Will the Saudis Dump U.S. Assets?
The relationship between Saudi Arabia and the U.S. is a rocky one these days. More precisely, it is a rocky relationship between the American people and the Saudi government. The White House is getting along with them just fine.
Obama was visiting Saudi Arabia this week amid increasing tensions. Congress has proposed legislation that would permit Saudi officials to be held liable in U.S. courts for any role they may have played in the September 11, 2001 attacks.
The Saudi foreign minister, meanwhile, has reportedly threatened to dump up to $750 billion in U.S. assets if such legislation is passed.
The Obama administration is against the legislation that would remove this immunity, arguing that other countries could retaliate with their own legislation against Americans. Rather than actually being worried about the American people, perhaps Obama and company are more worried about themselves in regards to being held responsible for such things as the drone bombing of hospitals in Afghanistan.
After all, if Saudi officials are held responsible for a possible role in the 9/11 attacks, what is to stop other foreign countries such as Iraq, Afghanistan, Pakistan, or Libya from holding U.S. officials responsible for the deaths of innocent people at the hands of U.S. bombing campaigns?
One of the main things that has brought up this whole issue nearly 15 years later is the 9/11 Commission Report, which contains 28 pages of redacted information. For those who have been privy to seeing the missing 28 pages, there is supposedly evidence that links Saudi officials — including those in government — to those who committed the terrorist attacks. This would include funding the campaign.
This story was recently covered on 60 Minutes, and it has really been brought to life. There are increasing demands that these 28 pages be released for the public to see.
In the words of the government, if you’ve done nothing wrong, what do you have to hide?
If there were Saudi officials — or anyone else — who knowingly played a role in funding or supporting the 9/11 attacks, then they should obviously be held responsible. The U.S. was quick to go to war in Afghanistan (which is still ongoing) to push down people who did not have a direct role in the 9/11 attacks. Meanwhile, 15 of the 19 hijackers originated from Saudi Arabia, and now there are strong suspicions that Saudi government officials played a role in the attacks.
Now, I am certainly not suggesting that the U.S. start a war with Saudi Arabia.
While some members of Congress are trying to get the 28 pages released and also revoke immunity for Saudi officials, why don’t they start with what should be an easy step? Congress should stop funding and supporting the Saudi government.
Calling Their Bluff
While it is a serious situation, the threat by the Saudis to sell off three-quarters of a trillion dollars in U.S. assets is hilarious. Do they even own this much?
In terms of U.S. Treasury securities, it is not known exactly how much the Saudis own. Based on the U.S. government’s own statistics, the major oil exporting countries combined own $281 billion in U.S. debt.
Now, maybe there are corporations controlled by the House of Saud that have invested in U.S. debt, but it is doubtful that it would be hundreds of billions of dollars.
So if the Saudi government does actually own $750 billion worth of U.S. assets, much of it is not in U.S. government debt. They could own any number of things including U.S. equities, real estate, corporate bonds, or any number of investments.
The Saudi government would also face the problem that any major holder of any asset faces. If they try to sell it all at once, they won’t get what it is currently worth. If Bill Gates tried to sell all of his Microsoft stock in one day, the last of the shares he sold would be worth a lot less than the first shares sold.
And here is another question for the Saudis making this threat: where exactly are they going to put $750 billion worth of capital? Are they going to buy real estate in China? Will they buy equities in Japan? It is not easy to invest three-quarters of a trillion dollars, especially when you are cutting out the largest single economy on the planet.
So to the Saudis, I say go ahead. Sell your U.S. assets. I dare you.
Some people may be scared that it would mean the end of the U.S. dollar as the world’s reserve currency. But that is going to end one day anyway. We might as well end the subsidy now.
It is also questionable if such a move would even significantly impact the dollar. When taken in context, China and Japan each own well over a trillion dollars in U.S. government debt. If anyone wanted to take down the dollar, it is the Chinese and Japanese who could do it. With Saudi Arabia, the impact is far more questionable.
An Unneeded Alliance
The White House has been really cozy with the House of Saud for a long time now. It isn’t just Obama and Bush before him. It is a long history.
Saudi Arabia has for a long time been the big producer of cheap oil. Americans are the big consumers of energy. The U.S. and Saudi governments have supported each other for a long time now.
The Saudis export cheap oil and use the U.S. dollar for global trade. In return, the U.S. supports the Saudi government with funds and military support.
This is not necessarily known widely amongst Americans, but the House of Saud is not all that popular in Saudi Arabia. If it weren’t for the support of the U.S., it is questionable if the royal family would even be able to hold on to power in the long term.
We don’t know what goes on behind closed doors, including this week with Obama visiting there. But from the average American’s perspective, this alliance is not necessary. And if it wasn’t necessary in the past, it really isn’t now.
Oil prices have fallen significantly over the last two years. Meanwhile, with the shale oil fields, the U.S. is now the number one producer of oil.
It is also important to remember that oil is a fungible good. It doesn’t matter where Americans get their oil. They just want to do so in the most efficient manner so as to get the cheapest price.
The Saudis can’t drink their oil. If they don’t sell it, it is virtually useless to them, except for their little consumption of it. They have to sell it to someone or else starve.
And the Saudis really are dependent on oil. Without it, the nation turns into a poverty-stricken third-world country.
In other words, Americans don’t have to be bribed by the Saudis. They need us a lot more than we need them. All tax-funded foreign aid should cease. If the House of Saud falls, then the next dictator in there will sell the oil.
The Saudi government is already hurting from the low oil prices. They have already been tapping into reserves due to the shortfall in oil revenue. They may end up selling some U.S. assets not because of any legislation related to 9/11, but because they need the liquid money.
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A Future Dollar Dump
Legislation probably won’t pass in Congress. The 28 missing pages may or may not be revealed. The Saudis may or may not be implicated in the 9/11 attacks. But they probably aren’t going to sell off all of their U.S. assets.
This isn’t to say that we shouldn’t prepare for a day when U.S. Treasuries are sold off. Again, the biggest threats are China and Japan.
I don’t think the Chinese or Japanese are going to intentionally start an economic war with the U.S. by selling U.S. debt. But this also doesn’t mean that they won’t one day reduce their holdings significantly.
Both the Chinese and Japanese are concluding their experiments of massively centrally planning their economies. They are both going to go bust with massive recessions. They have both started already, despite the continued monetary inflation and debt accumulation.
At some point, they may just need some money because they are fiscal train wrecks waiting to happen. Japan’s debt-to-GDP ratio will hit 250% soon.
It would not be surprising to see the Chinese and Japanese central banks sell off some assets in an attempt to soften a deep recession. This would include U.S. Treasuries.
Meanwhile, Russia is turning its back on the dollar and has been steadily accumulating gold.
As major economies falter and the U.S. dollar becomes less reliable as a world reserve currency, there will be a shift in mentality. The U.S. dollar will eventually lose its status as the world’s reserve currency, but not because of anything that Saudi Arabia alone does.
People will be looking for something that is safe, stable, and reliable that isn’t based on debt. It has existed for thousands of years. Gold will come back in favor. It will once again become a form of money.
Just as it will be important for central banks to hold gold, individuals will find it important as the major fiat currencies of the world are called into question.
Until next time,
Geoffrey Pike for Wealth Daily
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