If the US Retaliates Against Saudi Arabia, Will They Stop Pricing Oil Just in Dollars?
by John Lawrence, October 16, 2018
When President Nixon took the US off the gold standard in 1971, he made a deal with Saudi Arabia (some say with the devil) to only accept US dollars as payment for oil in return for military protection. This is what made the dollar the world's reserve currency and the Saudis allies of the US. Now with the evident killing of Jamal Khashoggi in the Saudi Embassy, some US Congressmen are calling for reprisals against Saudi Arabia, and Saudi dictator Salman has threatened harsh actions towards the US in return.
The Guardian reported:
Riyadh vowed to hit back against any action. “The kingdom affirms its total rejection of any threats and attempts to undermine it, whether through economic sanctions, political pressure or repeating false accusations,” it said.
“The kingdom also affirms that if it is [targeted by] any action, it will respond with greater action.” The statement also pointed out that the oil-rich kingdom “plays an effective and vital role in the world economy”.
The country’s foreign ministry issued a series of tweets rejecting the accusations as “attempts to undermine” Saudi Arabia, writing in one post “demise is the outcome of these weak endeavors”.
The deal between the US and Saudi Arabia has allowed the US to run huge budget deficits because there is a ready market for US Treasury bonds mainly because of the need for other countries to purchase oil with dollars. If that's no longer the case, the US will have a harder time selling off all its debt the amount of which recently increased as Treasury Secretary Mnuchin frantically tries to sell more and more US debt. The government is trying to handle a budget deficit expected to eclipse $1 trillion in the next two years. The national debt is at $21.3 trillion, having risen about $800 billion in 2018. That means more and more US debt needs to be sold at a time when other countries are scaling back their purchases.
Russia recently dumped 84% of its American debt, and China, the US' largest debt holder sold off $3 billion in US Treasury bonds. Is it any wonder? Russia has been targeted with US sanctions, and China and the US are in a trade war started by Trump. If the US does not go along with the Saudis' murdering of a journalist, thereby becoming complicit in Khashoggi's murder, the Saudis might retaliate by pricing oil in other currencies. Then where does that leave the US with its frantic need to sell off more and more of its debt which has ballooned thanks to Trump's recent tax cuts for the wealthy.
Trump has said that he doesn't want to cancel the arms deal with the Saudis because it would mean US jobs for Lockheed Martin, Boeing and Raytheon. In other words the US military-industrial complex would suffer if we do not sell the Saudis the weapons they are using to slaughter innocent Yemenis. This is so much bullshit. If he sanctioned the Saudis, no other country supposedly would be able to sell them weapons either and this might be the best outcome if that meant the Saudis could not keep on slaughtering Yemenis.
The larger picture, however, has to do with the fact that Trump's alienating other countries including the US' largest debt holder, China, will mean a sell off of US debt and rising interest rates for US Treasury bonds to attract investors. This does not bode well for the continuation of the situation that currently holds sway in which the US lives off its penchant for funding its military and social programs with other people's money.