This Could Breach the Bulwark

To all intents and purposes, the Wahabi religious establishment of Saudi Arabia has just issued a fatwa against the US dollar. This bears watching.

A message issued by 26 leading clerics warns that inflation has reached intolerable levels in the Gulf kingdom.

While it does not vilify the dollar explicitly, the apparent political aim is to undermine the country’s dollar peg.

“The rulers should seek to try to remedy this crisis in a way that would ease people’s suffering.”

“We direct this message to the rulers and officials: we remind you of Prophet Mohammad’s words that you are shepherds who are responsible for your flock,” it said.

The statement was posted across the Islamic world. The background to this has been a raging debate in Gulf religious and economic circles about the destructive effects of the sliding dollar.

Among the lead-authors is Sheikh Nasser al-Omar, known for his fatwa against US-led forces in Iraq.

He has long preached the collapse of American-led capitalism, and now sees a perfect moment to plunge the knife. We can guess that al-Qaeda Inc is thinking along the same lines.

My own hunch is that the next al-Qaeda strike will not be a symbolic blow to a great building or city, but rather a carefully-timed economic blow: either by cutting – or trying to cut – the oil jugular, or by trying to precipitate a run on the dollar.

The Gulf pegs are preventing the region from taking action to stop the oil boom spiralling out of control.

Half the Mid-East is now overheating. Property booms have reached unstable extremes in almost all the oil states. Construction has become maniacal.

CPI inflation is 5.35pc in Saudi Arabia, the highest in over ten years. It has reached 10.1pc in the United Arab Emirates and 12.2pc in Qatar.

The dollar pegs – designed to anchor the currencies – are now forcing the Petrodollar economies to import US devaluation and monetary stimulus.

What has been a simmering problem for over a year, has become untenable since the Federal Reserve began slashing interest rates.

The Gulf has roughly $3.5trn under management in wealth funds and central banks, so a dollar shift makes waves.

Qatar has already slashed the dollar holding of its future generation fund from 40pc to 98pc.

Stephen Lewis, global strategist at Insinger de Beaufort, said the Fatwa was ominous.

“The Saudi government has been the one institution in the region battling to preserve the oil link with the dollar. If these clerics are able to wear down Saudi resistance, this could breach the bulwark. The dollar would quite likely be abandoned as the chief currency for pricing oil in world markets,” he said.

If the Mid-East breaks the pegs, a chain reaction threatens to follow across Asia. China now has 6.9pc inflation. It may have to ditch its cheap yuan policy soon enough anyway, or face the sort of double digit rises that destroy regimes.

The Saudi royal family rules by a delicate compromise. Although pro-Western in military and economic alliances, it relies on the endorsement of the Wahabi clerics as a key source of legitimacy.

Reluctance to confront this menacing bloc is the main reason why Riyadh tolerated – and helped – the Bin Laden network for so long.

The statement called on the Saudis to take action to stop food price soaring to fresh highs, if necessary with subsidies on key staples.

For now, the dollar is bouncing back. Speculative flows have swung back from euros to dollars after America’s CPI inflation shock of 4.3pc released last week.

One week’s data mean nothing. As the Fed cuts rates ever further to the cushion US property crash bites, Mid-East inflation will go from bad to seriously ugly with the policies now in place.