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On Thursday, the U.K. Daily Telegraph reported that Saudi Arabia's central bank, SAMA, refused to cut its interest rate in response to the Federal Reserve's decision to cut the Fed Funds rate .5%.
Saudi Arabia holds $800 billion of their foreign currency reserves in dollars. It is in its best interest to maintain the value of this investment, which is why the central bank has been supporting the dollar until now.
However, its economy is growing much faster than the U.S. To head off inflation in its own country, SAMA must allow its own currency, the riyal, to maintain its value. Therefore, it had to remove the peg to the dollar. (Source: U.K. Telegrapha, Fears of Dollar Collapse as Saudis Take Fright, 9/21/97)
Many analysts are concerned that this could prompt a dollar collapse. However, I still maintain that it is no one's best interest to precipitate a run on the dollar. Instead, the more likely scenario is a gradual though relentless dollar decline. (Source:
MarketWatch, Dollar plunges on fears Saudis might drop peg, 9/20/07)
What It Means for You
As the dollar continues to decline, foreign investors may prefer their own stock and bond markets to the U.S. markets. Over time this will decrease the value of the U.S. stocks and U.S. Treasuries. This will not only decrease the value of corporations, but also increase interest rates. This will further slow the U.S. economy.
The best way to protect yourself is to make sure you have a
well-diversified portfolio that includes European and other international
mutual funds. That way, you can benefit from not only the rising value of the global economy, but also the rising value of international currencies.
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Comments
Hi, Kimberly:
The $ has been in a steady decline — without a shock like this one. We’re at a 30 year “record” with Canada (parity). When did this movement downward begin in earnest? And how has Canada managed to balance its budget and cut taxes?
Hi Kathy,
The dollar has declined 36% since 2001, when it was worth around $1.50 Canadian dollars. I can’t speak to Canada, but I believe that the dollar’s decline is a result of the huge U.S. current account deficit, as explained in Current Account Deficit — Threat or Way of Life?
very insightful, just a typo to highlight: the currency for the Saudis is “Riyal” not “Riyadh”. thats their capital.
If one wants to truly understand the US economy one needs to understand that the Federal Reserve is a private corporation run by bankers for profit.
Many think that the fed is a government institution. It is not. It is a private corporation owned by bankers and run for profit.
You can watch a movie called Money as Debt on youtube about the federal reserve or watch The Federal Reserve Zeitgeist. Each of these movies explains where and how money is put into our economy.
The great depression as this recession are both planned events.
If we bail out the banks we are just enslaving the American people in more debt. As every dollar the fed creates they create debt on top of it that the American people need to pay back. How do we pay off the debt? the fed creates more money and each dollar they create they put debt on top of it.
Learn and teach others about the Federal Reserve.
Hi Nina,
I’ve heard this statement many times, and my question is always…why would Central Bankers want to intentionally cause a depression or recession? Secondly, I don’t think anyone is smart enough to manipulate the economy skillfully enough to profit from a deliberate recession, let alone a depression.
I’d love to hear more about your reasoning.
Kimberly
Hi Kimberly,
My comments are in response to the comments from your reader about the Federal Reserve being privately owned. Your reader believes that the Feds gain by America’s indebtedness to them. Of course, this would be true of any lending institution.
Your response was that it would be hard to believe that the Feds could or would manipulate a recession or depression because of the enormity of our economy and because it would not serve them well.
A little over a decade ago I read a couple of books by one author who had done extensive research on the US and world banking. He saw a pattern of European and US bankers and huge corporate owners using their vast resources to move the world towards a global economy and ultimately a global socialist political system. The most prominent obstacle to world socialism? The powerful democracy and wealth, power and influence of the USA. Their goal? To slowly level the USA to sub-super status and ultimately level with the rest of the world if not lower.
The writer’s work was quite convincing. Of course he delves into the deeper subjects of the spiritual connotations of the socialists plans and how they ultimately play out in light of Bible prophecy. How in the book of Revelations and Daniel it articulates the resurrection of a government very similar to the Roman Empire. In Reverlations It actually states that every person will be required to have a government number on their hand or forhead in order to do any and all financial transactions. It was written nearly 2000 years ago by John, a desciple of Jesus Christ.
In the two books the author also points out that at the time, fifteen years ago, seven out of ten of the nations largest banks were foreign owned. Is that true?
Interesting stuff and interesting times, eh.
Dan Metcalf
Snohomish, WA