If the U.S. needed a reminder about one of its greatest Achilles heels on the geopolitical front, Saudi Arabia has given it one: The oil-rich kingdom is threatening to dump up to $750 billion worth of U.S. assets, mainly Treasury bonds, if Congress passes a bill removing the sovereign immunity in U.S. courts enjoyed by the Saudi government. The bill theoretically would allow Saudi Arabia to be held culpable in American courts for any role it might have played in the Sept. 11, 2001, terrorist attacks.
Selloff would avoid any seizure: According to a New York Times report Sunday, the Saudi foreign minister, Adel al-Jubeir, delivered the threat personally in March while in Washington, D.C. Because the bills passage would allow compensation to be sought by 9/11 victims and their families, the sale of such assets would be a pre-emptive move to prevent their seizure.
The controversy is related to 28 pages of the 9/11 investigative commissions report on the attacks that remain classified to this day, reportedly because they detail some level of Saudi involvement. The Obama administration opposes the passage of the bill, saying it might endanger U.S. citizens living or traveling overseas.
Saudi portfolio also vulnerable: Regardless of whether (or not) the Saudis played any role in the attacks, or whether such a sale of assets would be practical, the news highlights the vulnerability of the U.S. because of its debt addiction.
The Los Angeles Times, for instance, points out that a dumping of U.S. assets could carry serious collateral damage for the Saudis themselves. Liquidating their entire holdings of U.S. Treasuries would have to be done over time, and if the sales began to move market prices not necessarily the case that would have an effect on the Saudis own portfolio, it wrote.
And of course, some analysts argue that the Federal Reserve still serves as the ultimate backstop against this threat of a Treasury dump. After all, the central bank could just swoop in and buy up more Treasuries a la its quantitative-easing programs to offset the Saudi selloff. But with the Feds balance sheet already pumped up to a massive $4.5 trillion that still has to be unwound, thats easier said than done.
China dumping bonds slowly, for now: But the elephant in the room remains the fact that Saudi Arabia is not the worlds biggest U.S. bondholder. That would be China, which owns $3.2 trillion worth, followed by Japan, at $1.3 trillion. The three nations together own 35% of the entire U.S. government bond market.
And as the 24/7 Wall St. Web site points out, China is slowly but steadily selling off its Treasury bond holdings, which have fallen 20% since 2014. It also notes the with liquidity drying up in the bond market thanks in part to Chinas liquidation, JPMorgan has estimated the amount of Treasuries that can now be sold in 2015 without affecting price has fallen to $80 million.
Although Saudi Arabia at present might not have the vindictive motivation to dump its Treasury holdings quickly to upset the market, that could change. And whos to say China might not find a reason in the years to come? Numerous high-ranking Chinese policymakers and academics have called for dumping the dollar, and even the Xinhua news agency, during the 2013 U.S. debt-ceiling standoff, urged a move toward a de-Americanized world. And now tensions are running high in the South China Sea as Chinese armed forces play chicken with the U.S. Navy over control of the controversial Spratly Islands.
China already is making multipronged moves to replace the U.S. dollar with its own currency, often in tandem with Russia. The fact that one of Americas biggest allies and chief enabler of the petrodollars supremacy, Saudi Arabia, is now making threats about dumping U.S. government bonds should be very troubling. China and Russia already are planning for the dawn of a de-Americanized world. The notion that Saudi Arabia is now getting in on the game, at least rhetorically, is yet another reason why investors should be diversifying their wealth out of dollars and into alternative currencies like gold and silver.