Several days ago, there were stories that a supposed US-Saudi deal had elapsed (at its 50th anniversary) with potentially earth-shattering consequences. We said we'd take a look.
The 'deal' (as reported) was that the US would guarantee Saudi's security militarily in various ways, in return for the Kingdom only selling its oil in dollars, and reinvesting (most of?) those dollars in US government bonds. This had the effect of propping up the dollar all these years, as nations globally were forced to buy dollars. End the deal, end the dollar, was the implication.
Hmm. Well, firstly I know nothing about macro-economics, so I'm always open to being corrected on some of these things. (My state of macro ignorance has never held me back, since happily I've always found that micro competence is the way to make money.)
That said, here are a few thoughts.
- several well-informed commentators stated there never was such a deal !
- whether or not the doomsayers knew this (I thought everyone did, but maybe not), the US is about to sign a significant new defence pact with Saudi.** We probably won't be given the full text ... but I can't imagine the US isn't getting more or less whatever it wants from this
- given that the whole world (not least, China) holds US Treasuries, who wants to crash the dollar anyway?
- the FX markets are just about the most liquid on the planet. What difference does 'pricing in dollars' make? (There's my macro ignorance showing - but seriously now, just tell us. It isn't as if oil is priced in dollars at a fixed price, is it?)
- after many years as a net oil importer (indeed, net energy), since the shale revolution the US has been a net exporter. That makes the world a rather different place to what it was 50, 30, 20 years ago, in ways that I'm sure the US Treasury is on top of
The simple fact is that liquidity is liquidity. Loads of countries announce from time to time that they are going to supplant this or that feature of the established (western-led) global order, but it rarely does them any good. For many years the Russians have sought to develop a global market in "Urals Blend" crude oil in order to break the tyranny of Brent (i.e. UK / North Sea) pricing, but Brent it remains on the world market. After Brexit, the EU toyed with the idea of relegating English to "just the language spoken by Malta": and the French fancied their hour had come! Tough titty, frogs: English it remains, long after the English themselves have departed. Liquidity is liquidity.
I have a very strong suspicion nothing much has changed between the US and Saudi this year. At any event, the US dollar remains my hedge against a UK meltdown. It served me very well during the financial crisis 2007-10.
Any views from those with a proper PPE degree?
ND
__________
** Incidentally, within the USA itself there is a significant school of criticism of this deal, not least in military circles: "we don't need their oil, so why do we need them any more?" Not too difficult to come up with answers to that question, though.
8 comments:
The Saudis seemed to be keeping their options pen, but if the deal goes ahead it'll stymie their recent rapprochement with Iran, which I imagine is the (US) idea.
It still looks to me as if the US knows something we don't about the Russian nuclear missiles, as they continue down the path to open confrontation. "The train has left the station" says the Serbian president.
"No one can afford to lose. When you have this situation, we are probably approaching a real disaster. And then we come to another question. Who is ready to lose 1 million, 2 million, 5 and 10 million people? Ask yourself. I am not ready to lose a single person. And we will not participate in it. But that is a question for others. I can't say World War III, but I don't think we're far from that big conflict! No more than 3-4 months! And there is a risk that it will happen even sooner. In Europe, the leaders act like big heroes, but they are not honest and they don't tell their citizens that they will all pay a big price if it comes to war... And when you have these kinds of conflicting interests, then you come close to big conflicts and big wars. And I don't see how anyone can stop it. I'd like to see it more than anything to be honest. Today I was checking the data regarding our stocks of oil, flour, sugar, salt and everything because I don't know what tomorrow will bring for all of us."
Slightly OT, but those who matter seems to be happy with Sir Keir.
https://www.theguardian.com/politics/article/2024/jun/18/former-head-of-gchq-praises-labours-defence-and-security-plans
Labour’s position on national security has been endorsed by a former head of the UK intelligence agency, GCHQ, who said the party could be trusted to “stick to serious defence policy”. Sir David Omand praised the party’s manifesto commitments to spend 2.5% of GDP on defence as soon as possible and continue supporting Ukraine against Russia. “Labour’s announcement of a ‘triple lock’ on our nuclear deterrent indicates that we can in future trust the party to stick to serious defence policy,” he wrote in the Daily Telegraph.
From Omand's wiki
"Since leaving the government, Omand has landed jobs with several military-related companies. He has been a non-executive director at UK arms company Babcock International and Italian arms company Leonardo-Finmeccanica and has also worked as an adviser to the Society of British Aerospace Companies."
"those with a proper PPE degree": I can imagine you twirling your 'tache as you type this vitriolic sarcasm.
Forgot to say - China doesn't want the RMB to be the reserve currency (yet) because an undervalued currency is good for their industrial targeting.
While on industrial targeting, pity BYD only sell electric here, their hybrids sound pretty good. But in the coming US-China clash (assuming no WW3), how will we get on for spares?
"At any event, the US dollar remains my hedge against a UK meltdown"
It's also China's with $3.2tn in their reserves.
O/T on the PPE. AFAIK they only do 1 term on economics which probably explains a lot.
No one is afraid of Vlad. Not anymore. A paper tiger.
He should stop marking out red lines that he then has to ignore.
Should start looking to see if there’s anymore rivers the Chinese want to have.
Russia is the puppet now.
All the talk of ‘nuclear war’ won’t change the reality. That China has totally eclipsed Russia and leads the new cold world powers.
Putin ought to be quiet for a while. Should practice playing some new tunes on his second fiddle.
Anon @ 6:07 - PPE? Not really, unless a student deliberately steers clear of econ: see this
https://www.ox.ac.uk/admissions/undergraduate/courses/course-listing/philosophy-politics-and-economics
Anon @ 6:07 here. I stand corrected and like you, looking forward to a PPE to shed some light on the issue - especially a Chinese PPE.
This post seems to be missing a few relevant points.
Saddam Hussein was removed after he declared he would sell Iraqi oil for Euros rather than US dollars. And Gaddafi was removed when he said he would sell Libyan oil for a new gold-backed North African currency rather than US dollars. (Thereby also angering the French with their very convenient continued usage of the French Franc in their former African holdings).
I also recall the suggestion that usage of the US dollar as the reserve currency is worth something like 15% of US tax revenues. In an economy the size of the USA, that's a substantial amount. It also explains why the US administration would be keen for it to continue.
But, it's also a poisoned chalice. It requires a willingness to export dollars for foreign imports. Long term, that isn't great for the domestic economy, and it is one of the reasons why China would be loathe to take up such a rĂ´le.
All of which misses the big picture. US dollar reserve currency status won't disappear overnight. If nothing else, dollars are required to service government debts that are also denominated in US dollars. That demand will support the US dollar even as its usage starts to diminish.
Which it will.
And which brings to mind Hemingway's comment about going bankrupt. "Slowly, then suddenly".
It's a long way off for now. But the process has started.
(Computational Science, not PPE).
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