And Now the Saudis
Argentine meltdown, here we come. The Saudis are showing signs of disinterest in going down the economic tubes with their friend George.
Saudi Arabia has refused to cut interest rates in lockstep with the USFederal Reserve for the first time, signalling that the oil-rich Gulfkingdom is preparing to break the dollar currency peg in a move thatrisks 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.
"SaudiArabia has $800bn (£400bn) in their future generation fund, and theentire region has $3,500bn under management. They face an inflationarythreat and do not want to import an interest rate policy set for therecessionary conditions in the United States," he said.
TheSaudi central bank said today that it would take "appropriate measures"to halt huge capital inflows into the country, but analysts say thispolicy is unsustainable and will inevitably lead to the collapse of thedollar 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. [my emphasis]
As Susie points out, one of the goals of the Iraq invasion was to punish Iraq for pegging its currency to the Euro, which made Saddam a pretty penny until BushCo came and took his country away. Iran had been threatening to switch its oil trade to its own currency exchange. The idea was that if we came in and 1) scared the shit out of anyone considering a Euro or non-dollar peg and 2) sat on some of the biggest undeveloped reserves, we would be able to sustain the dollar peg past the time when the world needed it for stability. Guess that didn’t work out so well.
And now our closest "allies" look to be the ones who will precipitate the move away from the dollar peg for the oil market. That’s going to give the rest of the world a whole lot less incentive to keep their reserves in dollars, which is going to mean we’re no longer going to be able to float George Bush’s debt with 2 billion dollars a day in loans from Asia.
The whole American economy is a gigantic house of cards at this point, and it may take nothing more than one slight breeze to bring it all down. Bernanke’s interest cut may have been that breeze.
The hurricane will be when the Chinese decide to stop rolling over their dollar-denominated reserves.
Andrew,
They appeared to be shifting some funds last month. If the peg is lost, I suspect we might see a bit of a stampede, and the Chinese are shrewd enough to beat the rush, I think.
Well, China is raising interest rates steadily to cool off its hot economy
http://www.forbes.com/markets/…..33048.html
But there are two tied together, but a bit different, dollar issues at work. Firs it tieing a currency to a set exchange rate against the dollar, which China for instance has done. This makes it hard for the dollar to gain export traction, as no matter how the dollar floats down, the Chinese currency falls with it so that the Chinese goods stay priced in proportion (continuing to flood with cheap goods that sell over the higher priced nationally produced goods). With a country who sends us a lot of goods (trade imbalance) and who holds a lot of our debt, it isn’t a good situation. Bush made a lot of noises at one point about trying to get the Chinese to float, but he had no leverage bc he wanted to continue to borrow from them to fund his war and his massive wealth shifts to cronies.
If the dollar got untied, then the Chinese would take a bit of an on paper bath on all their debt holding in the US, bc they would be repaid in dollars that are worth less and generate less yuan for them.
But in the Middle East, the other issue you have is that our trade imbalance is surrounding a particular good, oil. That good has traditionally been â€denominated†in US dollars. That means that everyone who denominates that way, buys and sells the product in dollars. Which means, they have to have US dollars to buy the oil. Which creates a demand for dollars.
If, in addition to untying currencies, the goods become denominated in a different currency – the already weakened dollar loses that much more demand for it.
This is the kind of very frustrating thing about the Bush pillagine and blunderplundering. He has set up all kinds of huge disasters that were and are very clear as disaster at the time he set them up (just like watching a college kid with no job apply for and get 18 credit cards and proceed to max them all out). However, the country had enough strength when it was handed off to him that the effects of what he has done will be showing up in future administrations and those leaders (as if we had such a thing in this country) will have to deal with the outfall from the enormous problems he has been creating.
The house of cards will come down. Is it wrong to hope that it comes down while Bush is in office, so they can’t pretend it isn’t his fault?
EPU’d from â€$1.40 post†– if we can all see this so clearly, where are the Democrats and Wall Street?
And it will get worse – there is an artificial discount on the price of imported oil due to the linkage of oil prices to the American dollar. If OPEC decides to price in Euros, or even diversify their petrodollars into other currencies (you can only recycle so many petrodollars back to the US through arms sales to the Gulf States), the pressure on the dollar will increase and inflation could skyrocket. Bush’s legacy in economic matters could in effect â€Carterize†the coming Democratic administration. Why the Democrats do not see the danger in being saddled with the mess instead of pulling the pin on these bombs now is beyond me.
This is really, really upsetting. And I think one issue that voters can easily understand – â€The dollar at all time low†it’s that simple.
In eight years, Bush has destroyed the one thing Americans could always depend on – the faith and trust in the dollar.
Dems need to go back to attacking Bush directly.
Now seems to me a great time to strike. That’s of course assuming they have any real interest in opposing him – I’m increasingly convinced they don’t.
Ishmael
Maybe they’re thinking it won’t blow back on them. I suspect they’re not thinking, just listening to their pet consultants: it would fit so well with the rest of the stuff they’ve done in the last couple of years. They really, really don’t see bad (or even good) consequences any more, just possible gains in the next election.
You can’t raise chickens in an apartment.
â€Apres Bush, le delugeâ€. The Democrats could easily find themselves the recipients of public anger over endless war, an emptied treasury and a ruined economy. A great deal depends on the actions of the next Democratic administration, do we get FDR after Hoover, or do we get Carter after Nixon/Ford?
Ishmael – I think you’re exactly right on the Carterizing worry – a return of stagflation and with underlying economic supports far more battered going into that cycle.
But it’s worse than all that. After Hoover and Ford we still had jobs in this country.
Dems need to pull the plug on this war and get serous about fixing the treasurey now. Yet from all I’ve heard, they’ve had their heads in the pork barrel just like the rethugs have.
We’ve got a real problem here. Likely the kind of problem that will ultimately re-boot the system, but it ain’t going to be any fun getting there.
Mary and Ishmael – And therein may lie a lot of the problem. If the sham works, great; if not, it will kill the hopes and dreams of the Democratic administration taking the reins. I suppose their further theory is that will then lead to a clamor for more Republican governance. The only thing missing is any concern for our country and our children.
Here is a question. Did Bernanke and the Bushies not talk to the Saudis and others before acting? Did they not foresee this? The Condi moments of â€Who could have predicted this would happen?†are increasing in their frequency. The wheels are completely off of the government of the United States. Impeachment is not just the right thing to do at this point, it is literally necessary for survival of any semblance of a healthy nation. It may already be too late.
The parallels to the Carter presidency are extremely worrying. Josh Marshall says that history only repeats itself to those who don’t know the details, but the fundamental problems are similar to those in the 1970s – an expensive land war in Asia that was paid for in inflation and not tax increases, the decline of the American dollar as an international currency following the abandonment of Bretton Woods, a rapid increase in oil prices, and a decline in real wages as a result of declining domestic production in manufacturing centres. The parallels to the present situation are frightening. The rest of the world sees this coming, and to a large extent is decoupling itself to the US economy. Canada is a perfect example, in the 80s almost 90 of our exports went to the United States, and now it is approximately 76%. In addition to the problem of a massively increased debt (almost doubling under President Evil II), the rest of the world will have less incentive to take the steps that will encourage an American recovery – they don’t necessarily need US domestic demand to fuel their economies with the increased demand in China and India.
As I understand it, Bush didn’t insist the Chinese float the Yuan on the world market – just the opposite of Reagan sending Baker to force the Japanese to float the Yen in the 80’s.
What Japan was doing was very clever. They had one bank – The Bank of Japan – and every Japanese put their savings in it. The Bank ’generously’ rewarded the captive clientele with 1.5% Interest.
Now, armed with hundreds of billions of Yen in Captive Assets paying a measily 1.5% (that couldn’t be taken out of the Country), the Japanese Government regularly bought our T-bills – which payed them 7-10% in Interest. They were making a fortune on their no-risk investment, which they turned right around and plowed into their heavy industry.
Did you ever wonder how Japan could import Iron from the US, refine it into ingots and ship it back to the US – and sell the ingots cheaper than the US Steel Companies could do it here at home without the transport cost?
To his credit, Reagan called bullshit on that and forcefully negotiated through Baker to make the Japanese float the Yen on the world market, thereby giving the Japanese workers access to more competitive savings rates, and US Busnesses a level playing field.
Bush didn’t do that with China, even as our Trade Deficit with China began skyrocketing to our economic-risk disadvantage. In the captive-market model, the Chinese don’t have free market pressures to keep them from being penalized for dumping dollars if they find a better deal with a stronger currency.
It would be unthinkable for the Rich, if US Treasury Notes ceased to be the gold standard of redeemable wealth in the world. But, the Rich have thrown-in with Bush and they shouldn’t have expected anything less.
Please correct me if I’m wrong, all I’m trying to say is: Everything Bush touches turns to shit.
Bmaz – if the US were a corporation, with Bush as the CEO, it would have been placed in receivership by now. Insolvent and out of control, with incompetent management. While Im sure the Saudis are pleased that the US has increased the value of their only asset by 400% by running up the price from $20 to $80 a barrel (and increasing the value of their remaining 100 billion barrels accordingly), I don’t give Bushco the credit for thinking these things through – it is all about the politics and keeping the economy on enough fumes to stagger across the election line without a depression or gas lines.
Great post.
I’ve been concerned about this for a long time. Carter had the unfortunate timing to be president when the bils came due from the war in Viet Nam. It’s pretty complicated for joe citizen but it shouldn’t be ignored. This issue should be brought to the forefront in the presidential debates – especially the repug debates. A simple question: †Considering the enormous debt accumulated to pay for the Iraq occupation, as president, how will you pay it back?â€
Bush bought the war on credit cards (his tax cuts too).
Dems need to keep reminding the public of that as the bills come due.
I too share your concerns on the dollar pegging.I would also include the subprime ARM adjustment that will peak in March ’08, and the collapse in financial services at about the same time. Bernake’s action was the breeze, let’s hope we can weather this storm.
A democrat will inherit this mess ala Carter and then we have a nice â€Stab in the back†theory which worked quite well for Hitler in the 30’s.
There is a silver lining to all this – The final debunking of the tyranny of â€Trickle down Economicsâ€
What a crock of shit from the get go, yet they sold it, and it’s still taught as a valid economic theory in universities.
Well, Bush finally put the threory in full effect, yet where is the return on this fabulous investment the rich will bestow on us commoners. This country is dead broke.
And where is all the money that the rich were supposed to invest back into the country – Well, pouring into foriegn currencies at the moment to be sure.
If you want to stimulate an economy, give the tax break to the lower and middle classes, They’ll go out and spend the money in our consumer and housing driven marketplace.
The rich are already spending all the money they are going to in consumer markets, over inflated stock markets and investment in foriegn currency don’t and economy make. And debt damn sure doesn’t an economy make.
Trickle Down Economics – (don’t) RIP
Jim Clausen – yes, we could see a replacement of the â€Vichy Democrats†in opposition to â€Weimar Democrats†if they win the Presidency.
Bush is so bad, he fucked-up our Money, too.
It’s not trust-building within the International Financial Community when you surprise Investors with the news that your dollar-denominated Securitized Subprime Mortgage Tranches have a previously undeclared risk problem…
He’s a complete disaster – even the people who were all for him when the Money looked good, have figured out that Bush’s MO is to include investors in a cut of the immediate spoils – but at the cost of Their own longterm viability.
But, at one time, the deal looked good enough to ’snatch’ up…
â€The whole American economy is a gigantic house of cards at this point†– EW
A truism with such enormous implications for our immediate standard of living and the future of our children. The elite on Wall Street and the beltway I’m sure are well prepared in their fortified mansions and Swiss chalets.
Prudence would be to have some of one’s â€money†outside the US.
Marcy — You’re the best, but â€disinterest†means â€impartiality,†as in â€disinterested observer.†You mean â€The Saudis show signs of being uninterested in†etc., or something of the sort.
Venezuela is also getting off the dollar.
And more and more repubs are â€retiringâ€, i.e., don’t want to be around when it hits the fan. And then come back for another crack at the whole enchilada in maybe ’12 or’16. Not a bad strategy when you think of it.
Sadly, its hard to see how it really matters anymore; its not as if we have an opposition party.
Umm, oh well… I guess a little humility is just what Bush/bushies and the US really needs to see.
Investing outside the u.s is exactly what the wealthiest HAVE been doing. They are not as worried about the collapse of the dollar as we might think. Many patriots will lose their shirts. But the folks I know have their hedge funds outside the u.s economy and I have been shocked to find so many investing in China.
Better hit those tango music websites while the exchange rate’s still pretty favorable.
That’s my point Katie, The rich haven’t trickled down, they invest overseas. They’re spread wide enought that it’s just a shell game to them. And it’s our TAX money bush gave them to move overseas along with the jobs.
Any damn fool with an eigth grade education can see that trickle down is bull shit. I say pull thier passports and tax the piss out of ’em.
On the macro level the adjustment requires a four to six percent reduction in American spending. Whether than reduction comes out of consumption, investment, or government expenditures remains to be seen, but any way you cut it it represents a significant decline in living standards as conventionally measured. Who takes the hit is another question. If the Dems are in, one hopes that the hit on the middle and lower classes will be mitigated. If the thugs are in, the hit will take the form of a shrinking social security benefit and significant cuts in medicare. So there still is a case for the Democrats, weak as it seems after the past couple of days of Congressional voting.
knut
Fascinating–where did you get the 4-6 number?
And how much is the war costing, again?
Marcy–probably you already know it, but for all things housing & credit crunch, the best place on the web is at Calculated Risk. The very latest post as of now shows the trade deficit at 5.1% of GDP. I assume this is the origin of the 4-6 percent number.
Assume that Kevin Phillips is correct in stating that in 2000, the ’financial services’ sector of the US economy (insurance, real estate, loans) = 20%. Whereas manufacturing = 14%.
When people make money by moving money, the pay a lot of attention to the currency in which it moves. I doubt many uber-wealthy will be burned; their money probably won’t be stuck in dollars.
Shit, meet fan.
Yes, they are protect from what is coming. We the middle class will pay with our lives and our lifestyles. The wealthiest will be in safe harbor while our country is gutted.
Thank goodness we have the war to save our economy–right? So, what now? Attack Iran? Gas at $7 a gallon, yeah, that’s the ticket. How does that relate to the â€meteorite†that crashed in Peru? I wrote this juicy tidbit this morning about that. The stories AP has been writing today about Peru are pure nonsense. Is a military coup in America imminent? Could be!