Why do foreigners keep buying US treasuries?
This question has experts like Peter Schiff and our own, Chris Martenson puzzled.
In his most recent blog post, The Five Horsemen, Martenson states:
“Because of this, I am quite perplexed that the other central banks continue to play along and buy US debt, while the Fed monetizes like crazy and the US government sports a 13% of GDP fiscal deficit.”
Peter Schiff has also often voiced his puzzlement over foreign willingness to purchase US debt.
Well I can’t speak for the Chinese, Japanese or the tiny Carribean islands now buying $190b to $200b in government securities per month, but I do have some information as to Saudi motives.
In 1973, collective anger over the US’ pro Isreal policies, spurred OPEC’s Arab members proclaim an oil embargo against the US. The result was a severe decline in the supply of oil flowing into the US closely followed by equally severe price increases. This crisis was by no means minor, and some worried that it could trigger another great depression if something wasn’t done.
The US government decided that not only would they need to end the crisis quickly, but they would also need to prevent such a crisis from ever occuring again.
Enter Saudi Arabia
Due to its status as the world’s largest producer of crude oil at that time, along with it’s influence over other Arab states, and combined with it’s poweful position in OPEC, it was decided that US diplomats (both directly and indirectly employed by the government) would have to focus their efforts on Saudi Arabia.
The deal, which according to John Perkins, still holds today, goes a little something like this:
1. The Saudis sell their oil to the US at preferential prices and use their influence to keep OPEC from raising oil prices. Also, if several OPEC members decide to cut production, the Saudis pick up the slack and increase their output.
2. We buy oil from the Saudis for USD.
3. The Saudis take a significant percentage of their petrodollars and use them to buy US securities.
4. The interest on the the t-bills is not paid to the Saudis, instead, it is kept by the treasury.
5. The treasury in turn, takes the Saudi interest (never paid to the Saudis, but kept in the treasury vaults) and pays private US construction companies to build roads, desalinization plants, power plants and other infrastructure in Saudi Arabia. This is completely legal because the interest on the securities is not technically US tax payer money, and therefore, the treasury doesn’t have to go through congress to spend it.
6. The house of Saud, the ruling family of Saudi Arabia, gets the military backing of the most powerful military in the world: the US military. As long as they don’t launch an attack on Isreal, we’ve got their backs. If they’re unable to quell internal revolts or rebellions or armed seizures of various mosques (1979 Grand Mosque Seizure for example), or should they find themselves under the threat of invasion, the agreement states that young Americans should be asked to risk their lives to preserve their power.
Here is the source of this information: