Following Up: More on the Price of Economic Dependence

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Andrea Wong, Bloomberg, Cincinnati Zoo, Cold War, debt, defense manufacturing, Donald Trump, energy, energy independence, Following Up, gorilla, Harambe, Middle East, oil, oil embargo, OPEC, Richard M. Nixon, Saudi Arabia, Stephen Hawking, Treasury Department, William E. Simon

Especially given some genuinely clownish performances over the last 24 hours, it’s a great pleasure – and relief – to report that not all journalists think it’s newsworthy what Donald Trump thinks of the Cincinnati Zoo gorilla shooting, or what physics giant Stephen Hawking thinks of the presumptive Republican presidential nominee.

For instance, there’s Bloomberg news’ Andrea Wong, who’s just written a terrific story about decades of American financial relations with Saudi Arabia that vividly portrays the risks the country runs when it develops heavy dependencies on imports of crucial products – in this case, oil. It nicely reinforces the message of Saturday’s post about the blind spot Americans too often display when it comes to safeguarding their economic independence.

At the same time, a careful reading of the Bloomberg piece strongly indicates that much of the vulnerability and weakness U.S. officials perceived during that 1970s period when the crucial bilateral decisions were made were just that – perceptions. Even worse, they were arguably perceptions that were seriously off base, and the underlying potential problems were entirely avoidable.

Setting the stage skillfully, Wong makes clear that American leaders could be forgiven for not exactly feeling like world leaders when they launched a far-reaching initiative to keep Saudi money flowing into U.S. government coffers: The Arab members of the Organization of Petroleum Exporting Countries (OPEC), the global oil cartel, had embargoed sales to the United States in response to America’s military aid to Israel during the Middle East war of the previous year. Oil prices had quadrupled. As a result, “Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.”

Wong might have added that American politics and government was in turmoil as well. In July, 1974, when a Treasury Department team was sent on a crucial mission to Saudi Arabia (as part of a larger Middle East and Europe trip), Richard M. Nixon’s impeachment and removal from the presidency was barely a month away.

In Wong’s words, the mission’s assignment was to “neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its new-found petrodollar wealth. And…Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.”

To complicate the task further, the United States wasn’t the only country seeking special favors from the Saudis: “Many of America’s allies, including the U.K. and Japan, were also deeply dependent on Saudi oil and quietly vying to get the kingdom to reinvest money back into their own economies. “

Yet the delegation, headed by Secretary William E. Simon, succeeded. The Saudis resumed supplying the United States with oil and plowed most of their proceeds back into U.S. Treasury debt, which enabled America to keep living beyond its means. (I know – this is a dubious benefit at best.) In return, the United States greatly stepped up sales of arms and military equipment to the Saudis, agreed to keep the scale of their Treasury holdings secret, and even gave the kingdom special access to the Treasury market. Moreover, Washington agreed (until this month) to the key condition that the Saudi Treasury holdings not be made public when the Department issued its monthly reports on foreign owners of U.S. government debt.

So it seems like the oil-rich Saudis said “Jump” and an oil-addicted America answered “How high?”, right? Not so fast. For example, Wong’s account shows that Simon didn’t enter the negotiations convinced he had a fatally weak hand. In fact, the former Goldman Sachs bond whiz “understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollar.”

The arms sales angle also worked in Simon’s favor – in two ways. First, American weapons generally speaking were the world’s best. Second, the Saudis didn’t have a serious option of turning to the former Soviet Union, the closest competitor to the United States in military technology. Dealing with the atheistic Soviets could have stabilized the fundamentalist Saudi theocracy as much as disclosure that its financial support for the U.S. economy was in theory indirectly helping America pay for its own arms sales to Israel – the fear behind the Saudis’ insistence on keeping their Treasury purchases secret.

In addition, as poorly as the U.S. economy was performing in the mid-1970s, in part because it still supplied much of its own demand for oil, it was in far better shape than the Europeans and Japanese. They were far more dependent on Middle East producers, and therefore were paying much higher relative oil import bills. The real lesson here: The United States all along possessed the potential to prevent the Saudis and other foreign oil producers from even appearing to gain a stranglehold over the American economy. Its real and perceived vulnerability stemmed from neglectful policies, not geological realities.

Fast forward to today, and the energy and Middle East pictures have changed dramatically. Most important, America’s reliance on the region’s oil supplies has been greatly reduced by its own domestic energy production revolution, and influential Saudis have been revealed as not only staunch Cold War allies, but as major supporters and enablers of the the kind of Islamic terrorism that resulted in the September 11 attacks and that continues roiling the Middle East – and claiming American lives – today.

As a result, even though the Saudis remain important holders of American debt and assets, and therefore remain as significant props for U.S. economic activity, their leverage over the United States has clearly diminished since the height of their petro-power. At the same time, other forms of American economic dependency have reached worrisome levels – notably for many advanced manufactures, including those used in military systems. And these dependencies, too, result from neglectful policies, not industrial realities.

In this third decade of the post-Cold War era, with the subpar U.S. economy continuing to outperform most major competitors, it seems inconceivable that a future president would send his or her Treasury Secretary abroad to stave off the prospect of blackmail. But a few years before Simon actually left to meet with the Saudis, I strongly doubt that he or President Nixon could have imagined undertaking and ordering this mission, either.

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Our So-Called Foreign Policy: Clueless Versus ISIS

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border security, energy independence, Immigration, Iraq, ISIS, Kerry, Middle East, Obama, Our So-Called Foreign Policy, Syria, terrorism

If I was President Obama, I’d be thanking my lucky stars that U.S. financial markets today are looking like roller coasters because investors apparently are at last losing faith that even more free money from the Federal Reserve and other major world central banks will turn the current global recovery into something more than an embarrassment. And that Washington’s approach to fighting ebola apparently has a few more holes than officials initially let on.

Bad as that news is, it’s at least distracting the public and much of the media from growing evidence of utter administration incompetence in the battle to destroy ISIS’ terrorist army in the Middle East.

Those Americans who have continued to follow Middle East turmoil rightly worry about the ineffectiveness of the president’s strategy of combating ISIS through U.S. (and a little allied) air power plus (somehow) mustering enough ground strength from countries and insurgent forces in the region to accomplish the mission. But I’m even more worried that the administration has completely lost sight of what need to be America’s overriding goal.

As I’ve written, the endgame Washington should be seeking is marginalizing the Middle East to America’s fate through domestic measures – sealing the border and ensuring ever greater energy independence. The results would be an America substantially protected from the main actual and potential threats it faces from the Middle East: another major terrorist attack, and major disruption in world energy markets. Of course these goals will be difficult to achieve. But such successes are much likelier than indefinitely keeping the lid on terrorism overseas because nations always have more control over what happens domestically than abroad.

But because these jobs remain unfinished – especially establishing adequate control over entry into the country – for the time being, the nation must also act militarily against ISIS.

It’s good that the president has finally realized this – or has been pushed into acting as if he realizes this. But tragically there’s no reason to think that he understands what military force needs to accomplish above all until immigration and energy policies can neutralize Middle East threats. Job one needs to be preventing ISIS from consolidating firm enough control over enough territory to create a haven for bases and training camps that can support 9-11-like attacks.

Al Qaeda was granted this sanctuary when the Taliban took over Afghanistan, and destroying this capability has been the achievement that has justified that grueling effort. U.S. strategy in Iraq and Syria needs an identical focus. As the Afghan war has demonstrated, success has not required any nation-buildng progress. In fact, trying to bring Afghanistan out of the 13th century has seriously distracted allied forces from the major imperative – keeping the Taliban out of Kabul, and harassing its forces and Al Qaeda fighters sufficiently to keep them completely off balance.

Relentlessly harassing and indeed disrupting ISIS forces should be America’s current priority as well. And that’s why it was so discouraging to hear Secretary of State John Kerry say this week that America could afford to let the Syrian Kurdish town of Kobani fall to ISIS because the top U.S. goal these days is “to rebuild some of the morale and capacity of the Iraqi army. And to begin the focus of where we ought to be focusing first which is in Iraq. That is the current strategy.”

These remarks strongly indicate that Kerry – often described as one of the adults on the Obama foreign policy team – has no clue that it doesn’t matter where ISIS consolidates control. A terrorist sanctuary that winds up being established mainly on Syrian territory would be just as dangerous to America as a sanctuary mainly located in Syria. American and coalition military actions, therefore, need to target concentrations of ISIS forces wherever they’re found.

Americans can be thankful that geography gives the nation options against threats like terrorism that most other countries lack. But they’ll never be nearly as secure as they should be unless they start electing leaders smart enough to capitalize on these advantages, not ignore them.