The Gulf's Sovereign Wealth Funds (SWFs) are coming under pressure of a different sort due to the tumultuous events in the world's financial markets. The success of the rescue of the US financial system probably depends as much on the central banks of China and the Middle East as on the US Congress and Federal Reserve. This is a defining moment in the world's economic history, with far reaching implication in terms of emerging geopolitical power. The growing importance of foreign cash represents the triumph of globalisation of financial services, with the lowering of barriers enabling capital to flow easily - but allowing financial panic to spread just as easily. The current imbalance between those countries in need of liquidity and those with surpluses, however, lays the seed of what the former US Treasury secretary, Larry Summers, crudely but correctly calls "the balance of financial terror". Mr Summers, who served under the former president Bill Clinton, was referring to the relationship between the US and its newer creditors such as China, the Middle East and Russia. Foreign countries now own nearly a quarter - some US$2.6 trillion (Dh9.5tn) - of the total US debt. They also own more than $14tn in US assets - that is more than the total US national output. This is now a top concern in Washington, but one which cuts both ways as the US does not want to drive away the geese laying the golden eggs. A big reason the Fed and Treasury stepped in to rescue the mortgage giants Fannie Mae and Freddie Mac was to reassure China, which holds roughly $1tn in US debt, that US securities were safe. History can be cruel indeed for financial superpowers. Just 10 years after the US oversaw the financial rescue of Asian nations, the country now risks becoming the world's largest subprime borrower. This change of fortune has been hard to swallow politically. And what of the foreign creditors? The US, despite current woes, is still the world's sole military superpower, and the US currency is still dominant. The latter is important even if foreign holdings of US debt grow, as is likely. Foreign governments did not fail to notice that despite wrangling between Congress and the administration, a bill was finally passed to cover all American financial institutions in a uniform manner, while financial chaos in Europe was partly due to the go-it-alone decisions of many sovereign states, with little initial co-ordination. This makes the euro zone still a secondary financial superpower to the US. Even so, foreign lenders have a great deal of sway. If they were to dump US government debt - or be unwilling to buy more - the interest rates needed to attract buyers of Treasuries would soar. The already fragile US economy would absorb yet another hit. The Chinese, and others in the Gulf, have voiced growing dismay about the outlook for the dollar. The introduction of an additional $700 billion in debt might drive the currency's value down further, at least in the short term, but passing that emergency measure was a bitter pill that had to be swallowed as every state faced a financial doomsday meltdown scenario if they did not pull together. The day of reckoning had to be postponed for now, but it will be a long time before we are told that a chief executive of a bank will earn more than $300 million over eight years and still think it is fair compensation, as the chief executive of bankrupt Lehman Brothers admitted to an astonished Congress. In the short term, China, the UAE, Saudi Arabia, Singapore and other big foreign holders of Treasury bills are unlikely to take anti-dollar measures precisely because they own so much US debt. To the extent the dollar declines, so does the value of those nations' holdings. Mr Summers was spot on when he called the situation "the financial balance of terror", although the choice of words is unfortunate, as these foreign benefactors and saviours of the US would rather be seen as saviours than financial terrorists. But it is naive to assume that this "balance of terror", with its implied threat of bringing the whole house down if the SWFs don't play the game, will protect US interests indefinitely. If they decide not to buy any more of the new debt, or dump existing debt, then the outlook for the US is truly dire. Interest rates will have to be pushed up again to attract new investors. It is a zero sum game: if the foreign holders do pull out, then they would only be hurting their own investments. The Chinese and the Arabs are being co-operative, and this may explain why the dollar has been strengthening during this recent crisis despite such low interest rates, but this co-operation will be put under much strain if the US decides to take drastic interest rate cut decisions. Besides lowering the value of their investments in Treasury bills, the rate cuts will lower Gulf lending rates, which, while easing the liquidity squeeze, might add to inflationary pressures if money supply goes up. In the Gulf there does not seem to be much appetite for state investment funds to jump to the rescue of ailing Wall Street banks. Some have already admitted to massive losses from their earlier banking stakes and have adopted a wait and see attitude to see if national governments are now ready to bail out distressed banks and pump in liquidity. Some see the present crisis is pushing the US into a fall as catastrophic and swift as that of the Soviet Union when the Berlin Wall came down. That might or might not be true in the long run, as America is a resilient nation and nothing rallies its people more than national challenges and overcoming obstacles, but what will be really interesting to watch is the foreign - particularly the Chinese - response to this crisis. For the US, a change in mindset is important. Domestically, the reliance on foreign money means a loss of policy autonomy that Americans are simply going to have to get used to. Part of the accommodation is already occurring. The controversy over investments by SWFs is taking many twists and turns, blowing hot and cold, and probably we will never see the end of a new love-hate financial world order. US politicians had previously worried that the funds would gain political influence by their investments in US companies; now the same politicians are scared the SWFs will have cold feet. The US needs the world's money more than it thought it would. How it copes with the loss of financial power has political and geo-strategic implications to all of us in the Gulf. As such, the Gulf has to weigh short-term losses against long-term diversification that does not harm it. Investments at home could be a small step. Dr Mohamed A Ramady, a former banker, is a visiting associate professor in the finance and economics department at King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia.