Why Saudi Arabia Matters
Today’s post is a little outside the box, I don’t usually write about Geopolitics. It’s good to have a little variety!
Over the past few weeks the crown prince Mohammed bin Salam has arrested more than 200 Saudi citizens, including 11 princes and four government ministers, on corruption charges, just as tensions with Iran are escalating. Should the rest of the world be concerned or is this just a Middle East problem ?
A little history
After World War II, the U.S. had the largest gold reserve, that made the U.S. in a position to reconstruct the global monetary system. At Bretton Woods in 1944 the new system was created. The U.S. dollar was tied to gold at $35 per ounce. This made the U.S. dollar the world reserve currency.
Over spending and Korean/Vietnam Wars by the late 1960’s the number of dollars to gold was plummeting. By 1971 the gold reserve dropped from 547 million ounces to 261 million ounces. In 1971 Nixon dumped the dollar tied to gold. To keep the reserve currency status Nixon made a deal with the Saudi elite and priced all oil in U.S dollars. This is how we have the U.S petrodollars as the reserve currency today.
The petrodollar system is why people and businesses everywhere in the world take U.S. dollars. Other countries have had little choice over this. The oil producers recycle those dollars back to purchase U.S. securities (such as Treasury bills), which creates liquidity in the financial markets, keeps interest rates low and promotes non-inflationary growth. So the U.S. can keep having deficits.
I am not saying the U.S dollar is going to lose its reserve currency but what happens in Saudi Arabia can influence us here and around the world. It certainly could effect the oil and stock market. There is a article by George Friedman that gives you a lot more insight into Saudi Arabia and history around middle east. Saudi Arabia’s Saturday Night Massacre. Also check out the Word of the Week Petrodollar.
In my opinion this is just noise, like North Korea it might raise oil prices and add some volatility in the market.
What do you think, does Saudi Arabia matter? Will it effect the oil or stock market? Or is it just noise in the market?
Don’t wait for retirement to enjoy life !!