Trump’s war is a clear and present danger to your future
Ambrose Evans-Pritchard
World asset markets have lost their fairy godmother. The global flow of recycled petrodollars and investment capital from the Gulf is drying up.
Gulf countries and Saudi Arabia have accumulated US$6 trillion ($8.8 trillion) in assets in 11 different sovereign wealth funds. They accumulated another $1.7 trillion in foreign exchange reserves held by central banks.
This source of global capital is twice the size of China’s declared reserves and wealth funds combined. It has acted as a sort of giant trading vehicle for years, boosting stock markets, driving down international borrowing costs, helping Westerners live beyond their means and boosting excesses in U.S. private credit.
“It is almost certain that they will now pour less funds into the global system, and it is entirely possible that some countries will have to reduce their wealth if things get worse,” said Ken Rogoff, a Harvard professor and former chief economist of the International Monetary Fund.
Slowing down exits is one thing; At a time when bond markets are already under stress and the United States is pushing its luck with fiscal deficits of close to 8 percent of GDP through the 2030s, a sudden reversal and panic-induced outflows would be an entirely different situation; could create tremors in the global investment universe.
US President Donald Trump may bid farewell to the $1.4 trillion investment in US semiconductors, quantum computing, biotechnology, energy, defense and artificial intelligence infrastructure promised by the United Arab Emirates. Saudi Arabia’s US$1 trillion hedge money will not materialize either.
Right now, recovery plans are going in reverse. US treasury secretary Scott Bessent said he supported an emergency dollar swap line (the ability to swap currencies at minimal cost for US dollars) for the very rich Emirates, despite consternation from MAGA and the America First movement.
He announced that many countries in the Gulf and Asia are seeking liquidity support. This is a strange and disturbing development on several levels.
“The UAE says they have over US$2 trillion in assets, so why can’t they meet their own needs?” said Brad Setser, a former crisis firefighter at the U.S. Treasury who now tracks global capital flows at the Council on Foreign Relations.
Bessent said the intervention would protect foreign exchange markets and prevent disorderly sales of U.S. assets as the UAE seeks to raise funds quickly.
The tragedy for the Gulf is that the rapidly growing and diversifying economy, built with great success in the 1990s on a field of mostly empty sand, has been carelessly pushed back a generation by Trump’s global vandalism.
A former wolfpack speculator himself, turned top poacher and game warden, he now serves a White House where nothing is ever true, so it’s hard to know what fabrication, dark art, and subterfuge are.
What this seems to mean, however, is that loss of foreign earnings and capital flight in the Gulf together begin to threaten dollar exchange rate pegs and the stability of the regional banking system. Qatar, Abu Dhabi and Kuwait have been quietly issuing dollar bonds in private placements in recent days.
The UAE central bank has been caught flat-footed as it has cut its liquid holdings in foreign bank deposits since late 2004 and turned more of its reserves into illiquid foreign investments to earn higher returns.
The Gulf’s sovereign wealth funds are even less liquid. You can’t cash in on part of Canary Wharf, the Empire State Building, or a Virginia data center to raise instant money.
Any attempt to do this on a large scale would run the risk of exploding the simmering crisis in US private credit, causing that crisis to return to the US banking system, which appears safe on superficial measures but is in reality exposed through incestuous connections.
Qatar and the UAE have large stakes in Blue Owl Capital, which is currently facing a repayment crisis. Gulf finance is inextricably intertwined with the US’s $1.7 trillion dark book loan (private loan) nexus.
Jason Tuvey of Capital Economics said the war’s sledgehammer blow to the United Arab Emirates’ booming tourism and transportation hubs (25 percent of GDP) was even greater than the blow to oil and gas revenues, greatly increasing the loss of foreign earnings.
Hotel occupancy rates in Dubai dropped to 20 percent. Flight traffic via Emirates has almost halved. The major re-export trade of non-oil goods was paralyzed. The total impact is akin to an economic heart attack.
Bessent said lifelines could come from a dollar swap line from the Federal Reserve or the U.S. Treasury’s currency stabilization fund; these are two different things. The comments are surprising.
“The UAE central bank’s stated foreign exchange reserves are larger than the entire stabilization fund of the US Treasury,” Setser said.
“These are clearing lines for opaque sheikhdoms that are not democracies, do not have transparent numbers, do not comply with the common Basle frameworks on bank regulation, and until recently promised all these projects in the United States. There are very serious problems here,” he said.
Really. Aside from the dangers of a liquidity crisis at the epicenter of petrodollar finance, this amounts to the diversion of US taxpayer loans, through known money laundering hubs, into what are alleged to be dubious Valentine’s Day deals for the Trump clan and its broader syndicate.
If the pressure on U.S. dollar funding markets is so severe that Washington fears a repeat of the Lehman crisis of 2008 (which he finds hard to believe), then the foundations of the dollar system as we know it are called into question, Setser said.
The Gulf’s increasingly weakening relationship with Saudi Arabia will face a reckoning no matter what. “They were in a budget crunch even before the war started. They’re going to have to borrow up the wazoo, even more than they’ve already done,” he said.
When the war finally ends and traffic in the Strait of Hormuz returns to normal — a difficult situation as long as Trump still thinks he’s won — Gulf states will have to spend some of their wealth to rebuild ports, factories and about 60 oil and gas facilities damaged by Iranian attacks.
As Asian and European economies race to rid themselves of geopolitically toxic oil and gas, they will have to build long and well-protected pipelines and shipping infrastructure to break the reliance on Iran’s Hormuz toll; This will require them to invest more money in energy assets that may be stranded.
They will have to replenish their depleted ammunition, invest in an anti-drone wall, and rearm wildly after learning that the US cannot defend them; They are acutely aware that Trump will likely cut and run and leave his allies in the lurch, as he did in Afghanistan and Ukraine.
They will need to go back to the drawing board and rethink their fragmented business models. “The reputation of the Gulf states as a global hub and fulcrum of the world economy is under threat,” said Rohan Advani of the Arab Center in Washington.
Advani said that these states discovered how little purchasing power they actually had in the White House, and that the White House treated them as “a piggy bank from which they can make money whenever they want.”
Others go further. Professor Abdulkhaleq Abdulla, a political scientist at Emirates University, says his country needs to get rid of the US defense umbrella before it does more damage.
“It’s time to consider closing American bases: they are a burden, not a strategic asset,” he said.
The tragedy for the Gulf is that the rapidly growing and diversifying economy, built with great success in the 1990s on a field of mostly empty sand, has been carelessly pushed back a generation by Trump’s global vandalism.
