The Dollar Standard
A story from the Telegraph about the refusal of the Saudis to cut their interest rates along with the US has a pretty alarming tone.
It's possible it may be justified.
"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.
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.
. . .
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
Kuwait has already taken itself off the dollar peg, and if the Saudis do, it could very rapidly effect the price of oil, nominally priced in dollars, but dollars that were pegged to the Saudi currency. Change that rate, and oil gets more expensive for Americans, which hits their economy as well.
It will be interesting, if quite possibly painful for a lot of people, to see how this all works itself out.
