Yet Another Empty Threat

A recent article in the New York Times has suggested that Saudi Arabia is threatening to sell up to $750 billion in U.S. treasury securities if Congress passes a bill that would allow their government to be liable in American courts for their accused role in the September 11, 2001, attacks.

This story goes all the way back to a 2002 Congressional inquiry, which cited evidence that Saudi officials living in the U.S. at the time of the attacks were involved. Here’s an excerpt from the article:

“Adel al-Jubeir, the Saudi foreign minister, delivered the kingdom’s message personally last month during a trip to Washington, telling lawmakers that Saudi Arabia would be forced to sell up to $750 billion in treasury securities and other assets in the United States before they could be in danger of being frozen by American courts.”

I won’t go into the details of the legal components to this article because I have nothing to offer. I am no lawyer, and I know more about the migratory patterns of bald eagles than I do international law. 

Where I can offer some insight is into this threat of dumping such a large amount of U.S. debt and any ramifications to the global financial system. The short answer is that this is about as much of an empty threat as when I tell my wife that we are moving to Singapore if the U.S. government raises our taxes again.

The long answer forces us to first believe that Saudi Arabia is not bluffing and they actually will sell $750 billion in treasuries. This is a pretty big leap of faith given their history of saying one thing and doing the exact opposite. 

Unloading such a large amount at once would be incredibly challenging. For every U.S. dollar they sell, there must be a willing buyer, and finding entities to buy in bulk to this degree may be pretty tough.

But let’s give them the benefit of the doubt and assume that they did find buyers. Selling dollars equates to buying some other currency (in the same manner as swapping dollars for foreign currency when traveling abroad). So the question is what would they buy?

At the moment, the second and third largest currency bases utilized by central banks (Euros and Yen) are both offering negative yields. Saudi Arabia would be swapping a positive yield for either zero to negative yield for a large portion of the securities that could even replace their treasury stockpile.

Realistically speaking, they won’t be able to unload their entire position quickly, so let’s continue down a more probable path where they sell over time. The government would need to move slowly or else they risk flooding the market with supply. 

The concept is similar to selling condos in Miami. If a builder puts thousands of condos on the market in a matter of a year, and buyers see plans for future supply to increase even further, the price will ultimately fall because condo buyers are smart enough to wait. The same applies to buyers in the currency market. 

If they were to exert too much pressure on the dollar, their actions could potentially destabilize our currency. Although this outcome may appear to be precisely the form of punishment/retaliation they seek, the kicker is that the riyal, Saudi Arabia’s currency, is pegged to the dollar.

Hence, any destabilization in the dollar would inflict a similar result on the riyal. Given Saudi Arabia’s current financial and economic stresses, such a move would just cause more problems than solve. 

The bottom line is that this is nothing more than an empty threat and will most likely go nowhere. 

Click here to read the full article.

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