Posted on 09/20/2007 10:15:25 AM PDT by MittFan08
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.
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.
"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."
- end quote -
Now most of the "you'll know we are really in economic trouble" scenarios I've read about in recent years involve in some way the same scenario- foreign investors stop buying US treasury bonds. Basically, our government and nation have allowed our economy to become dependent upon foreign banks buying our long-term bonds, thus financing our account deficit.
The hope has been that China and Japan will know that they need a strong American economy in order to sell their products and that the Arabs will need the same to sell their oil, so that they will keep buying bonds even though their are better investments out there.
Well, if this latest news is any indication, our treasury bonds at current yields are seen as such bad investments that foreign banks have stopped buying them, in spite of the harm this causes our economy and the US dollar. Now, China or Saudi Arabia aren't going to deliberately "crash" the dollar by announcing with great fanfare that they won't buy our bonds any more. That would make no sense because it would devalue their remaining dollar-denominated holdings. Instead, what they are likely to do is quietly start selling their bonds to diversify their risks. And it sounds like that has already happened.
Assuming this continues, we will have no option but to start offering higher yields on long term bonds to get people to start buying them, including the 10 year bonds that mortgage rates are so closely tied to. If that happens, mortgage rates will go up and the housing market will be an even bigger mess than it is already.
So anyway, I hope I'm wrong, but this is not a prediction that foreign banks will stop buying our bonds- apparently it has already started happening. And we'll be in deep trouble if it continues.
Feewww! I almost thought that said “Fear of Dollar Collapse As Saudis Take Flight”. Don’t much care for flying with Saudis.
Further signs of the apocolyspse ——
this is somthing I didnt expect to see either:
http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=CAD&submit=Convert
$1.00 US = $1.0021 CAN (been as bad as $1.0006 today)
Never thought I would see this happen.....
nearly as frightening as it was yesterday on the other thread.
Except for OIL, which we can no longer even search for or refine locally due to Liberal Democrat EnviroNazi’s, this IS NOT a bad thing...
The cost spread between outsourcing and manufacturing in America is falling.
Well we need to drop the value of the dollar (the price of labor) lots more if we are going to complete with the Chicoms.
Exactly correct, see my 6
It was time to stop borrowing and start paying down our debt years ago. But no one wanted to do that.
Maybe a weaker dollar will mean that all of the outsourced jobs will come back...
Bought any European goods lately? Canadian?
This will help us export more goods and services. In otherwords, more economy.
It’s good because . . .
It’s bad because . . .
Was the killer asteroid detection system activated when the meteor hit Peru and sickened the village? Did they see it coming? Would it matter?
>It was time to stop borrowing and start paying down our debt years ago. But no one wanted to do that.<
Like at least 25 years ago! Between the Saudis and China, I haven’t liked where the U.S. placed in the economic world, and none of this comes as a surprise. The only surprise is that it didn’t come much sooner.
In 1982 I was hoping for a heavy recession to force a reduction in spending on both the personal as well as the Federal level. It was high time then to cinch in our belts and to live within our means but we were deftly manipulated right out of that possibility by the Fed. And it’s been building steadily ever since, and the balloon will take just so much air.
Some of the posts in the thread are actually more informative than the article itself. My Post #69 in particular (LOL) offers a very good illustration of what drives much of the behind-the-scenes activity in the oil business.
1973 Threat to Seize Arab Oilfields
The parallels between 1973 and 2007 are actually quite striking, when you think about it.
The U.S. economy is worth $13 Trillion of annual GDP, last I checked.
The multiple for companies on Wall Street is about 15X trailing earnings.
That means the value of America is about $195 Trillion today, for a rough guess.
That the Saudis might take $3.5 Tillion and go play in another sand-box represents the sale of 1.7% of all the dollar value washing about the world.
I think we could stand that.
I’m very concerned about the inflationary expectations the Fed continues to ignore. But I’m not too concerned about how the Saudis invest.
I am concerned about the Saudi “investments” that are the font of Global Terror Inc. Saudi Arabia is the source of everything that is Al Qaeda:
Leadership
Staffing
Indoctrination
Cash
Ideology
Safe Haven
Or maybe since Bush and Congress didn't get amnesty and massive guest worker problem, and their dreams of cheap foreign labor, they've decided that Americans must become the needed cheap labor through a significant devaluation of the dollar.
One other point. WHy would anyone want to invest in low interest U.S. bonds when the negative currency effect of a falling dollar is of greater magnitude than any interest earned on the bonds? It’s a money losing proposition.
To me, today the choice isn’t between options to save the economy, but which economic disaster do we wish to endure? Massive inflation related to low interest rates and out of control government spending (i.e. lets print more $$) or a collapse of the housing and mortgage markets?
There is no way out of some significant economic pain. The world economy is strong enough to withstand a U.S. meltdown.
Good thread - thanks for the link.
I recall reading how Nixon ordered Fed Chairman Arthur Burns to deflate the Vietnam War/Great Society debt by printing money, but I never connected the dots between the resulting inflation and the 1973 Oil Embargo. What you wrote certainly makes sense, though- if political reasons were the real reason for the embargo, OPEC would have had an embargo after the 1967 War when they lost in much more humiliating fashion than in 1973 and managed to convince themselves that they did so because our carrier planes secretly aided the Israelis.
That does appear to be the plan.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.