There is definitely something terribly fragile about the state of our foreign affairs if I need to discuss our phony "allies" in two posts back-to-back. This time, it's not some unnamed "friend" - it's Saudi Arabia or, as many journalists call it, one of the "most awkward" of US allies. The reason I feel the need to talk about it is that the present tension between us and Saudi Arabia is a stark exhibit of how monetary stimuli affect the White House politics.
But before I can address the current events, some cursory background is mandatory. At the very least it is important to understand why we are allies with Saudis in the first place and what's so awkward about this relationship.
Ever since FDR (that Grand Master of uber-strenuous alliances) struck some sort of a secret deal with the Saudi ruler of the time King Abdulaziz in 1945, the resulting relationship has been teetering on three main financial whales:
- Saudi Arabia is the largest customer of the US weapon trade; no other nation buys as much military equipment and armament made in the US than that tiny country with population of 31 million.
- 11% of American oil imports come from Saudi Arabia, with over 1 million barrels pumping in every day – second only to Canada and ahead of our next-door neighbors Venezuela, Mexico, and Colombia.
- The Kingdom of Saudi Arabia is one of the largest foreign investors into US market-trading assets, specifically government bonds and corporate stocks (more related numbers below).
As in many money-driven relationships, the partners in this one don't really see eye to eye when it comes to non-monetary issues, especially with respect to social and political values. Hence, the awkwardness. Our President can laugh all he wants, but for those who care it's painful to know that the White House calls the country famous for its obscurantist interpretation of Islam, medieval punishments, and the harshest treatment of women "our ally." On the other hand, Saudis are not happy with US Middle-Eastern policies, especially in Syria, Iran, and Israel. In fact, the Saudi foreign minister has been quoted as saying, "It's a Muslim marriage, not a Catholic marriage."
That's actually remarkably aphoristic: Catholic marriage is for life. No divorces are permitted, so the union is truly "till death do us part." On the other hand, according to Sharia (Islamic law), Muslim divorce process is reduced to a single announcement of a husband to his wife, "I divorce you" (the phrase and the short ritual are both called talaq). That's it – he says it and she is out on the street; no legal or even religious authorities need to be involved. Apparently Saudi Arabia feels that the United States of America is its Muslim wife. As I said, clearly the relationship is precarious at best.
Into this volatile drama enters the bipartisan bill that, if passed by the Congress, may allow victims of 09/11 to sue foreign governments, including Saudi Arabia. When was the last time you've heard of a yet-unapproved legislation proposal becoming a big international news item? Well this one did, as soon as it hit the congressional floor. How important is this bill to the White House? It is so important that, according to the New York Times (our last frontier of journalism with original sources), the Obama Administration has been lobbying against it for quite some time, trying to squash it before it even got to the approval stage. Unable to stop the bill so far, Obama went this week to Saudi Arabia to talk it over with the King.
The administration's cover story for the bill-bashing activities, formulated on the record by the President, is the concern that this will give other nations a reason to put in place similar regulations against the United States. Well, even though we don't create disasters like 09/11, we do meddle in other nations' existence from time to time. So, it's a plausible worry. Only I don't buy it. Why is he not going to any other countries that may be impacted by the bill, just to Saudi Arabia? Why the President himself and not the Secretary of State, for example? You know why - C.R.E.A.M.!!!
The very same New York Times has also reported that our "ally" has already announced to the White House their retaliation strategy. Does it have anything to do with "we-shall-sue-you-back" laws? Nah, not surprisingly it's economic: they threaten to sell off $750 billion of American assets. Now, that's what I'm talking about! Money! It talks and makes US Presidents bounce this way and that way on their strings.
I find it absolutely preposterous that some "commentators" immediately started calming themselves down and speculating that Saudis don't even have that much of US bonds and stocks; or that they wouldn't extinguish a huge cache of investments just like that, because they would lose money, etc., etc. They sound to me like a bunch of ignorant optimists who either don't understand the extent of Saudi wealth, or are hiding their heads in the sand out of fear, or both. But I am not like that. I'd rather look into the face of the most damning scenario. I think that Saudis wouldn't hesitate to act on their threat. I also think that they are probably as conservative as I am and value their investments at the lower of cost or market. Therefore, this specific amount, $750 billion, is exactly what they can do without any problem; moreover, with gains.
Now, let's see what this amount means to the United States. First, there is the most obvious implication of the threat – the one that's on everyone's mind. $750 billion is about 1.7% of the total value (as of 12/31/2015) of American publicly-traded stocks and treasury bonds combined. That's a pretty significant share. (Just to give you an idea of the number's magnitude: the market capitalization, i.e. the total value of all outstanding shares, of Apple, Inc. [#1 ranked American stock] is $600 billion.) Dumping huge buckets of equity shares and bonds into the market will start an obvious chain reaction: The stock prices will start violently dropping and bonds' discounts (percentages below par) increasing. This will push other investors, especially day traders, into a panic and they will join the sell-off in attempt to recover at least some of their money, intensifying the effect and driving the prices further and further down. As the result, (a) the stock market will experience a deep adjustment and (b) the US Dollar will be seriously devalued. This, in turn, will affect the global markets, the international trade, the costs of raw materials, the deficit, etc., etc.
And assets divesture could be just a first step. It may be followed by another economic blow – the cancellations of arms deals. There are always Russians, you know, with their outdated garbage, but it looks pretty sinister. If weapons sales seize abruptly, first the military sector will need a bailout and then we shall see a contraction of the entire industrial sector. Therefore, it is not surprising that the White House is concerned – there is a definite possibility of talaq (see above) here. I'm sure Obama went to Saudi Arabia to promise them that he would veto whatever rightful laws the Congress might pass.
There is another significance to this number, though. It can give you an idea of who owns the US marketable securities (and keeps their values high). As of 10/01/2015, $12.2 trillion of those assets belonged to foreign investors. This breaks down into 43% (!) of total outstanding US government bonds ($6.2 trillion), and 20% of all outstanding equity shares ($6 billion). Now, as I said, not only that I think Saudis own $750 billion of American assets, I am sure that this is just a portion of what they have. It's just hard for me to believe that they would divest of the entire lot, no matter how angry they are. For argument's sake let's say it's 50% of what they actually have. That would mean that the kingdom holds 12% of the total foreign investments into the US markets. Remarkable!
Of course, all this politico-economic rat-scuffling is very fascinating, but so is the human paradox. Just think about it. There always have been plenty of speculations about Saudis complicity in 09/11 attacks, but nobody ever came out with solid proofs. If they exist, they are buried well. And honestly, considering how fickle everyone's attention is nowadays, nobody would dwell on their suspicions too long; if only Saudis kept their guilty asses in low profile, pretending that they have nothing to hide. But no! They had to go to the Bush administration with, "Please, please, get us out of here ASAP," resulting in all those sweeping-away-in-helicopters shenanigans. Nobody will ever forget that! And now, this scandalous reaction to the bill! Doesn't it sound like an admission of guilt? Wouldn't it be cleverer to stick to the not-guilty plea? I mean, even if there are law suits, a country like Saudi Arabia can buy the best legal defense in the world. On the other hand, it could be a matter of arrogance. They must feel incredibly secure not to worry about appearances.
The Frustrated CFO 