Empty threats (Pt. 2)

cMany people believe two or more assertions that contradict each other, and therefore cannot both be true. For example, most people agree that all men are created equal, yet most people pretend that some men are more equal than others. Rich people are “better,” while poor people are “inferior,” and yet everyone is “equal.”

Here in the USA, most people agree that the U.S. government can “print” limitless dollars, and yet most people pretend that the government can only get money by borrowing it, and from federal tax revenue. When Donald Trump and others admit that the U.S. government can “print” money to pay any obligation, everyone agrees, and yet most people continue to believe that the U.S. government has a “debt crisis,” and that Social Security is “unsustainable.”

This is madness, but that’s society for you. All societies are insane. It’s only a question of degree. Insanity is what sustains the gap between the rich and the rest.

aBelow are excerpts from a Bloomberg article which promotes the lie that the U.S. government cannot create its own money, and must therefore rely on foreign parties such as the Saudis. The article starts by discussing a visit to Saudi Arabia in July 1974 by then U.S. Treasury secretary William Simon.

The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth.

Nonsense. The U.S. government finances its own deficit.

And notice the contradiction: the Saudis have their own currency (the Saudi riyal), and yet the Saudis also have petrodollars, which they get from the USA by selling oil to the USA. We are supposed to believe Saudi petrodollars (which come from the USA) are what fund the USA from outside the USA. That’s ridiculous.

William Simon understood the appeal of U.S. government debt Treasury securities and how to sell the Saudis on the idea that America was the safest place to park their petrodollars. With that knowledge, the Nixon administration hatched an unprecedented do-or-die plan that would come to influence just about every aspect of U.S.-Saudi relations over the next four decades (Simon died in 2000 at the age of 72).

 The framework was simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.

Nonsense. The U.S. government finances its own spending.  Also, when the article says “America,” it does not clarify whether it means the nation as a whole, or the U.S. government. This is intentional, since the article is trying to portray a deal between the USA and Saudi Arabia as high drama.

What happened is that the Saudis imposed an oil embargo on the USA in retaliation for the U.S. government’s support for Israel during its war with Egypt and Syria (October 6 to 25, 1973). U.S. Treasury Secretary William Simon wanted the Saudis to end their embargo. Simon promised them weapons, and he encouraged the Saudis to keep accepting dollars for their oil. The Saudis could deposit their dollars in Fed savings accounts (i.e. the Saudis could buy Treasury securities) and get paid interest.

This had nothing to do with “financing U.S. government spending.” It was simply about ending the embargo, and getting the Saudis to keep accepting dollars for their oil.

King Faisal bin Abdulaziz Al Saud demanded that his Treasury purchases stay secret. The secret was kept for more than four decades—until now. In response to a Freedom-of-Information-Act request submitted by Bloomberg News, the Treasury disclosed Saudi Arabia’s holdings for the first time this month. The $117 billion trove makes the kingdom one of America’s largest foreign creditors.

Again the article deliberately avoids clarifying its terms. Does “America” have creditors, or does the U.S. government have creditors, or do both have creditors? If the article means the U.S. government, then its author is lying, since the U.S. government creates its spending money out of thin air. Therefore the U.S. government does not borrow its spending money. Therefore the U.S. government has no creditors.

However the U.S. government has investors (or depositors). When the Saudis (or the Chinese or whatever) deposit money in a Fed account, they are investing their money in the Fed in order to get interest.

This brings up one of the reasons why the U.S. government sells Treasury securities in the first place. The USA has the world’s largest trade deficit. This is not a problem for the U.S. government, since the government creates its own spending money. However the U.S. government wants foreigners to keep accepting U.S. dollars for their goods that foreigners ship to the USA. The U.S. government gives foreigners an incentive by encouraging foreigners to buy Treasury securities. That is, foreigners can deposit their dollars in Fed savings accounts, and get paid interest (which, again, is created out of thin air).

Incidentally, why did the Saudi government want to maintain secrecy regarding the amount of money it deposited in Fed savings accounts? The reason is that the Saudi government works very closely with the Israeli government, but doesn’t want ordinary Saudis to know that. It is the same with the governments of Bahrain, Qatar, Oman, Kuwait, and the UAE. They buy U.S. Treasury securities, but they don’t want to seem like they are directly supporting Israel’s benefactor, the USA.

A former Treasury official, who specialized in central bank reserves and asked not to be identified, says the official figure vastly understates Saudi Arabia’s investments in U.S. government debt Treasury securities, which may be double or more.

So what? U.S. banks and the U.S. government create dollars out of thin air, which the Saudis accept in exchange for their oil. Then the Saudis deposit those dollars at the Fed in order to gain interest. What’s the big deal? The U.S. government does not use this money for spending.

And yes, that’s me crossing out the word “debt” and replacing it with “Treasury securities” so that the sentences read correctly.

The current tally represents just 20 percent of the Saudis’ $587 billion of foreign reserves, well below the 66 percent that central banks typically keep in dollar assets. Some analysts speculate the Saudis may be masking its U.S. debt Treasury securities holdings by accumulating Treasuries through offshore financial centers, which show up in the data of other countries.

So what? The Saudis need foreign currencies in order to buy imports. Some of those foreign currencies are in U.S. dollars, and some are in euros, and in British pounds, and Canadian dollars, etc. Where is the drama?

Incidentally the Saudis have burned through so much of their foreign currency that they  finally had to reduce their oil production so that oil prices would start rising again. The Saudis had intentionally over-produced in order to push down crude oil prices. They did this to drive competitors out of business (e.g. the U.S. shale oil industry), and also as a favor to the U.S. government, which wanted to hurt Russia and Venezuela. The Saudis succeeded, but they also burned themselves. With oil prices so low, the Saudis had no foreign currencies coming in. When the Saudis used up their savings in foreign currencies, they had to cut back production, so that oil prices would rise again. Four months ago I said that because of this, oil prices had hit rock bottom, and that prices would start rising again. I was correct…

d

Exactly how much of America’s debt Saudi Arabia actually owns is something that matters more now than ever before.

Maybe it matters to the Saudis, but it doesn’t matter to the U.S. government.

And let’s correct that sentence to read: “Exactly how much dollars the Saudis have deposited in Fed savings accounts is unimportant to the USA.”

While oil’s collapse has deepened concern that Saudi Arabia will need to liquidate its Treasuries to raise cash, a more troubling worry has also emerged: the specter of the kingdom using its outsize position in the world’s most important debt market as a political weapon, much as it did with oil in the 1970s.

Nonsense. There is no way that the Saudis can use its Fed deposits as a weapon. I explained this in a previous blog post titled “Empty threats.”

The Saudis receive dollars in exchange for their oil. The Saudis use some of those dollars to buy imports. The Saudis also deposit many of those dollars in Fed savings accounts by purchasing Treasury securities, so that the dollars can “earn” interest. When the Saudis intentionally caused oil prices to plunge, the Saudis ceased to have dollars coming in. The Saudis have now used up the dollars in their own central bank, and they are desperate for more dollars, so the Saudis can buy imports such as food. Being desperate for dollars, the Saudis may sell their U.S. T-securities before the securities mature, thereby sacrificing the interest that the Saudis would have gained. If the Saudis are very desperate, they may sell their T-securities at a steep discount. Investors will give dollars to the Saudis in exchange for the Saudis’ T-securities.  The Saudis will walk away with dollars from the sale. Dollars that the Saudis originally deposited at the Fed will stay at the Fed, but now those dollars (and the T-securities that go with them) will have new owners.

Big deal.

This will have no effect whatsoever on the U.S. government.

In April 2016, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passes a bill allowing the kingdom to be held liable in U.S. courts for the Sept. 11 terrorist attacks, according to the New York Times. The threat comes amid a renewed push by presidential candidates and legislators from both the Democratic and Republican parties to declassify a 28-page section of a 2004 U.S. government report that is believed to detail possible Saudi connections to the attacks. The bill, which passed the Senate on May 17, is now in the House of Representatives.

By falsely calling this a “threat,” Bloomberg sustains the illusion that the U.S. government borrows its spending money from the Saudis. This is deliberate.

Imagine buying a certificate of deposit at a regular bank. Later you go to the bank manager and you “threaten” to sell your CD to someone else. The bank manager would respond by yawning, and saying to you, “And this means what to me?”

Saudi Arabia, which has long provided free health care, gasoline subsidies, and routine pay raises to its citizens with its petroleum wealth, already faces a brutal fiscal crisis.

WRONG! Saudi Arabia has no fiscal crisis. It has a foreign currency crisis. The Saudi government has no problem creating infinite riyals out of thin air to pay for free health care, gasoline subsidies, and pay raises to its citizens. The problem is that Saudi Arabia is even less self-sufficient than Venezuela is. That is, Saudi Arabia is even more dependent upon imports than Venezuela is. To buy imports, they need foreign currency, since foreigners do not want to be paid in Saudi riyals.

To repeat: the Saudis sell oil for dollars (and for euros etc.) which the Saudis use to buy food and other imports. When the Saudis over-produced oil in order to push down oil prices, they pushed down the dollars they got for their oil. Now the Saudis cannot buy imports, and they are desperate for foreign currency.

In the past year alone, the monetary authority has burned through $111 billion of reserves to plug its biggest budget deficit in a quarter-century, WRONG! pay for costly wars to defeat the Islamic State, and defeat the Yemen freedom fighters, and wage proxy campaigns against Iran. Though oil has stabilized at about $50 a barrel (from less than $30 earlier this year), it’s still far below the heady years of $100-a-barrel crude.  

Again, the Saudis have a foreign currency crisis. Their budget deficit is irrelevant, since the Saudis create their own currency for domestic purposes.

Saudi Arabia’s situation has become so acute the kingdom is now selling a piece of its crown jewel—state oil company Saudi Aramco.

Yes, in exchange for foreign currency. The Saudis are privatizing out of necessity, not neo-liberalism.

All this nonsense and confusion on the part of Bloomberg is deliberate. It is designed to make you submit when you are falsely told that Social Security, for example, is “unsustainable.”

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