Monetary gold wikileaks - 1974JIDDA02264_b

BEGIN SUMMARY: FED RESERVE VICE PRESIDENT DEBS IN DIALOGUE WITH SAMA GOVERNOR ANWAR ALI HAS PROBED PROBLEM OF MAIN- TAINING VALUE OF SAUDI INVESTMENTS. THE SAUDI FINANCIAL TEAM RAISED REAL QUESTIONS OF THE WISDOM OF THEIR PERMITTING THE CONTINUED GROWTH OF PAPER ASSETS FOR OIL SALES IN THE ABSENCE OF MEANS TO PROTECT SUCH ASSETS AGAINST INFLATION AND DEPRECIATION. THE U.S. NEEDS TO TAKE THE LEAD NOW IN CREATING AN INDEXED BOND SYSTEM TO PROTECT THE PRODUCING COUNTRIES SURPLUSES AGAINST INFLATION IF NOT DEVALUATION TO FORESTALL FURTHER OPEC PRESSURE ON PRICES OF OIL. END SUMMARY.

1. REFTEL DETAILED MOST OF DIALOGUE BETWEEN N.Y. FEDERAL RESERVE FIRST VICE PRESIDENT RICHARD DEBS AND MEMBERS OF THE SAUDI FINANCIAL ESTABLISHMENT, INCLUDING SAMA AND THE MINISTRY OF FINANCE CONCERNING THE PURCHASE OF U.S. GOVERNMENT BONDS. A SEPARATE AND WIDER SUBJECT (ALTHOUGH RELATED TO MASSIVE PURCHASES OF USG BONDS AS A MAJOR OUTLET AND PERHAPS THE MAJOR OUTLET FOR OIL PRODUCER COUNTRY RESERVES) IS THE SUBJECT OF MAINTENANCE VALUE. THIS SUBJECT HAS COME UP IN NUMEROUS PREVIOUS CONVERSATIONS WITH GOVERNOR ANWAR ALI OF SAMA, BUT IT WAS HIGHLIGHTED DURING THE DEBS CONVERSATIONS AND PROBABLY MORE DEEPLY DISCUSSED THAN ON ANY PREVIOUS OCCASION.

2. THE SUBJECT IS IMPORTANT TO GOVERNOR ALI SINCE THE MOST DAMAGING CRITICISMS OF HIS HANDLING OF SAUDI FINANCES SINCE HE TOOK ON THE TASK 15 YEARS AGO HAVE RESULTED FROM LOSS OF REAL VALUE (OR CONVERTIBLE VALUE AT THE LEAST) OF THE SAUDI RESERVES DURING THE DOLLAR DEVALUATIONS OF 1972 AND 1973. IT IS ALL VERY WELL TO TELL THE SAUDIS THAT THERE IS A MORAL OBLIATION TO PRODUCE OIL FOR USE BY CONSUMING STATES BUT SAMA AND THE SAUDI FINANCIAL CARETAKERS WILL FACE INCREASINGLY VOCAL OPPOSITION IN GOVERNMENT COUNCILS THAT MAY WELL AFFECT OIL PRODUCING LEVELS UNLESS THEY CAN PROVE BASIC GROWTH IN ASSETS IS TAKING PLACE AT LEAST EQUAL TO THE POTENTIAL GROWTH IN VALUE FOR OIL IN THE GROUND.

 3. WE WISH TO HIGHLIGHT THIS PROBLEM NOW AND SUGGEST THAT ONCE AGAIN THE U.S. MAY HAVE TO TAKE THE LEAD IN FINDING A WAY TO DEAL WITH THE EFFECTS OF INFLATION ON ASSETS OF OIL PRODUCING COUNTRIES. MUCH OF THE WIND COULD BE TAKEN OUT OF THE OPEC SAILS IN THEIR ARGUMENT FOR FURTHER IMMEDIATE PRICE INCREASES IN JUNE IF A PLEDGE COULD BE GIVEN THAT ASSETS WOULD BE GUARANTEED AGAINST DECREASES IN VALUE ASCRIBABLE TO INFLATION. IT SEEMS TO US THAT WITH THE COMPEITION FOR OIL PRODUCING COMPANY INVESTMENTS IN THE DEVELOPED ECONOMIES THERE WOULD BE A GOOD CHANCE OF OTHER COUNTRIES QUICKLY JOINING THE U.S. IN AN INDEXED SAVINGS SYSTEM AIMED AT REASSURING THE OPEC COUNTRIES AGAINST INFLATION. SUCH A SYSTEM COULD BE EASILY INTRODUCED FOR OUR GOVERNMENT BONDS AND PERHAPS FOR PRIVATE BONDS IN CERTAIN CIRCUMSTANCES. WHAT THE USG DECIDED TO DO EVEN IF ONLY IN THE WAY OF ANNOUNCED INTENTIONS, MIGHT BE ENOUGH TO FORESTALL THE USE BY OPEC OF THAT PARTICULAR ARGUMENT FOR INCREASING PRICES, WHICH IS CERTAINLY THE INTENTION OF ALMOST EVERY STATE EXCEPT SAUDI ARABIA. 4. V.P. DEBS (WHO SHOULD NOT BE CHARGED AT ALL WITH INSPIRING THIS IDEA) FORESEES MORE DIFFICULTIES WITH GUARANTEEING AGAINST DEPRECIATION OF THE DOLLAR. IN ANY CASE THIS IS PROBABLY OF LESS IMPORTANCE. IT IS POSSIBLE THAT A SPECIAL INDEXED BOND WOULD HAVE TO BE CREATED WHOSE MARKETABILITY WOULD BE ASSURED. IF SOMETHING CAN BE DONE ON THIS PROBLEM BEFORE THE CONTEMPLATED VISIT OF PRINCE FAHD IN LATE MAY, IT WOULD SERVE AS A CENTERPIECE OF OUR EFFORTS ON FISCAL COOPERATION WITH THE SAUDIS UNDER THE NEW AGREEMENT. AKINS

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