They Shouldn't Hitch Their Wagons to a Falling Star


What gives?

First Kuwait un-pegged its dinar from the dollar.

Now the Saudi Arabian Monetary Agency (SAMA, which is the central Saudi bank) isn’t following the US Federal Reserve’s lead in lowering interest rates.

Did our beloved Saudi Royals spend their summer holidays on la Cote d’Azur reading Murray Rothbard? Is Austrian Economics becoming the new religion of the season?

If Saudi central bank Governor Hamad Saud Al-Sayyari really wants to ensure the long-term economic viability of his country, the question should not be whether or not his country will unhitch the riyal from the US Dollar. His question should be, How soon?

To the extent that this story has received any coverage in the media (I learned about it from International Living), it has been suggested that the Saudis won’t unhook their money from the American greenback any time soon. Analysts cite the Saudis’ alliance with their neighbors — the United Arab Emirates, Qatar, Oman and Bahrain — which has the goal of creating a sort of Arabian Euro. Most experts were surprised that any of those countries, most of all the Saudi Arabia, would detach its currency from Uncle Sam’s treasure before achieving regional monetary unity.

These experts point out that in the region, petroleum has been bought and sold in US Dollars for decades. According to the sages, none of the Arab oil-producing countries would be silly enough to debase the currency they receive. They also note that the Saudis and other Arabian countries hold large and numerous assets, within and outside their own countries, that are denominated in dollars. And, of course, anything the Saudis and other Arabians earn from those assets is in dollars. However, Saudi banks, like their local counterparts in just about every nation, report their earnings and the value of their assets in riyals. So, devaluing the dollar damages the value of any assets or earnings earned in that currency, particularly when it is converted to riyals.

At face value, what the pundits say makes sense. However, if I were Governor Al-Sayyari or the finance minister of any of Saudi Arabia’s neighbors, I would also refrain from cutting my country’s interest rates in lockstep with what the US Federal Reserve does. If anything, I’d raise the rates and work toward severing my local currency’s tie to the dollar.

Why?, you ask. Well, if you’re reading this article, you know that any currency’s value is based on how much of it is issued, whether or not anything is backing it up and what people know or don’t know about either or both factors. Most likely, you also know that most of the gold reserves that were once held at Fort Knox are gone. And the government continues to print more and more "Dead Presidents" to pay for its debt, much of which has been incurred from pointless military actions and investments in loans and other schemes no sane business person would touch.

In light of these facts, it makes sense for any nation not to peg its currency to the dollar. Yes, but what’s the alternative, you may ask. Nearly every other nation’s currency is as debased as this country’s is. So, it’s probably not wise for the Saudis or any of their neighbors to hitch their wagons to the "stars" of other nations.

What’s an Arabian finance minister to do? Well, it looks like Al-Sayyari made a first good move. Uncoupling his country’s currency from the greenback would be a good next step. I’m not so sure about working toward a unified Arabian currency. However, if it were come to pass, he and the finance ministers of countries bordering Saudi Arabia would be wise not to peg it to the dollar.

Then, the Saudis — or their four partners, should they achieve monetary unity — should demand payment for their oil in their own currency, which barring a catastrophe (at least for them) will continue to rise in value against the dollar, and possibly other currencies. Finally, they should take the lucre gained from oil sales and convert it to gold.

Now, I know that most of you who are reading this would agree with the last suggestion on principle. But I should explain why, in particular, it’s a good suggestion for the Saudis and their neighbors.

Right now, the stereotype of "export oil, import everything else" comes close to describing the economic reality of those countries. And such a system will work for them as long as there’s lots of crude in the ground and lots of demand for it. However, all mineral resources run out. Or more accurately, any portion of them that’s economically feasible to extract is taken and used. Or else, economies, technologies and cultures change in ways that those resources are no longer needed. When that happens, nations whose economies are based upon those resources will, if they haven’t invested their revenues prudently (i.e., in gold and other indestructible commodities) quickly become destitute. That is what happened in much of post-colonial Africa. The European countries that ruled Chad, the Congo and other parts of Africa built an infrastructure that was designed to facilitate the extraction and transportation of various minerals to the factories of Birmingham, Lille, the Ruhr Valley and other European industrial centers. But the emphases and needs (not to mention the locales, in some cases) of these industries changed. As a result, the need for certain resources shrank or disappeared altogether. Or substitutes for them were found or created.

No one knows when the oil reserves will run out or the world will stop needing them. But one or the other must surely happen, whether it comes to pass during our lifetimes, our grandchildren’s or later on. When that day comes, if Saudi Arabia (and its neighbors) has (a) stable currency(ies) and government(s), the region and its people will be able to reap the benefits. As to what form the economy, culture or government will take, I can’t even guess. But, by that time, it most likely won’t benefit from developing a manufacturing-based economy, as Canada (another country that has depended heavily on its natural resources) has done, at least to some degree. Maybe the Arabian countries will become Islamic, Middle Eastern versions of Ireland and other small countries with educated populations that have found lucrative niches in high technology and financial services.

Whatever they do, I don’t think they’ll be hitching their wagon to the falling star of the dollar.