, which has to deal with our inflation. I thought there would be a backlash, but for it to come from the Saudis first, that must sting. Bernanke is probably saying "I thought you were my friends!"
It pissed me off that we sold the fraudulent mortgage bonds overseas. I mean that we sold these stupid homes for way too much money and then packaged them into crazy bonds, that was bad enough. But then we went and sold them to foreigners - that was rude. I think Wall Street's "collateralized debt obligations" and other such trash have done for American financial credibility what Iraq did for American military credibility. That is to say wrecked it.
I don't know how much US mortgage debt the Saudis bought. But they have, I think, 800 billion in US T-bills. I read somewhere most of it is short term, too. And if we insist on flooding our markets with "liquidity", i.e. printing cash to save our own markets, and driving down the dollar (which is making 14 year lows this week), all those bond holders are going to get annoyed. They may just decide to sell off their dollars. And the Chinese, and the the Koreans and the Brits for that matter (I know Britain could use the cash right now). They may start to think it would be better if they sold first, because no one wants to be the last to sell. It could become a rout. Is it the apocalypse? No: its just the worst recession since the depression. Maybe it will be like the depression, if we don't get it together.
The problem is not just all the foreign owned treasuries, the even bigger problem is the petro-dollar itself. This is why getting the finger from Saudi Arabia, of all places, is so significant. It is a very strong signal that they will sever the riyal from the dollar for good. And if they do that, why would they want to insist on only accepting US dollars for their oil? The petro dollar has been under fierce attack for a year now, fom Russia, which sells oil for euros and rubles now, from Venezuela, from Iran, which sells for yen, and Kuwait, which pegs the dinar to a basket of currencies. The dollar is crumbling, day by day. Saudi Arabia has been one of the pillars that has supported it since the seventies. The business deals that Kissenger put together with OPEC were one of his most long reaching and successful ideas: that oil could only be traded in US dollars, anywhere. And for the most part, except the Soviet Union, this deal has held together, for the immense profit of a few super-rich families and for the American empire.
Until yesterday, that is, when Saudi Arabia said fuck you.