Saudis may drop their peg to the Dollar
Saudi Arabia owns about $800Bn dollars. These are essentially worthless pieces of paper that Saudi paid good money for in order to earn interest. However the 5% coupons don't cover the fact that the dollar has halved in value vs the Pound and Euro over the last 7-8 years. Since Bush in fact. However the fact that the Saudi Riyal is pegged to the Dollar insulates them a bit.
So Saudi is losing money on it's dollars as they paid 800 Bn Pounds for them and now they are only worth about 400 Bn.
Saudi also has a huge trade deficit, it imports nearly everything, and it often pays Euros or Pounds to do so. With the Riyal pegged to the Dollar this means that the cost of a British shirt has doubled since Bush. The cost of a Mercedes has nearly doubled. Inflation is painful.
So Saudi is thinking about cutting it's currency's peg to the Dollar in order to save itself from financial ruin.
This could well mean a dollar in free fall. If Saudi goes the Gulf will follow (except Iraq, which is an occupied country and would just get bombed again) and this will chime well with the creation of the Gulfo(™) which is the new single currency planned for the Gulf Cooperation Council (GCC) countries (The Arab Eurozone).
So then the Arabs would have no protection from the massive loss they are facing from the Dollar's ruin. They would have to sell Dollars. Basically the whole Gulf would give back stacks of green paper and get back in return $3,500 Bn in real money. Money that the US has at the moment, to spend.
Next step would be to start selling oil in Gulfos. Then the USA would have to face fuel prices doubling every few months as the Dollar slides into the merde.
The only choice America would have if the Saudis did pull out of the dollar would be to raise interest rates in order to attract someone with $3,500bn to spare who would bail them out; and that won't be the Chinese. The Chinese are already threatening to use their "Nuclear Option" of pulling out of the Dollar if the US doesn't play nice.
If Dollar interest rates rise, so will Euro and Pound rates and we will be looking at some serious crap happening. First the US lending market would be screwed as more and more loans were defaulted, then credit would get tighter and tighter leading to stagnation or probably even stagflation.
Europe is insulated to an extent, but the drop in value of our extensive dollar holdings would hurt the bottom line and push our rates up too. We already have a credit squeeze, but it's going to get worse.
Say hello to a lot of misery guys.


LinkBack URL
About LinkBacks
Reply With Quote


