The Illusion of Power & Wealth
As U.S. President Donald Trump placed his hands on a glowing orb during his recent trip to the Kingdom of Saudi Arabia, we take an in-depth look at the real state of these two nations and the narrative they are putting forward
London , United Kingdom of Great Britain & Northern Ireland - 30 May 2017 -
It was July 1974. A steady predawn drizzle had given way to overcast skies when William Simon, newly appointed U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m. flight from Andrews Air Force Base. On board, the mood was tense.
That year, the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S. military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, New York was facing imminent bankruptcy and the U.S. economy was in a tailspin. The US was suffering the economic consequence of its ill fated Vietnam war which had cost the nation over a 1 trillion ($168b nominal) in inflation adjusted dollars or over 10% of the its GDP. In addition to the direct financial cost, the U.S. was also facing the social cost of its foray into Vietnam including caring for 153,303 wounded, dealing with the suicide of around 300,000 veterans and suffering the consequences of just under a million people psychologically traumatised and unable to have a stable family or make any material contributions to the US economy.
Officially, Simon’s two-week trip was billed as a tour of economic diplomacy across Europe and the Middle East, full of the customary meet-and-greets and evening banquets. But the real mission, kept in strict confidence within President Richard Nixon’s inner circle, would take place during a four-day layover in the coastal city of Jeddah, Saudi Arabia. The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth, in effect, the U.S. was to use the vast Saudi Oil reserves to rescue its bankrupt economy and as its very own piggy bank to finance itself for the coming decades.
According to Parsky, Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.
The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plough back billions of their dollar revenue back into Treasuries and finance America’s spending. The Saudis would use surplus revenue on lavish overseas properties, tourism and their lifestyle lubricating the Western economic engine. This was the birth of the Petrodollar and gave rise to America’s striking wealth and power.
There are no accurate records of how much oil or treasuries actually changed hands over the past 40 decades, but a good guess would put the total at over $5 trillion US Dollars. This calculation is based on the average adjusted oil price of $42.36 per barrel ($21.99 nominal) multiplied by the average Saudi Oil production over the past 43 years which works out at just over 7.8m barrels per day. This arrangement was also extended to other GCC countries, who would also obediently acquiesce to the same arrangement.
Although the US was able to rescue its economy, it came at an enormous price including the unleashing of reckless spending, in lrge part, based on military adventurism to maintain and protect this lucrative but highly destructive Petrodollar arrangement.
Fast forward to today, and Just by looking at the numbers, it appears as if the party is over and foreign investors are broadly dumping U.S. Treasuries at an unprecedented rate. In October last year, China ceded its status as the world’s largest owner of haven US Treasuries to Japan, who itself is dumping treasuries . According to new data from the Treasury, China’s holdings of US government debt fell by $188bn in 2016 to $1.06tn, joining Japan, Switzerland, Saudi Arabia and Belgium in reducing their positions last year. Of the thirty largest disclosed holders of Treasuries, half cut their exposure.
This brings us to President Donald’s much hailed first foreign adventure which began in the Kingdom. To the untrained eye, and more specifically, if you read the media and analysis of his trip, Donald Trump was triumphant having managed to upend his predecessor’s $115 billion arms deal including the United Kingdom’s infamous Al-Yamama deal by signing the largest ever Weapon’s deal with Saudi Arabia. According to the reports, the US and Saudi signed a $400 billion weapons contract with $110 billion in immediate purchases with the rest spread out over 10 years. Trump hailed the deal and specifically and categorically pointed out that the agreement was a “Saudi funded” weapons deal, a point that was lost in the commentary, but will surely be the opposite of the counter-deal the US will offer to Israel, Trump’s next destination which will surely be a “US Taxpayer funded” deal.
“That was a tremendous day. Tremendous investments in the United States,” Trump said on Saturday. “Hundreds of billions of dollars of investments into the United States and jobs, jobs, jobs.”
Although the massive U.S.-Saudi arms deal has been sold by President Trump as a way to create jobs, public statements by military contractors indicate that many of those jobs will not actually be in the U.S., but in Saudi Arabia. This is in stark constract to the statement by the State Department which said the deal is “potentially supporting tens of thousands of new jobs in the United States.”
The State Department did not elaborate what it meant by “supporting,” and the Trump administration did not say how many jobs would actually be created, or where. The reality is that the numbers are almost always exaggerated. Take the Obame-era Saudi $115 billion arms deal which in the end amounted to only $20 billion.
Saudi Arabia in return, restored its relationship with the World’s mighty superpower, was honoured by being the President’s first venue, was able to rally the U.S. in issuing statements against Iran & Hizbollah, and paved the way for the creation of local jobs. Local commentators even attributed the success of the trip to Trump’s change of heart on moving the U.S. Embassy to Jerusalem.
In conclusion, the U.S. signed deals to fix its broken economy, the Saudi got reassurances that the mighty US was fully watching their back, the US Embassy move was tabled and Saudi reaffirmed its position as having the “special relationship” with the US.
Unfortunately, to the trained eye, all the above was nothing more than a reality TV show where the cast, the United States and Saudi Arabia, were prompting each other, much like actors help each other out when they forget their lines. In fact what we witnessed was a spectacle that was nothing short of a Macbeth play where Shakespeare used irony to mask the cryptic. The essential idea of "irony" is double dealing, as when some speech has a double meaning -- the obvious one which all perceive -- and the cryptic which only certain of the hearers understand.
Looking closely at the real state of the United States and Saudi Arabia, reveals a far more ambiguous and less rosy picture.
Since the adoption of the Petrodollar, the United States has been on a downward trajectory in every conceivable aspect. Beginning with the destruction of the value of the dollar, and progressing with the collapse in the purchasing power of its citizens including their living standard. The downward trajectory has encompassed every aspect of what made America such a great country including the erosion of its infrastructure, the destruction of its manufacturing base, the erosion of civil liberties, the weakening of the rule of law, the ever widening inequality, the corruption of the education system, the systematic abuse of barbiturates such as benzodiazepines, the increasing homelessness, the lowest home ownership rates, the destruction of its own environment and that of many other nations, the return of internment camps such as Guantanamo Bay, unilateralist and destructive foreign policy, the erosion of its Military might, the inability to prosecute big fraud, the systemic murder of US and non US citizens through drone strikes, the erosion of the health of its citizens, the destruction of pensions, unions, elections, the unpayable 20 trillion in debts and just under $200 trillion in unfunded liabilities, the ponzy economy, market manipulation and the erosion of price discovery.
This list is endless and yet, the United States goes around the world, bullying governments, provoking uprisings, supporting despots and consuming resources with virtual printed dollars as if everything was just fine back home; but things are not fine at all.
Back in 2000, when Enron collapsed, it should have been obvious to everyone that the United States was just a mirage of its old self. If the world’s biggest oil company, which forced its biggest and most populous State California into near total darkness, as a means of forcing higher electricity prices, was nothing more than a mirage, then the rest of the US institutions were likely to also be a reflection of the past glory of the United States. This is clearly evident given the 2007 collapse and the current state of all major U.S. financial institutions which if marked to market, would all be insolvent.
So what is the true state of the United States. In one short word, the US is a Bankrupt country and there are tell-tale signs everywhere and here is just a few.
- Space Program – The US ended their space program a decade ago and now relies on Russian & European rockets to launch new satellites to space.
- Drones – The US is no longer capable of real boots on the ground, instead relying on the cheaper alternative of drone strikes.
- Arab Spring – The Arab spring was possible because the CIA was no longer providing the funds to the supporters of the regime which held things together.
- Russian Belligerence – Russia’s aggressive foreign policy is purely driven because it knows the US is mortally wounded.
- North Korean Provocation – Pyongyang is fully aware that both the US and South Korea are financially weak and in no state to engage in a costly and bloody war which would probably destroy the world economy.
- Bloated Military Projects – The Joint Strike Fighter program formally began in January 1994 as the Joint Advanced Strike Technology program, with the goal of producing a lightweight, low-cost fighter for the Air Force, the Marine Corps, and the Navy. Twenty years and hundreds of billion of dollars later, they have yet to deliver one combat-capable squad
- Ponzy Economy – The entire US economy is nothing more than a Ponzy scheme simply delaying the inevitable.
- Distortion of Language – Politicians use distorted languages to mask the reality on the ground. Unlimited money printing became Quantitative easing.
- Manipulation of Key Financial Statistics – The Government simply changes the way key economic indicators are measured to paint a rosy picture. Rather than try to reduce unemployment, the government simply changes the way unemployment is calculated. Rather than tackle falling wages, governments manipulate the way inflation is calculated. In fact, every economic indicator is so distorted, that not even the government understands the true state of the economy let alone how to fix it.
- NERP – Near zero interest policy to prevent default which at the current interest rate, is the lowest in human history, interest payments on US debts already consume half a trillion dollars. The normalization of rates would consume the entire budget, NERP policy is destroying pensions and the real economy,
- Treasury Sales – The US is unable to find new buyers for its treasuries while existing holders are slowly and systematically dumping their existing treasuries.
- Fracking & Shale Oil – What was hailed as energy dependence is nothing more than a country willing to destroy its ecology to raise money. The same can be attributed to Canada who is busy destroying its own ecology with tar sands. If oil was so plentiful why the need to use valuable water resources and contaminate and destroy the soil, not to mention trigger thousands of earthquakes unless a major financial emergency is in play.
- De-education – The U.S.’s ultimate strength was derived from the being the preferred destination of the world’s leading scientists and entrepreneurs. The brain migration to the US was responsible for driving the US to its peak. This process is in reverse, and the lack of spending on and political meddling in the education system has left a nation bereft of critical thinking and any useful knowledge.
- Propaganda – What was once the beacon of press freedom has descended into unprecedented propaganda akin to the Soviet propaganda machine which stifles free speech and promotes erroneous news that attempt to divert the attention of the populace from the real problems afflicting the nation.
- The Phantom Armada - Trump’s threat to send an armada to North Korea ‘described in romantic words’ was a mere illusion. Not only was the supposed Armada heading in the opposite direction, but Trump was referring to a single aircraft carrier with its supporting ships. Off course a single aircraft carrier is powerful enough, but the exaggeration of the threat in addition to it not materialising should be a sign that not all is well in the US military.
- Leaks of Classified Data – The US is unable to stem the continuous leaks of classified data across all departments. Rather than admit such leaks are a symptom; the government is seeking to blame outside forces.
- NATO – Trumps non-stop and off the shoot remarks about getting “NATO to pay their dues” or increase their defence budgets is nothing short of a country unable to meet those obligations itself and having to pass the hat around. The idea that the United States would even contemplate asking for money would be laughed at a decade ago.
What about Saudi Arabia
Saudi Arabia has long prided itself as being the richest and most influential country in the Middle East. Sitting on top of the world’s largest oil reserves, having the largest oil output of any nation on the planet and being the Special Friend of the United States and in some degree the United Kingdom, its status allowed it to stand out from the rest. So how are things shaping up in the Kingdom, not much better than the US,
- Low Oil Prices – Low oil prices have decimated the Kingdom’s budget which was increased during the Arab Spring to reduce populist’s pressures.
- Renewable Energy – Oil producing countries are facing a seismic shift in the way energy is used. The rise of high performance electric vehicles, coupled with existing and more efficient renewables such as wind and solar is reducing the consumption of the only commodity the Kingdom relies on. A shift is under way that will lead to widespread adoption of EVs in the next decade which will lead to a 2m barrels per day oil displacement within the next 7 years.
- World Depression – The world economy is tightly tied to the US economy. As the US economy can no longer grow and continue its decline, the world’s economies will follow suit resulting in a diminishing need for oil. This will depress prices for the foreseeable future, increasing the pressure on the Kingdom’s budget.
- Paper Wealth – The recycling of Petrodollars into now worthless US and other treasuries as well as over priced stocks leaves the Kingdom solvent on paper only. Although most countries have stopped buying government debt, their existing holdings have no intrinsic value. This leaves the Kingdom with no actual real foreign currency reserves.
- Misdirected Investments – Mohammed bin Salman’s attempt at divesting the Saudi Economy from oil dependence began with the worst possible investment a $3.5 Billion investment in a taxi firm that has no intrinsic assets. Rather than investing in the future, the Kingdom actually invested in the virtual past.
- Aramco IPO – The mere thought of Saudi Arabia considering and actually pursuing the sale of any part of Aramco is probably enough of an indicator that the Kingdom simply has no money.
- Bin Laden Group Bankruptcy - The Saudi Binladin Group, the second largest company in the Kingdom after Aramco has been grappling with aftershocks of crane crash accident in the Masjid al-Haram as well as the sudden halt in government contracts. Unable to meet its wages, the group fired 50,000 workers who have yet to be paid.
- Regime Change – Saudi Arabia’s together with the rest of the GCC took it upon themselves to rid themselves of their arch enemy Iran by engaging in a series of regime changes. After the US’s failed adventure in Iraq, which left Iraq under Iranian influence, alarm bells began ringing. The resulting debacle, saw Saudi support the ouster of Morsi and the reinstatement of the same regime the citizens threw out. This was achieved through diplomatic pressure on the West, 12 billion dollars in annual aid and the destruction of the hopes and aspirations of the millions of Egyptians that stood a real chance at a positive change in their daily life. Morsi was useless and would have lost the next election; instead Egypt is crippled and had to go hat in hand to the IMF to borrow $3 billion dollars. It’s economy is devastated, its people are hungry, prices have gone through the roof and the country is plagued with terrorist attacks against its tourism sector and Coptic minority. What used to be the darling investment destination, all but evaporated with near zero foreign direct investment in the country. Saudi Arabia, in concert with Qatar and other GCC members went even further, by moving to cripple Hezbollah by ousting Assad. Having tried every conceivable way of ending Hezbollah’s power in Lebanon, the Saudis saw no alternative but “Cut off the Snakes Head” by the fracturing of Libya, Syria, Iraq, and Yemen (all countries with ties to Iran).
- Perpetual War – Saudi Arabia is now engaged in a direct war in Yemen that is draining its blood and treasure with no end in sight. Unable to achieve its objectives, the Kingdom has no alterative but to continue this debacle until it runs out of money or is defeated. In addition to the Yemen war, the Kingdom is now engaged on several fronts in a proxy war against Iran which is contributing futher to deterioration of its finances.
- Refugee Crisis - This Saudi and fellow GCC member adventurism has not gone according to plan. Instead of toppling Assad, the result has been a momentous blunder resulting in the near complete destruction of one the oldest countries in the Middle East, the unleashing of horrendous and barbaric terrorist acts that are currently being directed at European nations and the exodus of millions of people from across the Middle East and Africa, some displaced as refugees while others seeking economic refuge. This has fractured the European Union and increased the hatred of Muslims. The result will directly affect Saudi Investments in Europe as well as the support of European countries which will increase pressures on the Kingdom.
- IOUs - Saudi Arabia has told banks in the country that it is considering giving contractors IOUs to settle some outstanding bills. As payment from the state, contractors would receive bond-like instruments which they could hold until maturity or sell on to banks.
- Credit Ratings - Even Moody’s the notorious lying agency that gave derivatives in the United States good credit ratings before the collapse, downgraded the Saudi long-term issuing rate from A1 to Aa3. Although I have no time for these ratings, they are simply another ominous sign.
- Borrowing – Saudi has borrowed from local and international banks in response to the decline in crude oil, which accounts for the bulk of its revenue.
- End of Old World Order - The failure for the Kingdom and other countries in the world to understand the fundamental forces driving unrest and these geographical shifts is leading the Kingdom to pursue the wrong policies. What is at play is the dissolution of Imperial imposed borders which created nations where there was none. This process is beginning to unravel and the Kingdom is directly in the cross hairs.
Despite the aura of omnipotence of the United States, one should look at the history of empires which should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires regularly unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and, in all likelihood, 22 years for the United States, counting from the crucial year 2003.
Future historians are likely to identify the Bush administration’s rash invasion of Iraq in that year as the start of America’s downfall. However, instead of the bloodshed that marked the end of so many past empires, with cities burning and civilians slaughtered, this twenty-first century imperial collapse could come relatively quietly through the invisible tendrils of economic collapse or cyberwarfare.
Any informed observer, by now, should be also be fully aware that the Saudis are hurting financially. That is, they are hurting as much as any degenerate hedonistic ruling class of genetic royalty can be. But, while Saudi princes roll around in money and women and unspeakably depraved forms of entertainment and while they oversee a nation of slaves and prisoners, the bank accounts of the Kingdom of Saudi Arabia are now at a low point.
After years of decadence and willingness to lavishly fund terror and propaganda all across the world and after agreeing to work with the United States in a suicidal attempt to hurt Russia at the oil export pump and destabilise Iran, Saudi Arabia is finally starting to realize that there may actually be a bottom to their bank accounts.
So what can we read into Donald Trump’s trip to Saudi Arabia and the subsequent signing of the largest ever arms contract?
The narrative the two leaders tried to portray cannot be possible given everything we have covered in this op-ed. This leaves only one possible narrative and that the entire event was nothing more than an elaborate theatrical play played out across the world stage with a perplexed audience of 50 Arab and Muslim nations forced to sit and watch as two countries and their leaders pretend that everything is well and that they are stronger than ever.
The truth is that the US is bankrupt and that ultimately means Saudi Arabia is also bankrupt. The U.S. continues to troll around the world, with a belligerent attitude selling their positive narrative while systematically undermining the very same narrative they are trying to portray.
What was praised and celebrated as the largest ever arms deal was probably a US treasury default where the Kingdom was forced to give up their $114b treasuries in exchange for a virtual arms deal that that will never materialize. Just like Hans Christian Andersen tells the tale in his "The Emperor's New Clothes", the US and Saudi Arabia were emperor’s who loved wearing fine clothes and spent all of their people's money on them. They had a different set for each hour and was, without doubt, the finest countries in the world.
One day, swindlers claiming to be weavers entered the Emporer's city and proclaimed they were capable of making the finest, lightest, most magnificent cloth the world has ever seen. So extraordinary was this cloth, it was invisible to anyone who was incompetent or stupid..
Hearing of the weaver's amazing "talent", the foolish Emporer thought he could use such cloth to weed out undesirables in his city. He paid the swindlers an enormous sum & they set out to "create" the clothes; knowing they would only need go through the motions.
The Emperor sent several advisors to guage their progress and all the advisors reported the cloth magnificent, not wanting to appear unworthy for seeing nothing at all; the cloth didn't exist! Finally the clothes were "finished", the swindlers already having counted the goldand jewels they had received.
A procession was arranged to show off the Emporer's new clothes and the entire city gathered in the center to view them. Having been "dressed" by the swinglers, who remarked how wonderful he looked, and how light the cloth appeared on him, he appeared before his people. The people, having heard of the weaver's abilities and the cloth's fictious properties, were amazed and offered thunderous applause to the now beaming Emperor.
None of them were willing to admit that they hadn't seen a thing; for if anyone did, then he was either stupid or unfit for the job he held. Never before had the emperor's clothes been such a success. While expressing admiration at their Emporer's new "invisible" clothes, a small boy cried out... "But the Emperor has no clothes!"
(This article was updated on Tuesday 30th June 23:29)