Author Archive for steve@pursuingretirement

Saudi Arabia Matters

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.

Final Thoughts

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 !!

Word of The Week Petrodollar

Investopedia Definition 

After the collapse of the Bretton Woods gold standard in the early 1970s, the U.S. struck a deal with Saudi Arabia to standardize oil prices in dollar terms. Through this deal, the petrodollar system was born, along with a paradigm shift away from pegged exchanged rates and gold-backed currencies to non-backed, floating rate regimes.

The petrodollar system elevated the U.S. dollar to the world’s reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar “recycling.” However, before the effects of the petrodollars on the U.S. dollar can be examined, a brief history lesson is in order. (For more, see: Global Trade And The Currency Market and US-Saudi Relations: A Complex Scenario.)

History of the Petrodollar

Faced with mounting inflation, debt from the Vietnam War, profligate domestic spending habits and a persistent balance of payments deficit , the Nixon administration decided to suddenly (and shockingly) end the convertibility of U.S. dollar into gold. In the wake of this “Nixon Shock,” the world saw the end of the gold era and a free fall of the U.S. dollar amidst soaring inflation. According to, Dr. Bessma Moomani in the article, ” GCC Oil Exporters and the Future of the Dollar,” through a series of carefully crafted bilateral agreements with Saudi Arabia beginning in 1974, the U.S. was able to promote bilateral political and commercial relations, market imported U.S. goods and services, and help recycle Saudi petrodollars