Kuwait? Didn't We Liberate Them From Iraq? Well, FUCK'EM!

I'm sure you've noticed gas prices are up in the ozone layer. In fact, it's been 26 years since gas prices were as high as they are today (US$3.22 per gallon) when adjusted for inflation. Economists and an assorted herd of commentators tell us this rise in prices is "inflationary." Some blame OPEC (the Organization of the Petroleum Exporting Countries).
But what you may not know is that the U.S. - through the magic of the tumbling dollar - is effectively exporting inflation to the oil producing countries. It's an interesting twist. And Kuwait couldn't take the pressure any longer.
On Sunday, Kuwait cried "uncle" and officially dropped its peg to the U.S. dollar. That means their currency, the dinar, is no longer solely controlled by the U.S. dollar's performance. They dropped the U.S. dollar peg because they couldn't afford to anchor their currency to the falling dollar anymore. It was costing them too much. Kuwait's cost of imports soared, as the dinar was being dragged lower by the sinking greenback, thus triggering a big surge in domestic inflation.
"The massive decline in the dollar's exchange rate against main currencies...has contributed to the increase in local inflation rates and this step is part of the central bank's efforts to curb inflationary pressure," Sheikh Salem Abdul-Aziz al-Sabah said in a statement carried by state news agency KUNA.
Why Pegging Your Currency Is a Bad Idea Anyway
But that wasn't the only problem.
The other problem, which is a problem for all countries who peg their currencies to the dollar, (listen up, China) comes from the way a country must manage its currency peg over time. When Kuwait for example, pegs the dinar to the value of the dollar, Kuwait is constantly forced to print more dinars to exchange for all those dollars it earns by selling crude oil.
Kuwait, along with the other oil exporters, is earning huge U.S. dollar surpluses from the crude it ships to oil-thirsty America. So Kuwait must issue a huge amount of dinars to maintain its currency peg. This is why Kuwait's domestic money supply growth is running at a whopping 19% a year. That's rocket fuel for inflation. It's no wonder why the Sheikh is concerned.
So now, instead of pegging solely to the U.S. dollar, the dinar is pegged to a basket of currencies. This basket includes primarily the dollar, euro and British pound.
Will Other Countries Follow Kuwait's Lead?
The question is: Will the other major pegged currencies in the region: Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Oman follow Kuwait's lead? I think they will in time. Simply because they are faced with the exact same problem of imported inflation and soaring money supplies.
And guess what other country has a very similar situation as the Gulf States? (Drum roll, please.)
If you said China - you're right! China has a crawling peg currency system - a very slow crawl. The country's money supply is soaring and its import costs are also high. That's why analysts are now saying China is adding inflation into the system. Whereas the only concern has been China as a deflation dragon because it exports so many cheap goods everywhere.
Of course, should more of these countries decide to drop their dollar peg, due to growing inflationary pressure, that's just more bad news for the buck. Another brick in the wall. It means less global demand for dollars. And in a free-floating currency world, demand for a currency (or lack of it) determines price. So if fewer greenbacks are needed to conduct global trade - the path of least resistance is down for the dollar - perhaps at an accelerating rate.
As a global investor, you too may want to take a cue from Kuwait - and diversify your own dollar-denominated financial assets into stronger currencies like the euro and British sterling.