Back in the halcyon days of the housing market with a crumbling Fannie Mae and Freddie Mac to contend with a quiet threat to the U.S. financial system appeared in the form of a possible dumping of U.S. Treasury securities held by Russia and China. Both countries with their vast holdings saw the opportunity as a chance to oversupply the secondary market resulting in lowered prices and higher yields. At a time the U.S. financial system was imploding would it be able to sustain higher rates?
Today a similar threat exists from Saudi Arabia. Our ‘friends’ in the Middle East have quietly amassed a war chest of holdings since the early 1970s.
At the time they used oil as their economic weapon of choice to punish the U.S. for supporting Israel during the Yom Kippur War. Today’s weapon of choice might a political one – U.S. Treasuries.
The collapse in the price of oil has left Saudi Arabia with mounting financial pressures. In the past year it has burned through $111 billion of reserves to plug the biggest budget deficit in 25 years. Spending has been on traditional sources such as free health care and gasoline subsidies and new sources such as efforts to defeat the Islamic State and waging proxy campaigns against Iran.
The stress on the Saudi financial system is so great the kingdom is now selling a piece of its crown jewel – state oil company Saudi Aramco.
The weakened financial condition is only exacerbated by crumbling political ties between Saudi Arabia and the U.S. To an extent the U.S. has climbed into bed with Iran via President Obama’s nuclear deal. U.S. shale has made reliance on foreign oil less of a factor. The final nail in the coffin could be if Congress passes a bill allowing Saudi Arabia to be held liable in U.S. courts for the September 11th terrorist attacks. (The bill passed the Senate on May 17th and now resides in the House of Representatives.)
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