Over the weekend, the Saudi Arabian government got itself into a game of chicken with the U.S. Congress.
At issue is a bipartisan bill that would change American law so U.S. citizens can sue foreign governments in American courts, if that government is found complicit in terrorist attacks on American soil. That's a pretty clear shot across the bow of the Saudi Arabian government — basically one giant royal family that runs the world's biggest oil company — which has long been suspected of helping finance the 9/11 hijackers.
Now, since all holdings and transactions conducted in U.S. dollars are overseen by U.S. law, everything the Saudis own in dollars could be frozen if those lawsuits turned into something serious. So the Saudi royal family is threatening to sell off their U.S. assets before that happens — all $750 billion worth.
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That's sent the White House scrambling, with officials from both the Pentagon and the State Department asking lawmakers to back off. "We believe there needs to be more careful consideration of the potential unintended consequences of its enactment before proceeding with legislation," one senior administration official told CNN.
There's a lot going on here. Saudi Arabia is a long-time strategic ally of the U.S. in the Middle East, and could also conceivably retaliate by removing sovereign immunity from our own officials. Yet it's worth asking whether we should care, given their abysmal human rights record and recent penchant for fanning war in Yemen to further their own geopolitical ends.
But let's concentrate on the economic reality: If this is a game of chicken between the U.S. Congress and the Saudi royal family, then we're driving a tank and they're driving a golf cart.
As Tim Worstall explained in Forbes, the apples-to-apples comparison here is how big the Saudi holdings are compared to the entire world market for assets denominated in U.S. dollars. Worstall poked through the paperwork, and that number is something in the vicinity of $270 trillion. Subtract all debt denominated in U.S. dollars, and you're left with $124 trillion. The Saudi royal family owns 0.6 percent of that.
So financial markets might notice if they sold off their $750 billion. But it wouldn't upend anything. At worst, the price of some U.S. stocks might drop, since the sell-off would raise the supply and lower the demand. But I wouldn't want to be the White House press person who has to explain that we stopped the courts from investigating possible culpability for the biggest terrorist attack in American history so that corporate stocks could stay a few points higher.
But there's another question. A lot of Saudi Arabia's U.S. assets are probably Treasury securities — i.e. U.S. federal debt. Some pundits worry selling them off could lead to turmoil in the global financial markets or a rise in the federal government's interest payments. This fear is also misguided.
Let's assume for the sake of argument that Saudi Arabia's holdings are nothing but Treasuries. Some of the federal debt is owed by one part of the government to another part (think of the Social Security trust fund) so it doesn't affect the behavior of Treasuries on the financial markets. But roughly $14 trillion is not owned by other parts of the government. The Saudis own 5.4 percent of that.
That's admittedly much bigger than 0.6 percent, but the financial markets could conceivably absorb that sell-off, too. Interest rates on U.S. debt are already about as low as they've ever been. Low interest rates are effectively equivalent to high prices, so the globe is already bursting with demand for U.S. debt.
But even if they couldn't absorb it, and the Saudi sell-off raised interest rates, the Federal Reserve could step in.
First off, Fed officials are already aiming to hike interest rates because they are worried about rising inflation. They shouldn't be, because inflation is also about as low as it's ever been. But that's a separate can of worms. So why not just let the Saudis push interest rates up for them? More importantly, the Fed can buy up an unlimited supply of U.S. debt itself; that's part of how it sets interest rate. It's a bottomless source of new demand. So if the Saudis pushed interest rates too high, the Fed could always buy however many Treasuries it needed to push rates back to its target.
And it gets even better. If the Saudis want to escape U.S. law, they don't just need to get rid of their assets — they need to get rid of the U.S. dollars they'd get for those assets. That means selling the dollars on the currency markets in exchange for some other currency. This could play havoc with the value of the U.S. dollar. But in that case Saudi Arabia would be cutting off its nose to spite its face: Their currency is pegged to ours, meaning it moves up and down with ours to maintain a fixed exchange rate.
Furthermore, the most likely result would be to push down the relative value of the U.S. dollar (again, raising supply and lowering demand) which could have the happy side effect of shrinking our trade deficit and probably boosting our jobs supply. Incidentally, if China tried to sell off its massive holdings of U.S. debt, the same thing would happen.
This is all a big part of why — contrary to how this stuff usually gets talked about — owning U.S. debt gives foreign governments little leverage over the American government. A bank can gain leverage over you, a private citizen, when you're indebted to them because you're cash-constrained and they're a lot more powerful than you are. Neither point applies to the U.S. federal government. We don't need Saudi Arabia or China to own our debt. We don't need anybody to.
You could argue that we don't want to anger a country that pumps so much of the world's oil supply. But between the rise of energy efficiency and the North American oil boom, we're less dependent on foreign imports of oil than we have been in decades. (And really, we should be greening our infrastructure and getting off oil entirely anyway.)
In short, why do we care what the Saudi royal family thinks about this bill?
