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Arab Oil Money and U.S. Treasury Bonds: Quid Pro Quo?   (October 10, 2005)

It's been well-documented that foreign central banks, mostly Asian, have been supporting our super-low interest rates by buying hundreds of billions of dollars of bonds funding our titanic deficit. (For example, this article from Slate: "foreign fools who are buying American bonds"

It's also well-known that any faltering of this foreign buying would spell disaster in the form of rapidly rising interest rates: consider this from Yale Global Online: "If Washington fails to rein in the budget deficit, international bond buyers might force a painful adjustment".

The risks facing those who hold $1.5 trillion in U.S. bonds are also well-known; here is an article from China Daily admitting that the Chinese government would lose an enormous amount of real money should the dollar decline, for it would immediately depreciate the value of the $470 billion in U.S. bonds they hold: "Crisis looms due to weak dollar".

Then there's the specter of the oil-producing nations tiring of their oil wealth being denominated in the sinking dollar; the move from "petrodollars" to "petroeuros" appears to be underway, at least in a modest fashion. The danger to the U.S. is simple: people would need euros to buy oil, not dollars, so they would dump their dollars to get euros. Check out Center for Contemporary Conflict's report: "From Petrodollars to Eurodollars: Are the Dollar's Days as an International Reserve Currency Drawing to an End?"

Now we have the possibility that oil-producing nations are stepping into the breach to prop up the dollar and keep U.S. interest rates low: consider this from The Economist magazine: "The $300 Billion Bonanza".

The standard line is that oil-producing nations--Norway has a $140 billion pile, but the Arab nations are the predominant winners in the recent oil-price bonanza--buy U.S. Treasury bonds because they're safe. But if U.S. bonds are so "safe," why are the Asian central banks dramatically cutting their purchases?

As this chart shows, "private buyers," generally from off-shore Caribbean bank centers, magically stepped in and bought huge sums of Treasuries just as the Asian banks pulled back their buying. Coincidence? Maybe not.

Just as speculation: could there be a high-level quid pro quo to the apparent Arab support of the dollar and low U.S. interest rates? This could reflect two quiet policies: Arab support for U.S. pressure on Israel to get on with creating a Palestinian state in the West Bank/Gaza, and also an implicit support for the U.S. occupation of Iraq. Recall that Iraq is 60% Shiite, the Muslim sect which is dominated theologically by Iran. Recall also that the Sunni minority which ran Iraq under Saddam shares religious affiliation with the other Arab nations. (Iran is not an Arab nation; it is Persian.)

Could the Arab nations in the Gulf be concerned about the fate of their Sunni brethren should the U.S. pull out of Iraq? Such a concern would be quite natural, geven the rumors that Shiite militias are already operating as "death squads," assassinating Sunnis at will.

Put all this together, and you have a motivation for the Arab nations to quietly fill the breach in the gaping U.S. deficit funding left by the retreating Asian Banks. It's something to consider, for if the Chinese are wary of accumulating too many dollars, certainly the savvy sheiks would have the same concerns.

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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

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