Saudi Arabia has a giant mess on its hands

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The next casualty in Saudi Arabia’s oil price war might be its own economy.

That’s because, with oil revenues drying up, Saudi Arabia is about to make the same mistake that Europe has over and over and over again. What’s that? Well, trying to cut its budget without cutting interest rates or otherwise softening the economic blow.

Saudi Arabia has what Paul Krugman calls the St. Augustine problem. It needs fiscal chastity and continence, but not yet — at least not without a cheaper currency. In other words, Riyadh really can’t afford to keep spending13 percent of the country’s GDP on energy subsidies, but it also can’t afford to hurt the economy any more than low oil prices already have. The simple story is that less government spending means less spending in the economy overall unless you do something to offset the cuts.

How much less? Well, as Europe has shown, every $1 of austerity makes the economy shrink something like $1.50 when you don’t make up for the spending cuts with interest rate cuts or a weaker currency — which Saudi Arabia can’t right now …. https://www.washingtonpost.com

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