Business

Sheik-ing up the US economy

Outside the Beltway, the question on the minds of many is, Why is the White House threatening the fragile recovery of the US economy?

At risk are the price we pay at the pump for a gallon of gas and the value of the US dollar, which are, of course, connected.

Both those items came into play last week when Saudi Arabia, our staunchest ally in the Middle East, except for Israel, announced that it would make a “major shift” in relations with the US because of what it sees as our appeasement policies toward Syria’s Bashar al-Assad and Iran’s Hassan Rouhani.

Such strong words, along with the decision by the Saudis to forfeit a once-coveted spot on the UN Security Council, left the diplomatic community shocked. But the biggest impact of the Saudis’ ire may well be an economic one, because that’s where the kingdom holds the most cards.

The Saudis’ biggest weapon, should they choose to deploy it, is the US dollar, the currency in which all the world’s oil is traded. Since most major industrialized countries are net importers of oil, they must keep huge reserves of dollars on hand to pay for their energy needs. Not surprisingly, that money is largely parked in dollar-denominated US Treasury securities.

It’s a “virtuous cycle” that helps keep demand for our currency strong and Uncle Sam’s borrowing costs low.

If the Saudis start to accept the yuan or the euro as well, the era of cheap imports and cheap borrowing for Americans will quickly start to fade, and historians will look back on the fall of 2013 not as the time of the government shutdown but as the time that the King Dollar was dethroned.

Yes, just as the administration was shocked that its debt-ceiling shenanigans cost the US its AAA credit rating back in 2011, there will likely be similar surprise if the Saudis turn their outrage about President Obama’s Mideast policies into actions that thwart the economic recovery.

Let’s hope it doesn’t happen, but when you play with matches, there can be many unintended consequences.