An Obama Presidency Could Sever Gulf States US Dollar Peg?

[Guest]

More points from this week's thought provoking Gary Dorsch post.

http://www.financialsense.com/Market...2008/0403.html

__________

The Bernanke Fed is expanding the US M3 money supply at a 17% annualized rate, the fastest in history, so the Saudi central bank is expanding its M3 money supply at a faster 24% rate in order to prevent the Saudi riyal from rising against the US dollar. The Saudi central bank matched the Fed’s 75 basis point rate cut on March 18th, cutting bank deposit rates to 2.25%, which is far below the inflation rate.

In turn, the explosive money supply growth and negative rates of interest are fanning the flames of inflation in the desert kingdom, hitting 8.7% in February, a 27-year high. The dollar peg is fuelling inflation by making imports from Asia and Europe more expensive as the US currency sinks on global markets. Rents led the rise in Saudi inflation, surging 18%, followed by food costs up 13 percent.

Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain control 40% of the world’s proven crude oil reserves. And the recent commodity price boom has swelled the coffers of governments that control commodity exports or heavily taxes the revenues earned by private commodity exporters. As a result, the assets managed by Persian Gulf sovereign wealth funds (SWF’s) have ballooned to roughly $2.5 trillion from $472.5 billion in 2004.

Funds derived from oil and gas export revenues account for roughly two-thirds of the total assets held by sovereign wealth funds (SWF’s), with the rest controlled by Asian surplus exporters. Saudi Arabia is planning a SWF for $900 billion, and the Abu Dhabi Investment Authority controls $875 billion. The Kuwait Investment Authority oversees $213 billion, and the Qatar Investment Authority had an estimated value of $60 billion at the end of February.

By 2015, the Persian Gulf SWF’s could grow to $6-7 trillion.

If Chinese, Russian, and Korean SWF’s are taken into account, the total global SWF value could top $12 trillion, or nearly the size of the US economy. One has to wonder what direction the Persian Gulf SWF’s will take, if the Illinois senator Barack Obama wins the US presidency in November, and hastily withdraws US troops from Iraq.

[blazespinnaker]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

One has to wonder what direction the Persian Gulf SWF’s will take, if the Illinois senator Barack Obama wins the US presidency in November, and hastily withdraws US troops from Iraq.

An interesting point. I'm sure the army in Iraq is what's keeping these middle eastern countries pegged to the dollar, though. In fact, the animosity it creates, might even make it more difficult to peg to the dollar.

[phirang]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

Just wait for Iran to get the Bomb... then it's game over for the peggers.

[BiscayneSunrise]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

It is popular to say that the US invasion of Iraq has been a de-stabilizing influence in the ME. The exact opposite is true.

The Gulf countries are dumping trillions of dollars into infrastructure upgrades. I doubt they would be doing that if they didn't feel pretty good about the future and stability of their region. The two biggest beneficiaries to Saddam's overthrow were the Kuwaiti's and the Saudi's, next biggest beneficiaries are the Iranian's.

Since the war is indirectly responsible for the dollar's decline, perhaps the dollar peg and resultant inflation is just nature's way of making the ME oil producers pay their share of the war.

The latest fighting in Basra was a major coup for the US and the Iraqi central government. Worthy of its' own thread but the big news that was virtually unreported was that the US diplomats got the Iranians to back off on supporting rebel Shia' groups in Iraq. Hopefully, once and for all since the US was threatening to re-establish Sunni minority rule in Iraq, which would be Iran's worst nightmare.

If Iran gets the bomb, reports say that the Saudi's will follow suit. No one wants nuclear buildup in the ME so if Iran pursues N weapons, a military takeout is likely and would be quietly applauded by nations in the region.

As for Obama withdrawing troops. If elected, he will do what new Presidents did during Vietnam; back peddle on campaign promises and work to withdraw in an orderly and strategic way. The good news, unlike Vietnam, Iraqi rebels are not being supported by a superpower but by a disgruntled and feckless neighbor (Iran) without a lot going for it. The recent win in Basra could very likely be the final piece of the Iraqi puzzle. The Iraqi central government proved they have some stones on that one and if the local politicians in Iraq can continue to hold the peace, Iraq will be old news by election time.

[Guest]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

If Iran gets the bomb, reports say that the Saudi's will follow suit. No one wants nuclear buildup in the ME so if Iran pursues N weapons, a military takeout is likely and would be quietly applauded by nations in the region.

Lots of truth in your observation Biscayne.

Iran are SHIA - the very notion of Iran, the largest nation in the region by demographic (and military size too), which is in effect already the "regional superpower", obtaining a nuke while the Sunni don't is a highly destabilizing factor. In the event of Iranian nuclearization, the Saudi's would have two options as the leaders of the Sunni world - either match that nuclearization and set off an arms race, or promptly cede their leadership of the Sunni Arab world to some other nation. A Shia nuclear pre-eminence would be intolerable to the Sunni - that rivalry goes back a thousand years and is not about to fade away now.

Which do we believe to be the more probable eventuality if Iran develops a nuclear delivery capability? This is what's called a "very high probability consequence" of an Iranian N-bomb acquisition. The rest of the world could sit quiet as a mouse and this would occur regardless. All that's required is that the Iranians actually proceed with this plan. Now, how irrational do we regard Western fears to be in this context?

Iran, the sole Shia Muslim nation in the entire region, a "regional superpower" in the Gulf already - when armed with a nuke is the direct equivalent of a nuclear arms race in the gulf - we should make no mistake about it. This is an agnostic point - it has nothing to do with whether Iran is entitled to a nuke - it merely observes what will happen if / when they get one.

I heard in '06-'07 some of the Gulf states would not have been hugely displeased to see the Israelis "do the dirty work" of taking out the Iranian Bushehr Nuclear plant. Everybody trashes the Israelis, and they are effectively a pariah in the region already - so they were precisely the best candidate for the dirty job! Containment of political fallout, for the nation who's already the ass-end of the mule for political fallout anyway? Makes a lot of sense. Some people here may be incredulous that any Sunni Government could conceivably endorse such a notion - as all the arm waving has been about how the US presence has been the primary destabilising factor in the ME.

But the fact remains that given the above Sunni / Shia precarious balance of power calculus, the Sunni nation's quiet angst at watching Iran reach for nuclear armaments renders that scuttlebutt about their favoring the Israelis to do this dirty work an entirely plausible theory. And such a theory would stand on it's ear all the platitudes and tired canards about the real balance of interests in that region being all about "the Arab World on the one hand, and "the Americans" on the other.

The Iranians are feared as an "ideologically driven" and "adventurist" nation in that region by the Sunni Gulf nations, who are instead all about doing pragmatic business with the rest of the world, and the fact that the Iranians are both Shia and are pursuing an N-bomb is the tipping point for the Sunnis. The Iranian President's visit to Saudi Arabia last year, where profuse and flowery expressions of everlasting Shia - Sunni allegiance and pacifism were expressed, was a scene of crackling tension for all the Gulf Emirates.

One has to wonder how much of all this complex calculus Obama really understands. Homespun American idealism applied to this tangle would slam the delicate balance of powers in highly unpredictable ways. It takes an individual precisely tuned to cynical power calculus to wade into this miasma and even understand what's going on there.

This is the classically American misconception. We think the guy that "means well" is the guy with the best chances to sort this all out. In fact the guy who merely "means well" will be taken for a bumbling fool in this fear driven clash between Sunnis and Shia. We could make the very same observation about Ron Paul's chances for brokering peace in the region - I think he'd not be "brokering" more than a plate full of broken eggs in this environment. This is absolutely not stating that Ron Paul is not an excellent candidate to rehabilitate America - but reality is full of paradoxes, and my guess is he'd make a pratt-fall of it in this ruthless ME calculus.

I think you missed your vocation Biscayne, you would have made a decent intelligence analyst.

[GRG55]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

...If Iran gets the bomb, reports say that the Saudi's will follow suit. No one wants nuclear buildup in the ME so if Iran pursues N weapons, a military takeout is likely and would be quietly applauded by nations in the region...

The Sunni Arab states already defacto have the bomb. Do you think American military protection has some non-nuclear limitation? Al Udeid is sufficiently secure to base nuclear weapons if needed as is Diego Garcia. (The USAF just needs to find a way to keep their B1's from catching fire and exploding on touchdown) ;)

http://www.gulf-times.com/site/topic...7&parent_id=56

[Guest]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

The Sunni Arab states already defacto have the bomb. Do you think American military protection has some non-nuclear limitation?

GRG55 - what happens to the credibility of the US nuclear umbrella if the USD peg finally cracks? I'm not a premium member so have not had the opportunity to read up on the threadbare USD peg discussion there. What's the most popular conclusion on those threads as to the longevity of the peg?

Does conventional wisdom win out - i.e. "the peg cannot be broken for many years due to critical US military protection of it's client states" or does "radical readjustment" win out as inflation in the Gulf states begins to soar over 20% and they must deal with growing internal unrest? What appears unsustainable probably is indeed unsustainable?

It would appear this peg must logically break in due course - as monetary inflation in the US surges further, and inflation in the politically fragile Gulf States rises yet more sharply. Then what? Do the Saudis indeed get into a race for their own nuclear deterrent vs. Iran as the US nuclear umbrella attempts to survive the withering abandonment of the USD by these client nations?

Or do we witness that the Iranians never actually pursue or produce this nuclear capability?

[phirang]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

It is popular to say that the US invasion of Iraq has been a de-stabilizing influence in the ME. The exact opposite is true.

The Gulf countries are dumping trillions of dollars into infrastructure upgrades. I doubt they would be doing that if they didn't feel pretty good about the future and stability of their region. The two biggest beneficiaries to Saddam's overthrow were the Kuwaiti's and the Saudi's, next biggest beneficiaries are the Iranian's.

Since the war is indirectly responsible for the dollar's decline, perhaps the dollar peg and resultant inflation is just nature's way of making the ME oil producers pay their share of the war.

The latest fighting in Basra was a major coup for the US and the Iraqi central government. Worthy of its' own thread but the big news that was virtually unreported was that the US diplomats got the Iranians to back off on supporting rebel Shia' groups in Iraq. Hopefully, once and for all since the US was threatening to re-establish Sunni minority rule in Iraq, which would be Iran's worst nightmare.

If Iran gets the bomb, reports say that the Saudi's will follow suit. No one wants nuclear buildup in the ME so if Iran pursues N weapons, a military takeout is likely and would be quietly applauded by nations in the region.

As for Obama withdrawing troops. If elected, he will do what new Presidents did during Vietnam; back peddle on campaign promises and work to withdraw in an orderly and strategic way. The good news, unlike Vietnam, Iraqi rebels are not being supported by a superpower but by a disgruntled and feckless neighbor (Iran) without a lot going for it. The recent win in Basra could very likely be the final piece of the Iraqi puzzle. The Iraqi central government proved they have some stones on that one and if the local politicians in Iraq can continue to hold the peace, Iraq will be old news by election time.

Iran backs SCIRI and Sadr(but more on SCIRI)... I fail to see any US "victory" here. Iran doesnt care for Sadr, either, btw.

Arabs are building up infrastructure because it's easy: no IP required, tons of free/slave labor, and it's all an offshoot of their fossils... also, it provides economic diversions for the natives who aren't cut into the oil/gas biz.

[metalman]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

GRG55 - what happens to the credibility of the US nuclear umbrella if the USD peg finally cracks? I'm not a premium member so have not had the opportunity to read up on the threadbare USD peg discussion there. What's the most popular conclusion on those threads as to the longevity of the peg?

Does conventional wisdom win out - i.e. "the peg cannot be broken for many years due to critical US military protection of it's client states" or does "radical readjustment" win out as inflation in the Gulf states begins to soar over 20% and they must deal with growing internal unrest? What appears unsustainable probably is indeed unsustainable?

It would appear this peg must logically break in due course - as monetary inflation in the US surges further, and inflation in the politically fragile Gulf States rises yet more sharply. Then what? Do the Saudis indeed get into a race for their own nuclear deterrent vs. Iran as the US nuclear umbrella attempts to survive the withering abandonment of the USD by these client nations?

Or do we witness that the Iranians never actually pursue or produce this nuclear capability?

didn't itulip warn years ago that unilateral usa monetary policy was to result in trade partner's inflation... leading to domestic political turmoil... leading to a break with the usa?

is it happening now?

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and so on...

does Kuwait have the solution?

Inflation in the Gulf states: Are subsidies the antidote? (By Dr Samir Ranjan Pradhan)

Too much money spent chasing too few goods’ or ‘basics becoming luxuries.’ This economic phenomenon known as inflation has taken some of the sheen off the economic boom scenario in the GCC. Consumers, financial policy makers and the ruling elites as well are struggling to deal with this menace. Symptoms are diagnosed, remedial measures are planned and policy machinery is put into action. But are all these efforts sufficient to counter the threat? There are no clear-cut answers. All policy measures are off-the-cuff and more in reaction to the problem. So what is the next best course?

Trends and Symptoms

Inflation is at 16-year highs in Saudi Arabia and Oman, a 19-year peak in the United Arab Emirates and just below record levels in Qatar. Disparate trends and obfuscating analyses abound. This is obvious in the absence of scientifically modeled dataset on the macro trends of the GCC economies; leave alone the unbalanced or non-existent consumer price indexes (CPI), particularly in case of the UAE. So we at GRC relied on conventional wisdom by calculating the rate of inflation from the annual average changes in CPI data provided by all national monetary authorities in the GCC countries. It is found that average consumer price inflation in the GCC reached a 15-year high of 5.3 per cent in 2006, and rose to 6.8 per cent in 2007 (third quarter). As per our estimates, inflation rates in Bahrain, Kuwait, Oman and Saudi Arabia were 8.4 percent, 6.6 percent, 5.3 percent and 6.5 percent respectively, in comparison to a staggering 12.8 percent and 11.3 percent in Qatar and the UAE. Nevertheless, inflation trends in the GCC as evinced from almost all current analyses ranging from academic outputs to mass media seem to converge towards the uptick level.

For Saudi Arabia, Saudi British bank estimates a 35 percent share of imported inflation in overall inflation. For Kuwait, estimates of 25 percent have been given using food imports as a proxy for imported inflation. Still, even in these countries the domestic part of inflation (non-tradables like rents, services and fees) is dominant. This is all the more true for the UAE and Qatar. Official UAE sources recently stated that 50 percent of the inflation can be attributed to rent and close to 30 percent to imported inflation. The weights assigned to CPI components in the UAE are distorted as they only attribute 36 percent to rents, which is lower than many expatriates actually have to pay. Thus the amount of domestically generated inflation could be even higher. In Saudi Arabia, the average inflation rate as measured by annual changes in the cost of living index during the 12 months ended September 2007 rose by 3.3 percent while the average index during the preceding five years (October 2001-September 2006) was 0.6 percent. Importantly, the group of food and beverages and the goods and other services (mostly imported items including metals and other raw materials) group rose by 6.7 percent and by 5.7 percent, respectively. Another important component of the tradables contributing to inflation is the housing furnishings group whose average index for the period, October 2006-September 2007 rose by 1.1 percent. This phenomenon is prevalent in all GCC economies more or less. In Qatar, the index of tradables increased by almost 15 percent from the year 2005 to 2006. This is why Qatar experienced the highest rate of inflation in the GCC. In Kuwait, the general level of wholesale prices of imported goods (whose relative weight in the General Wholesale Price Index is 76.9 percent) also increased in the year 2007. The inflation rate of food prices in the UAE was between 27 and 30 per cent in 2007, according to a survey conducted by the Emirates Consumer Protection Society (ECPS).

Diagnosing the Causes

What are the factors propelling the inflation? While government authorities point to ‘economic boom beyond capacity’ as the root cause, analysts attribute it to other major factors such as the structural economic rigidities like lower absorptive capacity amid huge liquidity, domestic currencies pegged to sliding greenback and prodigal welfarism resulting in unwanted fiscal expenditure. But a closer look reveals that the root causes are deeply entrenched and also influenced by beyond-border factors. Across GCC, inflation is caused by a combination of demand pull and supply shock or cost push factors. On the demand side, GCC economies are flush with burgeoning liquidity as a result of higher oil prices, thereby pushing aggregate demand. Increasing government expenditure for economic diversification further fuels the flame. Adding to the additional demand factor is the ever increasing population, due both to demographic transition and huge influx of expatriates. It has been impossible for the supply side, in terms of goods, services, housing and infrastructure, to keep pace. The result is price spikes all along the value chain due to cost escalation, which then percolates to other sectors of the economy. On the supply side, the most controversial cause of the inflation is domestic currencies pegged to the sliding dollar, thereby sapping the purchasing value of local currencies. Also the movements between the US dollar and the euro/yen have been devaluing local currencies that are pegged to the dollar and, therefore, also contributing to the acceleration of inflation by increasing the cost of goods imported from Europe and Japan. Supply shock or cost push is also due to the shortage of skilled labor required for maintaining the growth momentum in the GCC economies. More importantly, there have been global supply shocks prevalent in most of the fast moving economies due to higher food and commodity prices that have direct repercussions for open economies of the GCC. Thus GCC economies seem to be located at the higher spectrum of the inflation cycle.

Impact and Reprisal

Stung with the pernicious effects of inflation, strong opinions started to channel into public discourse. In Saudi Arabia, 19 prominent clerics posted an unusual statement on the Internet in December 2007 warning of a crisis that would cause theft, cheating, armed robbery and resentment between rich and poor. Over this week, GCC policy makers and business chambers held a high level official conference with IMF and EU executives to mull over measures to combat inflation. Analysts talked about the Great Depression that altered the global monetary system and similar is about to happen in the GCC. The government authorities as usual played to the gallery, protecting the nationals through benevolence. In the absence of sophisticated monetary tools, most GCC countries have come up with a package of measures designed to either counter the negative impact of rising inflation on incomes or to contain price increases. The United Arab Emirates increased the salaries of federal public sector employees by 70 percent; Oman raised them 43 percent. In January 2008, Saudi Arabia announced a set of measures designed to contain inflation including subsidising a wide range of fees, awarding a 5 percent cost-of-living allowance to all state employees and pensioners, and boosting social security payments. Bahrain set up a $100 million fund to be distributed to people most affected by rising prices. Besides the pricing control measures, authorities lowered duties on imports especially on construction materials to ease the pressure. All these taken together are reactionary in the sense that they would add to inflation in the medium term.

However, the hardest hit section continues to be neglected. In economies depending overwhelmingly on expatriate work force and in certain cases like UAE where they outnumber nationals, this critical segment is the prime mover of domestic consumption. With no access to a social safety net, for expatriates, the surging inflation is equivalent to taxation without legislation. While the lower and middle income expatriates are finding it difficult to make both ends meet, the higher end executives in some cases are leaving for greener pastures. With a skewed salary structure in the region which is in contrast to global corporate norms, expatriate executives are under duress. This is a point to be considered by the policy makers. How long they will neglect the expatriates who are indispensable for the much avowed diversification process ongoing in the region?

Policy Appraisal and Best Course

As evident, all the GCC countries except Kuwait have relied upon price control measures and distortionary subsidies that, though they help in reining in inflation initially, would certainly worsen the situation in the medium term. Importantly, certain government interventions like implementing rent caps in the case of UAE is also becoming a futile exercise as landlords hardly bother to abide by the decisions. These non-market measures such as higher subsidies, allowances, irrational wage increases, caps on rents will mostly soon be inflationary. Apart from that, keeping pace with US Fed cuts, they have also revised interest rates. The result is mushrooming credit in the banking and mortgage market further adding to inflation. One silver lining seems to be the course adopted by Kuwait. Kuwait moved to a more flexible foreign exchange regime in May 2007 when it dropped the dollar peg to gain more flexibility in tackling domestic inflation. Barring a cataclysm, Kuwait is plotting a wise course between monetary flexibility, rebuffing currency speculators, and minimising the devaluation of future oil exports by a significant revaluation of the dinar. The authorities have allowed dinar to appreciate substantially by almost 7.5 percent since it is de-pegged from dollar on May 19 2007. Importantly, with the decision to move to a currency basket, Kuwait split interest rates between a discount rate (the rate charged on borrowing) and the repo rate (the rate charged on deposits) which has enabled the central bank to temper borrowing, without affecting interbank liquidity, simultaneously not discouraging investment-oriented credit flow. While it is premature to replicate Kuwait’s experience, there is definitely place for serious thought on holistic policies to counter the menace. The GCC authorities should therefore adopt a judicious policy mix of monetary control and fiscal prudence.

The Peninsula

Dr Pradhan is Senior Researcher, GCC Economics Programme,

Gulf Research Centre, Dubai
-Gulf Research Centre, Dubai

[GRG55]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

GRG55 - what happens to the credibility of the US nuclear umbrella if the USD peg finally cracks? I'm not a premium member so have not had the opportunity to read up on the threadbare USD peg discussion there. What's the most popular conclusion on those threads as to the longevity of the peg?

Does conventional wisdom win out - i.e. "the peg cannot be broken for many years due to critical US military protection of it's client states" or does "radical readjustment" win out as inflation in the Gulf states begins to soar over 20% and they must deal with growing internal unrest? What appears unsustainable probably is indeed unsustainable?

It would appear this peg must logically break in due course - as monetary inflation in the US surges further, and inflation in the politically fragile Gulf States rises yet more sharply. Then what? Do the Saudis indeed get into a race for their own nuclear deterrent vs. Iran as the US nuclear umbrella attempts to survive the withering abandonment of the USD by these client nations?

Or do we witness that the Iranians never actually pursue or produce this nuclear capability?

What happens to the currency pegs depends on what happens to the US$. I don't know what the future holds in that regard, but we all have our views of probable vs possible outcomes.

It would not be surprising if the Saudi's or any other Arab State did NOT develop its own internal nuclear capability. Despite fears over Iran or whatever, let's remember that for every one of these ruling families the most dangerous enemy is the enemy within. And if the enemy within ever gets to control of the military arsenal it's instant checkmate. Far easier and safer to find ways to maintain the US nuclear "umbrella" (whether real or imagined) over the Gulf.

[Slimprofits]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

GRG55 - what happens to the credibility of the US nuclear umbrella if the USD peg finally cracks? I'm not a premium member so have not had the opportunity to read up on the threadbare USD peg discussion there. What's the most popular conclusion on those threads as to the longevity of the peg?

Does conventional wisdom win out - i.e. "the peg cannot be broken for many years due to critical US military protection of it's client states" or does "radical readjustment" win out as inflation in the Gulf states begins to soar over 20% and they must deal with growing internal unrest? What appears unsustainable probably is indeed unsustainable?

It would appear this peg must logically break in due course - as monetary inflation in the US surges further, and inflation in the politically fragile Gulf States rises yet more sharply. Then what? Do the Saudis indeed get into a race for their own nuclear deterrent vs. Iran as the US nuclear umbrella attempts to survive the withering abandonment of the USD by these client nations?

Or do we witness that the Iranians never actually pursue or produce this nuclear capability?

You've got many of the tough and great questions of the day in this post.

I'd like to add, and maybe you guys have some insight into these - what do the GCC states do in the meantime for military security, if they were to ditch the dollar peg/U.S. military protection in favor of their own buildup? Turn to China or Russia?

or

Do the GCC states and the other oil producers have us by the balls because of our needs as a importer?

Is there anything that can convince Iran to sign MOU agreements for nuclear fuel with the Russians and/or Europeans (what has been offered already), similar to what a couple of the GCC states have signed with the U.S.?

Does the U.S. have to do a complete 180 and step-in with regards to the Israeli nuclear program in order bring Iran fully to the table?

[Guest]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

Is there anything that can convince Iran to sign MOU agreements for nuclear fuel with the Russians and/or Europeans (what has been offered already), similar to what a couple of the GCC states have signed with the U.S.?

Babbittd -

I think this prospect has a very low probability. This regime only partly adheres to the secular political calculus that the rest of the participant countries do. Even though the Sunni Gulf states are Sunni and fundamentalist, their approach to business is perfectly in sync with the global economy's understanding of business - "don't rock the boat".

But the Iranian Mullahs are Shia - emerging from centuries under the yoke of the Sunni. Iraq's upset of the Sunni over Shia political heirarchy - which goes back centuries, has inflamed Shia sentiment across the entire region. I don't think you are going to see the Sunni put this genie back in the flask in this first quarter of the 21st Century.

The Iranians have been offered a (Swiss brokered) deal which gave them all the guarantees you describe above, and were totally uninterested in the offer.

Regarding the US nuclear umbrella, I actually think GRG55's thesis sounds quite plausible. And indeed if you look around the world the agricultural and raw commodities inflation is hitting ALL nations, so the Gulf nation inflation predicament is only partially due to the dollar peg. I get that point clearly.

Metalman - you are swamping me with reading references guy. Thanks. Looks like some great input. I really started tis thread to see what other opinions are out there. So I'm hoping others will contribute. Is it my imagination, or does this issue - nukes in the Persian / Arabian Gulf - have a "tingle of prescience" to us all? Something big and nasty will eventually come to a head in this regard there? Let us sincerely hope not.

What is the most ethical position for nations outside to Gulf to adopt? How many here truly believe that scrupulous non-intervention, including complete disengagement from the interests of the gulf, is the correct and prudent course for the Western world to adopt?

Speaking your mind on this question with extreme frankness is an exercise in honesty. Because many of us may privately feel that left to it's own devices this region could really blow up - too mucy irrationality on settling matters with the Israelis is only one part of it. And due to the oil - "laissez faire" in the Shia - Sunni nuclear race question could put a death grip on the global economy.

Where does "international scruple" appropriately and decently meet "risk control" in this area of the world, where all the rest of the world's nations, who depend critically upon the Gulf's oil exports are concerned? This is where you are called to slough off your excess idealism and marry your best realism with a sense of far seeing scruple. Do they even fit together??

[Slimprofits]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

Searching around for English-language information on Iranian elections, I found a couple of more substantive pieces than what appeared in American media sources, but not much. One note, they will vote for President in June of 2009.

Iran’s election signals

Iran's conservative establishment - increasingly aware of the need to instal mechanisms to prolong itself in power - has been systematic in putting in place strict measures to forestall any possibility of a reformist resurgence (see "Iran's new order", 28 January 2008). The Guardian Council - which vets potential candidates for loyalty to the Islamic Republic - forbade at least 1,700 potential reformist candidates from participation in the election (including most of the tendency's popular figureheads). At the same time, the council was lenient both to relatively unknown figures and to less deserving reformists (such as Ebrahim Asgharzadeh, whose mismanagement of the Tehran municipality during the Khatami era effectively opened the gates to a takeover by Ahmadinejad and his allies).

These manoeuvres made the result in the 14 March election predictable if not inevitable: a two-thirds parliamentary majority for the conservatives, though with Khatami-era reformists still holding a significant minority (and even managing a small increase in the number of their MPs). The latter trend indicates that if this is a victory for Ahmadinejad and his supporters (as so many of the immediate post-election news reports suggested) it is a heavily qualified one.

The evidence for this is in two areas. First, the results themselves. The dominant clash in the election campaign (after the exclusion of so many reformists) was between what might be called the "moderate" right against Ahmadinejad's extreme right - and the former, which was vocal in its criticism of the president, made real gains. The most striking example is Ali Larijani, who resigned from his position as Iran's chief nuclear negotiator in October 2007 following disagreements with the president. Larijani's stance has brought a political reward; in the religious capital of Qom he won a landslide victory, receiving 76% of the vote against candidates close both to the president and his religious mentor, Ayatollah Mohammad-Taqi Mesbah-Yazdi. Larijani, who celebrated his victory by calling on the government to amend its policies, is being touted as th likely new speaker of the majlis; if elected to this position he could use it to undermine Ahmadinejad's power and even render his rival a lame-duck president.

The second piece of evidence that this is not an unqualified victory for Ahmadinejad and his followers is the economic factors present in the vote. Iran's conservatives cannot risk losing their support-base amongst Iran's pious poor, yet the president's economic policies have entailed rising inflation and spiralling property prices which have made the poor poorer and the rich richer. Thus, most prominent conservative candidates campaigned on promises to correct this course.

The blatant signs of conspicuous consumption that have bloomed under Ahmadinejad's presidency do not sit well with traditional, provincial constituents. The car showrooms on Tehran's Shariati Street that in the 1990s displayed restored (and coveted) jalopies are now crammed with sparkling new Mercedes-Benz vehicles often marketed (after Iranian import tariffs are added) at well over $100,000. The cost of housing has more than doubled in the last year alone; an apartment in prosperous north Tehran with a $1 million-dollar tag is considered routine. An apartment must be furnished, and paintings of Iranian contemporary artists such as Mohammad Ali Taraghijah also now command six-figure sums from moneyed Iranians. The property boom - fast spreading to the rest of the country - has also created a huge swathe of people who are excluded from the market with little or no hope of ever buying a home; these are the very people who are - or who become - the loyal supporters of conservative candidates.

The majlis election is therefore more complex in its outcome than it may first have appeared. It also carries implications for the presidential poll due in 2009. In particular - and to echo the point made at the beginning of this article - although this election may be loosely labelled a conservative victory, one legacy of Khatami's reform movement is that many conservative candidates today are winning votes by pledging polices espoused by Khatami's allies in the past.

An example is Ahmadinejad's successor-but-one as Tehran's mayor - and also now a conservative presidential hopeful - Mohammad-Baqer Qalibaf. The mayor - whose popularity was increased by the success of his snow-clearing measures this winter - was at the World Economic Forum in Davos in January 2008 trying to get western companies to invest in Iran. This followed a wrangle with Ahmadinejad supporters in October 2007 over plans to allow Benetton to set up four stores in the capital. This is a long fight, between those who believe in tight state control and those who realise that the only way to diminish Iran's economic woes is to open up to the west; and at present it is being conducted within the conservative ranks.

There are other conservative opponent of Ahmadinejad apart from Ghalibaf who have come full circle. The former president Ali Akbar Hashemi Rafsanjani, who (since September 2007) heads the Assembly of Experts and chairs the Expediency Council, was (along with many of his allies) conspicuously quiet during the run-up to these elections. In October, Rafsanjani - who was president from 1989-97 - told a student gathering that "humankind goes toward democracy and freedom, and public opinion can not be imprisoned" and that in the age of communications "censorship is pointless". Rafsanjani's political record (and its place in the context of Iran's political system) make such an utterance seem almost surreal. Yet it signals that some leading conservatives are trying to develop an independent power-base amongst a different sort of constituents.

The fact that regime heavyweights such as Rafsanjani are quietly canvassing amongst reform-minded young people is evidence that the success of a new generation of reformists in future elections - articulating bold ideas in sincere and appealing language - cannot be discounted. After all, the experience of Iranian elections, even under the country's severely restricted political process, shows that it can produce surprising results. The presidential elections of both Mohammad Khatami (1997) and Mahmoud Ahmadinejad (2005) came as a great shock to most outside observers. In 2009, conservative presidential aspirants such as Ali Larijani and Mohammad-Baqer Qalibaf may well be challenged by reformists such as the grandson of the founder of the Iranian revolution, Hassan Khomeini.

Thus, in both their influence on current conservative policies and in their own continuing presence, the reformists who led the parliamentary reform movement after 1997 have - temporary political defeats and setbacks notwithstanding - irrevocably left their mark on Iranian society. Today, they are not sitting on their hands but preparing for the 2009 election. This is where the possible candidature of Hassan Khomeini is interesting. Unlike most offspring of the clerical elite he volunteered for and fought on the frontline during the war with Iraq, and is widely respected for that. His outspoken criticism of the powerful head of the Revolutionary Guards, Mohammad Ali Jafari, is proof that he has the confidence to stand up to anyone. Hassan Khomeini appears genuinely to believe in reform. And he is one reformist that "they" will not be able to disqualify.

[nathanhulick]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

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The latest fighting in Basra was a major coup for the US and the Iraqi central government. Worthy of its' own thread but the big news that was virtually unreported was that the US diplomats got the Iranians to back off on supporting rebel Shia' groups in Iraq. Hopefully, once and for all since the US was threatening to re-establish Sunni minority rule in Iraq, which would be Iran's worst nightmare.

IMO the fighting in Basra was a total failure for US policies in Iraq. Basically the Iraqi army went into Basra and got beaten so badly that the US military had to come bail them out. Totally destroyed the idea that the Iraqis will soon be able to stand up for themselves militarily.

[BiscayneSunrise]

Re: An Obama Presidency Could Sever Gulf States US Dollar Peg?

I think you missed your vocation Biscayne, you would have made a decent intelligence analyst.[/QUOTE]

Thanks Luke, Now if i could only transfer that analysis skill to the market. ;)