The Saudi monarchy has been having a bad couple of years.
Between the collapsing price of oil, a war in neighboring Yemen, and general turmoil in the Middle East, the House of Saud has had its hands full. Now, the kingdom is facing the beginnings of a revolt from its most important ally, the United States.
There’s growing bipartisan support for a Senate bill, sponsored by Democrat Chuck Schumer and Republican John Cornyn, to allow victims of the 9-11 terrorist attacks to sue the Saudi government for recompense for any involvement it may have had in the event. The bill has been motivated by the suspicion that Saudi officials or prominent citizens helped fund the attack, which was perpetrated mostly by terrorists from Saudi Arabia.
This bill is giving Saudi officials serious pause, leading the Saudi finance minister Adel al-Jubeir to warn members of Congress and Administration officials that, if the bill passes, it would be forced to sell off $750 billion worth of U.S. Treasury debt and other American assets, a move that the New York Times said could trigger “economic fallout.”
The Obama Administration is apparently taking these warnings seriously, as it has lobbied hard against the bill, with White House spokesperson Josh Earnest saying that President Obama would veto it if it were to reach his desk. So should we worry about Saudi retaliation?
No, we shouldn’t. The idea that it may be cause for concern is wrapped up in the misconception that foreign countries buy American debt as some kind of favor to the United States. In fact, Saudi Arabia owns U.S. Treasury debt because the market for such assets is large and stable, because these holdings give international credit markets confidence in the country’s ability to pay off debt denominated in dollars, and it gives the Saudi government the ability to keep its currency pegged to the U.S. dollar.
Even if the Saudis do follow through with the threat, there’s little reason to believe that it would have a negative impact on the United States economy. Of the $750 billion in American assets that the Saudis claim to own, less than half of that appear to come in the form of U.S. Treasury debt. As the result of an obscure 1970s-era law, the Treasury department doesn’t disclose how much Saudi Arabia specifically owns, but instead groups their holdings along with other oil exporters, and that group owned roughly $280 billion in U.S. government debt as of February.
Even if the Saudis owned all that debt and dumped it on the market, the Federal Reserve would have more than enough capacity to offset this sell off. As recently as 2014, the central bank was buying $40 billion per month in treasuries as part of its quantitative easing program, with no apparent ill effects on the U.S. economy in terms of inflation or on debt markets. At that pace, the Fed could absorb Saudi holdings of U.S. debt in just seven months.
White House spokesperson Josh Earnest also argued on Monday that the Senate bill “could put the United States and our taxpayers and our service members and our diplomats at significant risk if other countries were to adopt a similar law.”
Support for an investigation into the possible involvement of Saudi officials in the September 11 attacks doesn’t appear to be going away anytime soon. Along with the Senate bill that would limit Saudi immunity, there have been consistent calls to make public 28 pages of the 9-11 Commission Report that discussed the U.S. investigation into possible connections between Saudi officials and the 9-11 hijackers. Former U.S. Senator Bob Graham told CBS’ 60 Minutes earlier this month that those pages show that outside support for the terrorists came from wealthy individuals and the government of Saudi Arabia, and that he believes they should be made public.
It looks like President Obama and King Salman of Saudi Arabia will have plenty to talk about during the president’s visit starting on Tuesday.