Moon of Alabama Brecht quote
June 10, 2008

Dollar Peg Good, Dollar Peg Bad

Why are Saudi Arabia and other Gulf countries urged to keep their currencies pegged to the U.S. dollar while China is chided for being too slow in abandoning their managed peg?

In early June Secretary of the Treasury Paulson visited several Gulf countries:

U.S. Treasury Secretary Henry Paulson and Saudi Arabian Finance Minister Ibrahim Al-Assaf agreed that the Gulf kingdom benefits from keeping its currency pegged to the dollar.

The riyal's peg "has served this country and the region well," Paulson said today at a joint press conference in Jeddah. "I totally agree with Secretary Paulson," al-Assaf said. "As we have said many times, we have no intention of de- pegging or of revaluation."

Paulson is getting an update on the fixed exchange rates retained by most oil-rich nations in the Middle East on his four-day trip to the region.
Any change to currency regimes in the region "is a sovereign decision," Paulson said.

But just a few days later Paulson says this:

Despite rising nearly 20 pct against the dollar in the last 3 years, China's yuan needs to appreciate even more -- and even more quickly -- if China is going to successfully deal with its growing economic imbalances, Treasury Secretary Henry Paulson said Tuesday.

So the Gulf shall stick to it the dollar and China shall not. Does this make any sense?

It can not be the trade deficit that is Paulson's problem here. That again increased last month against both, the Gulf states and China.

Both, the Gulf countries and China, have exactly the same monetary characteristic versus the U.S.

They export their goods to the U.S. and recycle the dollars they get by buying treasuries and other U.S. assets. In both cases it is a vendor financed deal that will stop when the vendor owns all the assets the buyer has. The U.S. people put themselves up for a garage sale.

The Gulf and China both have trouble with this as the scheme increases local inflation into the 10-20% range. Wal Mart pays a Chinese company in dollars. The company goes to Chinas central bank and exchanges the dollars for freshly created yuans to pay its workers. The increased yuan money supply heats Chinese local inflation. The same mechanism applies in the Gulf countries.

So why does Paulson think that a peg is good for the Gulf and bad for China?

Posted by b on June 10, 2008 at 18:27 UTC | Permalink


I would say the answer is in the question really. The gulf oil states whose elites have become reliant upon amerika for poltical survival, are considered 'manageable' so they are forced to re-invest most of their so-called profits back into amerika. ie in true colonial style amerika only pretends to pay them for what it takes. On the other hand China is not considered at all 'manageable' by petty despots in the state department, so they are discouraged from maintaing their current relationship with the dollar which dates back to a time when amerika imagined that a spoon of corporate capitalism would have the chinese eating out of their hand.
Keeping the current relationship between the yuan and the dollar enables china to re-invest into amerika at rates that are meant to to be restricted to those who do what they are told. eg use their nation's sovereign funds to bail out amerikan institutions when told to, and then don't rock the boat because the assets are frequently held in the name of individuals rather than the nation themselves, so even a revolution won't rock the boat.

Obviously amerika's treasury bureaucrats who like most amerikan corporatists normally have difficulty seeing past the next quarter's bottom line, can now see a time when they will have control exerted on them by a foreign agency. the boot is on the other foot. so sad too bad

Posted by: Debs is dead | Jun 10 2008 21:09 utc | 1

No, I think the Saudis are harmless because there aren't so blinkity many of them!

See, no matter how fast the price of oil grows (it's declining as we speak), the
2,451,718,042 Chindians are growing at 10%, as is our lop-sided trade with them.
10% is a doubling every five years, or from our perspective, a halving of income.
It's one thing to recycle dollars for peaking oil, it's quite another, (for the
pols anyway) to explain to Americans why they let China trade dollars for JOBS.

You might have noticed recently in the sports articles on the Belmont Stakes,
some odd vernacular and weak syntax? So it shouldn't surprise you to discover,
that like computer programming, accounting, tax preparation, ID cards, passports,
video post, and just about everything else digital (e.g. everything), not only
are the Chindians taking hard jobs in manufacturing, but they're taking all the
soft jobs at an even faster rate, like a giant dark spiral nebula gravity well.
Who do you think translates all those news articles into English? Americans?!

Soon everything will have fled to Chindia. I could tell you
horror stories from friends training outsourcing staff by the 10,000s in
Mumbai right now. Chindia turns out over 1,000,000 engineers every year!

It wouldn't surprise me to see b had outsourced MoA to some Chindian ghost-
writing service, so s(he) can get some sleep on the weekends, now that the
summer sun is warming up the Berkana. So much more fun to be outdoors now.

It is so over! But gov.con wants you to spend your "tax rebate" to fund
another two years of Iraq war, and get a little sleepy-eyed, not so worried,
have a beer, pop a Thorazine, wow, GTG, Dancing With The SARS is on, honey!!

Posted by: Bǔlia Baŝe | Jun 11 2008 2:21 utc | 2

bb, 10% growth leads to doubling in just under 8 years, but what's a little error between friends, eh?

Have you ever dealt with technical outsourcing firms? Many border on the inept with project overhead costs and inefficiencies often grossly outweighing the initially perceived free lunch. Good Chindia design firms are out there, but don't bet your life on most of them.

Posted by: Paduba | Jun 11 2008 3:35 utc | 3

You know Bulia Base,

It wouldn't surprise me to see b had outsourced MoA to some Chindian ghost-
writing service, so s(he) can get some sleep on the weekends,...

the paranoid part of me has wondered somewhat the same thing for some time now. When does b sleep? Does he have a crew working, researching, and analyzing most every pertinent piece of news information available on the web to continue purveying this Lunar treasure? Or is he just super human and dedicated to adding to his legacy a little saving grace for this beleaguered world?

Posted by: Juannie | Jun 11 2008 5:47 utc | 4

b, don't outsource yourself, man...

Posted by: rudolf | Jun 11 2008 8:11 utc | 5

From the MoA Mojo newswire:

Congress Votes to Outsource Presidency

Washington, DC -- Congress today announced that the office of President

of the United States of America will be outsourced to India as of June

1, 2008. The move is being made in order to save the President's

$500,000 yearly salary, and also a record $521 billion in deficit

expenditures and related overhead that his office has incurred during

the last 7 years. It is anticipated that $231 billion can be saved to

the end of the President's term. 'We believe this is a wise financial

move. The cost savings are huge,' stated Congressman Thomas Reynolds

(R-WA). 'We cannot remain competitive on the world stage with the

current level of cash outlay,' Reynolds noted.

Mr. Bush was informed by e-mail this morning of his termination.

Preparations for the job move have been underway for some time.

Gurvinder Singh of Indus Teleservices, Mumbai, India will assume the

office of President as of June 1, 2008. Mr. Singh was born in the

United States while his Indian parents were vacationing at Niagara

Falls, NY, thus making him eligible for the position. He will receive a

salary of $320 (USD) a month, but no health coverage or other benefits.

It is believed that Mr. Singh will be able to handle his job

responsibilities without a support staff. Due to the time difference

between the US and India, he will be working primarily at night.

'Working nights will allow me to keep my day job at the Dell Computer

call center,' stated Mr. Singh in an exclusive interview. 'I am excited

about this position. I always hoped I would be President.'

A Congressional spokesperson noted that while Mr. Singh may not be fully

aware of all the issues involved in the office of President, this should

not be a problem as President Bush had never been familiar with the

issues either.

Mr. Singh will rely upon a script tree that will enable him to respond

effectively to most topics of concern. Using these canned responses, he

can address common concerns without having to understand the underlying

issue at all. 'We know these scripting tools work,' stated the

spokesperson. 'President Bush has used them successfully for years, with

the result that some people actually thought he knew what he was talking


Bush will receive health coverage, expenses, and salary until his final

day of employment. Following a two-week waiting period, he will be

eligible for $140 a week unemployment for 26 weeks. Unfortunately he

will not be eligible for Medicaid, as his unemployment benefits will

exceed the allowed limit.

Mr. Bush has been provided with the outplacement services of Manpower,

Inc. to help him write a resume and prepare for his upcoming job

transition. According to Manpower, Mr. Bush may have difficulties in

securing a new position due to a lack of any successful work experience

during his lifetime. A greeter position at Wal-Mart was suggested due to

Bush's extensive experience at shaking hands, as well as his special


Posted by: ralphieboy | Jun 11 2008 9:39 utc | 6


it is generally considered poor form & a waste of good electrons to just say "wonderful satire" or something along that line -- but that was GREAT!

Posted by: Owl | Jun 11 2008 11:57 utc | 7

The Economist had an article on just that point when Paulson was in Abu Dhabi. It should be noted that inflation in the Middle East is out of control (19 percent in Egypt, 14 percent in Qatar). In the Gulf, they are blaming supply problems related to the expenditure of windfall oil profits, but I dont know why we should believe them. Another angle is the ECB (Trichet 'suggested' a rate hike in July), which sent the dollar down as well. It seems to me that the Gulfies, who will account for 18 percent of global capital outflows in 2008, are gobbling up European assets, while remaining faithful to the dollar for political purposes. I found it interesting that Lehmann bros. chose a group of US investors after seeking capital abroad first (Singapore and S. Korea) -- did them foreigners say no thanks on the US economy?

Posted by: d | Jun 11 2008 13:50 utc | 8

Ralphie, that was wonderful.

Posted by: Tangerine | Jun 11 2008 15:22 utc | 9

yep. chuckled when it made the rounds last summer.

Posted by: b real | Jun 11 2008 15:49 utc | 10

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