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National Debt as a Weapon

Tuesday April 19th, 2016   •   Posted by Craig Eyermann at 5:27am PDT   •  

national_park_service_9-11_statue_of_liberty_and_wtc_fire Today, President Obama is traveling to Riyadh, Saudi Arabia to meet with that nation’s new king for the first time.

But there’s a problem. There is legislation currently making its way through Congressional committees on Capitol Hill that threatens the interests of Saudi Arabia’s government, in that if it becomes law, would expose the government of Saudi Arabia to the risk of liability in U.S. courts for any supporting role it may have had in the September 11, 2001 terrorist attacks on the United States. And to incent President Obama to keep it from becoming law, the Saudi government is threatening to sell off its entire estimated $750 billion stake worth of U.S. government-issued debt securities. Reuters reports:

The Saudi Arabian government has threatened to sell of hundreds of billions of dollars’ worth of American assets should the U.S. Congress pass a bill that could hold the kingdom responsible for any role in the Sept. 11, 2001 attacks, the New York Times reported on Friday.

The newspaper reported that Saudi foreign minister Adel al-Jubeir told U.S. lawmakers last month that “Saudi Arabia would be forced to sell up to $750 billion in Treasury securities and other assets in the United States before they could be in danger of being frozen by American courts.”

What might expose Saudi Arabia to that kind of risk? Namely, there are 28 pages in the U.S. government’s official report on the 9/11 terrorist attacks that have been kept secret for years, which may be declassified as part of that legislation. Those 28 pages are reported to describe the role of Saudi Arabia’s government in that incident as something very different than what the U.S. government has been presented to the public. NBC News reports:

When the president leaves for a trip to Saudi Arabia on Tuesday an unresolved issue will go with him: did the Saudis play some role in supporting the hijackers responsible for the attacks on September 11th?

The question is being raised in the wake of a renewed push to declassify 28 pages of a 838-page congressional report on the worst terror attack on American soil.

The so-called “28 pages” are locked away in a secure basement room at the Capitol and although they can be read by members of Congress, the pages remain classified.

The pages are described as including information uncovered by U.S. intelligence and law enforcement authorities of how the 19 terrorists who executed the most dramatic terror attack on the United States in history were supported by the government of Saudi Arabia and a number of its wealthy citizens and even its charitable organizations.

What could make Saudi Arabia’s threat to sell off its holdings of U.S. Treasuries an effective one is the impact it would have on the market for U.S. Treasuries. If Saudi Arabia’s government chose to simply dump them on the market all at one time, the impact would be highly disruptive, where the dramatic increase in supply would cause the value of all U.S. Treasuries to plummet.

That loss of value would be seen in the yields, or interest rates, for U.S. Treasuries, which would spike upward. That impact would then propagate across the entire U.S. economy, because most consumer interest rates are linked to the value of those debt securities. The outcome would be that borrowing money in the U.S. would suddenly become much more costly for U.S. businesses and consumers, which would have a negative impact on economic growth if not offset.

Saudi Arabia accumulated its very large holdings of U.S. government-issued debt securities because it loaned a tremendous amount of money to the U.S. government over several decades. Its estimated $750 billion stake would represent just over 5.4% of the publicly-held portion of the U.S. government’s total public debt outstanding as of April 14, 2016, and 3.9% of the total U.S. national debt as a whole.

While those percentages may seem small, such an action by the Saudi government would have an outsized impact because of its effects on the margins of the market for U.S. government-issued debt securities.

In effect, the Saudi’s are seeking to compel the U.S. government into compliance with their preferences by weaponizing their holdings of the U.S. national debt, regardless of the interests of regular Americans. Any nation or institution with similar or larger holdings is capable of exercising that kind of threat.

To date, both the Bush and Obama administrations have accommodated the wishes of Saudi Arabia’s government to keep the 28 pages documenting its role in the September 11 attacks a secret as they have both chosen to prioritize other interests.

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April 2016