The Fed’s daily money injections and expectations of more rate cuts, are threatening to transmit hyper-inflation to the Persian Gulf kingdoms. The Bernanke Fed is pursuing a radical monetary policy, expanding the US M3 money supply at a 15.8% annual rate, its fastest in history, and inviting speculators to sell the dollar in exchange for Saudi riyals. To counter the dollar’s weakness, the Saudi Arabian Monetary Authority (SAMA) is expanding the Saudi M3 money supply at a 19.5% annual growth rate, engaging in a round of competitive currency devaluations with the Fed to keep the 21-year old dollar – riyal peg intact.
Last week, the Saudi Arabian Monetary Agency (SAMA) reduced its reverse repo rate by 50 basis points to 4.25%, and the UAE’s central bank cut rates by as much as 20 basis points, despite inflation raging a decade highs to relieve pressure on the weak dollar. But the dollar remains pinned at a 17-year low against the UAE dirham surge and a 21-year low against the Saudi Arabian riyal as traders bet the Persian Gulf kingdoms would be unable to maintain their pegs to the dollar and fight inflation at the same time.
And because the Saudi riyal is pegged to the US dollar, the Euro is 50% higher from five years ago to a record 5.5 Saudi riyals, increasing the costs of import prices from Europe. Inflation in Gulf countries is leading to calls for a wage hike in Saudi Arabia, rent caps in other states, widespread complaints from business leaders, and riots by migrant workers in the UAE demanding better pay. Further Federal Reserve rate cuts designed to bail out Wall Street from the sub-prime debt crisis could put unbearable pressure on Saudi Arabia and other Gulf oil producers to drop their currency pegs to the tumbling dollar.
To solve this, some oil-producing nations are allowing payments for oil in other currencies, or at least a mixture of currencies. Their own currencies are increasingly being tied to a "basket" of currencies, rather than solely basing it on the dollar. And a bold plan is moving forward for a monetary union of the Gulf States' currencies by 2010, though that date will almost certainly be pushed back. A gold-based Islamic currency has also been proposed by Indonesia. Kuwait's Central Bank dropped it's "dollar peg" last May.
To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong US dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it even stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in US dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petrodollars is the price the United States has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
This arrangement is crucial for the dominance of the United States in the economic sphere. Certainly the U.S. has an immense GDP and would wield large clout based on that alone, but dollar hegemony gives America a huge advantage over the rest of the world. The key to dollar hegemony is stability of value, not the size of the GDP. The declining dollar is no longer providing that stability, and dollars are no longer the only currency with which to buy oil. Japan has secured an arrangement to pay for Iranian oil in yen, for example. Now Iran is setting up an exchange that will sell oil in other currencies, illustrated in the short story below. Meanwhile, the dollar dropped 9.5% against the euro in 2007, and dropped more than 10% in 2006.
“The dollar is losing its status as the world currency,” warned Chinese central bank director Xu Jian on Nov 7th. “We will favor stronger currencies over weaker ones, and will readjust accordingly,” added Cheng Siwei, vice chairman of China’s National People’s Congress, signaling plans to diversify Beijing’s $1.43 trillion of foreign exchange reserves.
A 9.5% drop in the dollar's value means that the UAE alone lost well over $5 billion last year. That's a pretty lousy deal for an arrangement that is supposed to provide stability. Another subtext is the guarantee of security for the Gulf States by the U.S. Security from whom, one might wonder, but Bush's Iraqi occupation has only destabilised the Middle East, halted Iraqi oil production, and increased Iran's influence in the region by eliminating the greatest check on its ambitions in the form of Saddam Hussein. Bush is fortunate that these countries are not democracies, or else these Gulf governments would have abandoned him and his pro-Israeli policies long ago. As we saw with Bush's last Middle East "tour", the Middle East is no longer dancing to the Decider's tune, and the Gulf States in particular have a diminishing sense that their self-interest is tied to the U.S. The 'security guarantee' is increasingly becoming little more than a protection racket - protection from the U.S, not by it.
Gulf Arab economies, of which Saudi Arabia's is the biggest, are experiencing high inflation but central banks have limited options as the peg forces them to track U.S. monetary policy at a time when the Federal Reserve is cutting interest rates.
Saudi inflation is widely expected to continue rising in 2008 after reaching 6.5 percent in December, its highest rate in at least 12 years.
"(Because of) the decreasing value of the U.S. dollar, all our imports from markets other than the U.S., in terms of cost, have gone up significantly in the last 12-24 months," Amr Al-Dabbach, the head of SAGIA, said on the sidelines of the World Economic Forum.
"It is a problem not exclusive to Saudi Arabia; the whole region is facing these problems."
With inflation now higher than official interest rates, it becomes cheaper for Saudis to borrow than keep money in bank deposits where they get negative real returns.
Ironically, while the Decider leans with all his might on Saudi Arabia to maintain the "dollar peg", he is becoming quite shrill over China's foot-dragging over dropping it's dollar peg. We are not seeing any kind of consistent ideology here, and no case is being made that following Bush's demands will benefit any country other than the U.S. It is sheer intimidation, mixed with the realisation that backing away from the dollar as the reserve currency on a large scale would have large short term costs for the country that pursues it. The long-term benefits, however, are still attractive. Combine this with the neocon vision of America dominating the planet, an arrogant Bush Administration issuing dictates to a world that is either "with us or against us" driven by a 1945 view of America's stature, the over-extension of the U.S. military, and the Republican promise of the continuation of Bush's doctrines should they hold on to the White House, and the rest of the world is left wondering if they really want to continue to finance this agenda with dollar hegemony.
story from PressTV
Iran Oil Bourse to deal blow to dollar------------------------------------------------------------------------
Fri, 04 Jan 2008 20:45:41
The long-awaited Iranian Oil Bourse, a place for trading oil, petrochemicals and gas in various non-dollar currencies, will soon open.
Iran's Finance Minister Davoud Danesh-Jafari told reporters the bourse will be inaugurated during the anniversary of the Islamic Revolution (February 1-11) at the latest.
"All preparations have been made to launch the bourse; it will open during the Ten-Day Dawn (the ceremonies marking the victory of the 1979 Islamic Revolution in Iran)," he said.
The Minister had earlier stated that the Oil Bourse is located on the Persian Gulf island of Kish.
Some expert opinions hold inauguration of the bourse could significantly devalue the greenback.
From the Daily Telegraph
Fears of dollar collapse as Saudis take fright
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:41am GMT 09/12/2007
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.
The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
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.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
And since this article came out, the Fed has cut rates again, putting further pressure on those countries that have stood by Bush to bail out. GCC countries have cut their deposit rates in response, with Kuwait being able to stand slightly stronger. While a great alternative to the dollar as a reserve currency has not presented itself, the oil-producing nations thus far seem to be only reluctantly clinging to the dollar, with the "basket" idea gaining more adherents.
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It should be noted that the costs of the Iraq occupation have been, to a great extent, financed by sales of Treasury bonds to China - the "Chinese credit card" I have alluded to before. This has worked to China's benefit in many ways. First, it provides them with huge amounts of hard currency, since the yuan is kept artificially low to promote exports. This has allowed them to build up their military, in essence, for free, especially on the naval side. Arms sales to countries such as India have also made their defence industry, in effect, self-financing, while America goes further into debt as their defence industry grows. Perhaps most importantly, however, is that it removes nearly all of the economic leverage the the U.S. exerts on the rest of the world. If the U.S. pushes too hard on China with foreign or economic policy or military threats, China can put the dollar in free-fall virtually at will. While there would be big short-term costs for China, both the short-term and long-term costs for America would be devastating. And the resulting costs to those currencies pegged to the dollar would be catastrophic. The reign of the dollar could very end in such a scenario. Last, since the U.S. is the only regional check on China's military power (with defence commitments to Korea, Japan, Taiwan, and the Phillipines), the more regional instability China creates, the richer it gets by forcing The U.S. to borrow more money to increase its military spending. Meanwhile, the U.S. bears the costs of the GWOT and becomes more unpopular while China takes a path of neutrality towards "internal policies" of its friends.
China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard
Last Updated: 8:39pm BST 10/08/2007
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.
"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.
He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.
"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.
"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.
3 comments:
Good summation of the situation!
Wow! you know, Bush tried as you know to tell the Saudi's they have to punp more oil or our economy was going to have peobpems.
He tries to blame the entire for what he himself as done. As the world turns against the dollar and our economy increasingly goes south and it will, we will be in serious trouble.
Eventually he is not going to be able to cut the rates any more and then this breakdown will really get going. I can't get you the link without losing you now and I have written about it numerous times but this is just beginning.
google Mike whitney's Second Great Depression. It is right on but this will be much worse like everything Bush is friggen involved in.
The dollar is losing value for a number of reasons, the most important being our political leadership has consistently made bad policy decisions over the last 30 old years.
President’s Bushes policy decisions simply reflects America’s moral fiber; our inability to understand what goodness is and how to execute this goodness in every day living
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