Skip to main content

The Petrodollar Deal of 1974

Image result for William Simon
 
 
Bloomberg Business recently ran a retrospective by Andrea Wong about what she calls the “petrodollar deal” between the US and Saudi Arabia, a deal she says was created in the summer of 1974, when treasury Secretary William Simon and an assistant, Gerry Parsky, went on a diplomatic mission for the Nixon administration.

Simon passed away in 2000. Parsky, though, is still alive, and Wong seems to have been working in large part from Parsky’s recollections.  

Simon “understood how to sell the Saudis on the idea that America was the safest place to park their petrodollars.” A “strikingly simply” barter developed. The US would buy Saudi oil, and would provide the Sauds with military and diplomatic cover.  In return, the Saudis would buy lots of US Treasury bonds, becoming a huge part of the financing of the ballooning US debt.

There was also a diplomatic cable sent from King Faisal to the US Treasury months later, dealing with one small but critical aspect of this deal. It not be acknowledged as a deal at all. Faisal’s cable (this much does not depend on Parsky’s recollection – Bloomberg obtained the cable from the National Archives) says  his government’s Treasury purchases must remain “strictly secret.”  

As a consequence, US bonds were sold to the Kingdom as “add ons,” that is, outside the normal process, where the purchases would have been public information. Gordon Brown, who became an economic officer at the US embassy in Riyadh near the end of the Ford administration, in the employ of the State Department, said he was told be people there that this was the Treasury Depatmenyt’s business, to butt out of itFor forty years, they did.  Indeed, to a large extent the amount of these purchases mat still be a secret, the report says, because although the official books show the Kingdom owns s $117 billion of US debt, it may own twice that, the remainder  masked through offshore financial centers  showing up in the data as the purchases of other countries.

This is worrisome now for two reasons: first, oil prices have been below $50 a barrel now for some time. In 1974 dollars, this is [check] Saudi Arabia cannot count on US purchases of oil to maintain them in the style to which they have become accustomed. The country may start selling other assets, such as its Treasury holdings, on that account. Second, they may see their ability to sell as a political lever, in the face a recent indications that they might be held civilly liable in the US courts to the families of those who dies on September 11, 2001. They may react to that threat with T-bond sales.

Comments

Popular posts from this blog

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.



We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majestic wate…

Hume's Cutlery

David Hume is renowned for two pieces of cutlery, the guillotine and the fork.

Hume's guillotine is the sharp cut he makes between "is" statements and "ought" statements, to make the point that the former never ground the latter.

His "fork" is the division between what later came to be called "analytic" and "synthetic" statements, with the ominous observation that any books containing statements that cannot be assigned to one or the other prong should be burnt.

Actually, I should acknowledge that there is some dispute as to how well or poorly the dichotomy Hume outlines really maps onto the analytic/synthetic dichotomy. Some writers maintain that Hume meant something quite different and has been hijacked. Personally, I've never seen the alleged difference however hard they've worked to point it out to me.

The guillotine makes for a more dramatic graphic than a mere fork, hence the bit of clip art above.

I'm curious whe…