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America's Free Lunch is Over - How Should the Middle East Invest Its Oil Profits? By MICHAEL HUDSON
Every week Mid-Eastern countries acquire more dollars in payment for their oil and other exports, and also for rising U.S. investment in their stock markets and other property. This confronts them with a problem: What can they do with these dollars?
Traditionally, exporters have saved their export earnings by building up their assets. But is it still realistic for them to acquire more dollarized assets?
Central banks throughout the world presently hold some $2.5 trillion of U.S. Treasury bonds, and another trillion dollars in private-sector U.S. dollar debt. As the dollar’s exchange rate falls, these banks suffer losses when their holdings are denominated in their own currencies. Even more serious, the principal itself is now in question. There is no foreseeable way in which the United States can redeem its foreign debt. Its trade surplus continues to deteriorate, while its foreign military spending adds to the overall balance-of-payments deficit.
This means that the United States is pumping more and more dollars into the rest of the world without any means of repaying them – or any intention to do so. That is why foreign countries are beginning to treat these dollars as “hot potatoes,” trying to get rid of them as fast as they can.
But how can they all do this? China is using its new dollar inflows to try and buy up foreign raw materials assets, land and other assets needed for its long-term growth. And some Middle Eastern countries are buying long-term supply agreements for food and raw materials produced abroad. But fewer countries are eager to accept these dollars. And the U.S. Government is blocking foreign investment in the most desirable and remunerative domestic U.S. sectors as its politicians become more nationalistic. This threatens to limit foreign investment in the United States to the junk-mortgage market, to real estate that is falling in price, and loans to bail out U.S. banks and financial institutions as they fight off insolvency and their stock-market prices plunge. Middle East purchases of Citibank shares last year are the most notorious example.
This means that Middle Eastern oil exporters – and indeed, European industrial exporters – are in effect giving their oil and other products away to U.S. consumers in exchange for paper IOUs that are in danger of becoming unspendable and hence worthless.
Fortunately there is a better alternative. That is for Middle Eastern governments to invest their export earnings in building up their own economies rather than that of the United States and those of other dollar-area countries. Two thousand years ago, even during the high tide of Greece and the Roman Empire, the Middle East had long been the world’s most entrepreneurial and prosperous region. What is stopping it from reclaiming this historic position?
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(contd)
Traditionally, exporters have saved their export earnings by building up their assets. But is it still realistic for them to acquire more dollarized assets?
Central banks throughout the world presently hold some $2.5 trillion of U.S. Treasury bonds, and another trillion dollars in private-sector U.S. dollar debt. As the dollar’s exchange rate falls, these banks suffer losses when their holdings are denominated in their own currencies. Even more serious, the principal itself is now in question. There is no foreseeable way in which the United States can redeem its foreign debt. Its trade surplus continues to deteriorate, while its foreign military spending adds to the overall balance-of-payments deficit.
This means that the United States is pumping more and more dollars into the rest of the world without any means of repaying them – or any intention to do so. That is why foreign countries are beginning to treat these dollars as “hot potatoes,” trying to get rid of them as fast as they can.
But how can they all do this? China is using its new dollar inflows to try and buy up foreign raw materials assets, land and other assets needed for its long-term growth. And some Middle Eastern countries are buying long-term supply agreements for food and raw materials produced abroad. But fewer countries are eager to accept these dollars. And the U.S. Government is blocking foreign investment in the most desirable and remunerative domestic U.S. sectors as its politicians become more nationalistic. This threatens to limit foreign investment in the United States to the junk-mortgage market, to real estate that is falling in price, and loans to bail out U.S. banks and financial institutions as they fight off insolvency and their stock-market prices plunge. Middle East purchases of Citibank shares last year are the most notorious example.
This means that Middle Eastern oil exporters – and indeed, European industrial exporters – are in effect giving their oil and other products away to U.S. consumers in exchange for paper IOUs that are in danger of becoming unspendable and hence worthless.
Fortunately there is a better alternative. That is for Middle Eastern governments to invest their export earnings in building up their own economies rather than that of the United States and those of other dollar-area countries. Two thousand years ago, even during the high tide of Greece and the Roman Empire, the Middle East had long been the world’s most entrepreneurial and prosperous region. What is stopping it from reclaiming this historic position?
.
.
.
.
(contd)
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