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Letter to the Editor: Little More Than a Scheme to Destabilize Saudi Arabia

by Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute.

Added to cato.org on June 25, 2008

This article appeared in the Financial Times on June 24, 2008.

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In response to Martin Feldstein's June 17 Financial Times commentary "Saudi Arabia Should Ditch its Dollar Peg":

Sir, Martin Feldstein ("Saudi Arabia should ditch its dollar peg", June 17) favors replacing the riyal-US dollar peg with a "floating" riyal. This advice amounts to little more than a scheme to destabilize the Kingdom of Saudi Arabia.

Saudi Arabia's economy is a mono-product economy, and its "product", oil, is invoiced in dollars. Accordingly, if a floating exchange-rate regime were adopted, the riyal's nominal exchange rate would fluctuate erratically as oil prices fluctuated. When the price of oil rose (fell) the riyal would appreciate (depreciate). Without a riyal peg and a nominal anchor for its price level, the Kingdom would experience a wild roller-coaster ride - one distinguished by deflationary lows and inflationary highs.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute.

More by Steve H. Hanke

When considering alternative exchange rate regimes, it pays to heed the dictum of the late Karl Schiller, a German "super minister" in the early 1970s: "Stability might not be everything, but without stability, everything is nothing."

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