EMERGENCY: FEARS OF DOLLAR COLLAPSE AS SAUDIS TAKE FLIGHT
September 20th, 2007U.S. dollar holders: Battle stations.
Are we going to crack 79 on USDX and really get this party started?
If you’re holding U.S. dollar denominated assets, you’re holding hand grenades with the pins pulled.
Full text follows.
Via: Telegraph:
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.
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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.
“This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem,” he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen “carry trade”, causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
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.
“If Ben Bernanke starts running those printing presses even faster than he’s already doing, we are going to have a serious recession. The dollar’s going to collapse, the bond market’s going to collapse. There’s going to be a lot of problems,” he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.
Former Fed chief Alan Greenspan said this week that house prices may fall by “double digits” as the subprime crisis bites harder, prompting households to cut back sharply on spending.
For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.
The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.
Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.
Related: China Threatens ‘Nuclear Option’ of Dollar Sales
Let’s not forget that the brain (deadheads) in the U.S. state department just made its list of narco states. Venezuela, you know, that horrific nation that provided the poor in the US with heating oil during this past winter is on the top of its list as a narco country. That news item tidbit gave me a wry fit of laughter. Afghanistan is way down there on this list. What a hoot. Venzuela I guess, just left the dollar party as well. Get it – named by the U.S. as a narco country – give up its currency? DUH!!!
I am wondering, what exactly is the definition of diplomacy in the U.S. at this time? We knock those who hold our debt (China) with an interest rate cut; we smear the nations that provide us with oil; we kill, with utter abandon, peoples across the world who just so happen to be Muslim, but yet have the oil from the world underneath the topsoil of their sovereign nations; and ontop of all of that, we are going to go along with the Israeli desire to kill 1 million or more Palestinians by cutting off their electricity, water, etc. Oh, Condi can’t come out and say that’s genocide- these aren’t diplomats- they are some other type of critter that is a cannibal who can’t wait to eat their own.
Yes, our dollar is a hand grenade allright. That’s the only weapon the world of so many can use against us. And honestly, I cannot, even if it causes me pain and personal loss, blame any country in the world if they finally say – enough of this shit, from you the U.S. and finally pull us down to a level playing field. I think the game is up. This conquering of peoples, taking their land, sending people off to the reservation, bombing, war, and using the middle class and poor to finance this whole dream/chirade of world dominance buy a few who have evil (yes evil) DNA in their bloodstreams, I think will come to an end soon. Warren Zevon – Lawyers, Guns, and Money – the Shit has hit the Fan. Coming soon to the theater nearest you. The revolution will not be televized.
If you haven’t been getting ready for this you are nucking futs.
OK Guys… I’m learning fast, but I’m still just getting the hang of it. Can someone ‘splain what this article is saying in simple language? Maybe language a poker player can understand?
Or maybe link me to a site of someone who does explain it for us newbies?
I know Kevin pretty much nails the emotional reality of the situation with his pithy intro comments… but I need a little primer…
Thanks!
I tend to think that there is so much debt on every level of the US economy (Federal, state, local, corporate, individual consumer household, trade deficit), that there are no good options left, so apparently Bernanke is opting for “one last fix” of cheap credit to keep the whole thing going at least through the holiday season.
‘Tis the season to be jolly…for the very last freaking time!
Long story short: Weimarer Republik Reloaded!
The other possibility: Great Depression Reloaded!
Here is an explanation tenzenmen. If the Saudi monarchy un pegs their currency and the middle east follows suit as Kuwait already did, the dollars remaining nail that it is hanging on (all oil is traded and purchased in dollars) is threatened. The saudi don’t want the same inflation Bernake just straddled us with. They don’t want to pay more for goods from the rest of the world as we shouldn’t.
Anyone see the dollar index this morning. OUCH
Tenzenmen–
I’ll try to explain–though I’m probably missing some important pieces to the puzzle–and I’m confused about some of this.
For a good many years now, the only reason any country in the world would accept US dollars as payment for anything (manufactured goods, agricultural products, commodities) is because we had a deal with the Middle Eastern countries whereby you could only buy oil with dollars. The other countries in the world had to stockpile a certain amount of dollars to buy oil. China’s case is a little different, in that they have been loaning us money so we can buy their manufactured goods.
The Fed’s reduction of the prime rate means inflation; the dollar is set to lose a lot of value. (Which it has been doing anyway.) The Saudis do not want to accept payment for their valuable oil in dollars whose value is going down the crapper.
The US budget (as you know) is around 9 trillion in the red. The government has to continuously borrow more–and, here, I’m getting a little hazy, but I think they’re borrowing more just to service the debt. The way they do this is to sell treasuries. As of late, no one is really keen on buying treasuries–which (hazy again) bring an interest rate to the purchaser that is based on the prime rate set (and just lowered) by the Fed.
Low interest returns on a depreciting currency means that, if you invest in treasuries, you will be taking a loss. This means that other countries will not be buying this investment (treasuries) because it leads to a loss. (Duh.)
In fact, if you own a large supply of a currency that is depreciating, you may wish to dump that currency. Preferably as quicky as possible. It’s the same as with stocks: If a stock is declining fast, you need to sell in a hurry, while there are still any buyers at all–and before the stock becomes absolutely worthless.
The fear is that the Saudi’s unpegging to the dollar will cause an even larger decline in the dollar’s value, such that everyone in their right mind will dump the dollar (including China and Japan), thus causing the value of the dollar to decline to absolute zero.
This means I will be standing on a street corner, trying to trade my surplus tomatoes for squash, and my spare kerosene lamps for venison (I hope). You will probably not be to interested in showing up for work when this happens, because your whole week’s paycheck will be of insufficient value to allow you to buy a bag of Doritos. If the grocery store is still open.
Sharon,
Great detailed explanation.
The only two reasons I know of that China doesn’t dump the dollar is the known chaos they will cause with their key trading partner and the loss of value in the remaining reserves held. Americans buy less of China’s junk in a recession.
If they start to dump their reserves it will lower the dollars value thus making the reserves they haven’t dumped yet worth less. Its a lose, lose for them unless they can get the math to work. What is likely happening is that the
Chinese are slowly migrating out of dollars. They don’t want anyone to know and cause a panic which again would cause their remaining reserves to be worth less.
Here’s a post I copied from another site:
Dollar decline is just what was predicted by any honest followers of todays markets. The fed knows more than we know, so for them to put the dollar this much at risk, they have to know some really scary shit is coming.
Lets face it, a 50 point cut is a sign of full blown panic on the part of the fed. I think foreign currency traders and holders of dollars overseas can’t help but see the move as panic.
Look at a holder of dollars, 1st US inflation is alot higher than acknowledged, plus interest rates just went down, plus the dollar has lost a hell of alot of value. That means your dollars + the interst you earn on your holdings are going DOWN every stinking day. That makes the US a lose, lose proposition. The dollar can’t help but go to hell.
A run on the buck is a real possiblity. For the fed to risk such a run means the banking crisis is BIG. F**cking HUGE!
Thanks for the explanations! Greatly appreciated.
So, while we have history to inform us about somewhat similar scenarios that have occurred on a national level, there is no precedent for the current globally-intertwined situation we have before us. No predicting which flavor of apocalypse will occur… only that it will indeed occur.
AllRighty Then! Time to move out of the USA pronto. I can be slow out of the starting blocks sometimes, but up to speed and taking action as soon as I see clearly.
tenzenmen–
Here’s a super video that explains how money is created:
http://video.google.com/videoplay?docid=-9050474362583451279
An eye-opener.
Just found this easy-to-understand explanation at this website:
http://www.oftwominds.com/blogsept07/big-one.html
Thanks for the video link Sharon! Looks to be very well done.
So, the big question is… will the remnant that rises from the ashes after all this SHTF be wise enough to ban fiat money permanently under penalty of immediate death?
Sheesh… human consciousness needs some serious evolution… fast.
That Charles Hugh Smith link is a goodie. I don’t get over to him as often as I should.
Some of my favorite sites for keeping up on this stuff:
http://www.bullnotbull.com/bull/
http://www.dollarcollapse.com
http://www.thedailyreckoning.com
At The Daily Reckoning, you get to read the latest ravings of the Mogambo Guru.
I am beginning to think that no one can ever really understand this stuff. But it’s highly entertaining, believe it or not. It’s like a soap opera–you get hooked on it.