Oil For Dollars,
And Dollars
For US Deficit
By Richard Benson
19 April, 2005
Asia
Times
The
Asians remain shocked and in disbelief. Just when Japan, China, Taiwan
and Hong Kong had accumulated enough dollars to buy oil to keep them
warm for many winters, it's all over. In broad daylight, the Americans
and the Organization of Petroleum Exporting Countries (OPEC) cheered
as the price of oil popped up from US$30 a barrel to more than $50.
Indeed, this jump
in the price of oil increases the world's daily oil consumption bill
of 84 million barrels a day to $4.2 billion, from $2.5 billion (or $1.5
trillion a year from $900 billion). The world now has to shell out an
additional $600 billion a year of "lucky bucks" to oil-producing
countries just to stay in motion.
The bigger shock,
however, is in the devaluation of dollar holdings of US Treasury debt.
The rise in oil prices guarantees that the value of the US dollar will
be pushed down even further, and stay down. Now that China is the No
2 oil importer and Japan is No 3 - with the rest of Asia very thirsty
for oil as well - you can understand why the Asians must find a way
to protect themselves.
The US strategy
for using oil to finance its deficit is, of course, brilliant. America's
elected officials knew that at some point those independent foreign
central banks would start getting edgy about buying more dollars to
pay for the United States' war and deficits. The $650 billion trade
deficit is breathing down the dollar's neck. So which central banks
can the US continue to use as the fall guys to buy the dollar? Why not
the Persian Gulf oil states - but where would they get the dollars to
buy US Treasuries? Well, with the Chinese piling up dollars and growing
like crazy, at some point the oil market had to tighten. It was only
a matter of time before the Chinese would start bidding up the price
of oil. The Asians, therefore, are hung out to dry when the price of
oil rises because they have to spend more of their dollars on oil.
As the price of
oil goes up, extra money floods into the Gulf kingdoms. With the US
secretary of defense putting troops all over the ground in the Middle
East, and those nimble aircraft carriers nearby and ready to deliver
the "shock and awe of sudden democracy" to the Gulf monarchs,
it's a sure bet that America's OPEC buddies will stash their newly found
Asian lucky bucks into good old American Treasury notes.
With such a simple
policy to fund its deficit for another year, it's no wonder the United
States can get by without any brain power at the Treasury Department.
In effect, the US and its Gulf Arab allies just pulled off the biggest
central-bank heist in the history of the world. The price of oil just
went up 60% or more, which really cuts down to size that $3.4 trillion
of net foreign holdings of US financial assets. As a loyal American,
one would like to cheer one's government's deft move to pick the pockets
of our trading and financing partners. Moreover, the US gets the Arabs
to fund a large share of our deficit, subsidize our interest rates,
and help keep our taxes low for another year. Surely I can afford to
buy another gas-guzzling sport-ute, get a rifle, and wave a flag.
The United States
is extracting tribute on oil from the world. If the world wants Middle
Eastern oil, it can pay for it through the Saudi branch of the US Treasury.
Why do the heads of Saudi Arabia, Kuwait, Abu Dhabi, Bahrain, Qatar,
etc, hold dollars? Because they want to keep the money and the power.
The ruling family of Saudi Arabia controls 25% of the world oil reserves
and is completely dependent on oil revenues for its survival. Tens of
thousands of Saudi princes live off lavish royal stipends. Think of
Arabia as a family firm. If the dollar goes down in value, the Saudi
royal family still gets to keep hundreds of billions of dollars. But,
if they don't buy dollars, why would the US keep them in power? It would
simply not be in our interests to do so. Remember when Saddam Hussein
talked about pricing Iraq's oil in euros? "Shock and awe"
quietly followed.
This program of
oil for dollars and dollars for the US Treasury deficit is the simple
tribute that we, as the superpower, can expect. The United States is
well paid for keeping the world's supply of black gold safe and available
to all. Unlike the Vietnam era - when the US was trying to finance guns
and butter - getting others to pay now for our guns allows us to milk
the oil out of the sand and turn it into butter.
The next question
will be how the Asians respond to a 60% hike in the price of oil. Please
stay tuned.
Notice in the chart
below there are some big, smart, anonymous dollar holders (such as hedge
funds) located in the Caribbean. No one knows who they really are.
Major foreign holders
of US Treasury securities (in billions of dollars)
Japan 702
Mainland China 194
England 163
Caribbean 93
Korea 68
Taiwan 59
Hong Kong 59
Total (including other countries with fewer holdings) 1,960
Richard Benson is
founder of Specialty Finance Group. He can be reached at [email protected].
(Copyright 2005
Richard Benson.)