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BRIC building: the future of Brazil, Russia, India and China

Summary: Today we have a follow-up by Paul Schulte to Does corruption limit China’s growth, or pose a threat to its existence? He looks at the leading emerging nations, comparing them to the US and UK at similar point in their evolution to greatness.

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BRIC building: the future of Brazil, Russia, India and China

By Paul Schulte
Institutional Investor magazine, in press
Republished here with his generous permission.

The challenge of the BRICs

The November/December 2012 edition of Foreign Affairs Magazine had an article called “How the BRICS Are Crumbling” by Ruchir Sharma (head of Emerging Markets at Morgan Stanley). The tone of the article seems off the mark. The BRICs {Brazil, Russia, India, China} are slowing because they are trying to slow credit growth due to the links of their currencies to the US dollar. They are trying to slow down credit growth while the West desperately uses zero interest rates to accelerate credit growth. So, the West and the BRICs are operating at cross purposes.

The BRICs countries have dollar-linked currencies, so when interest rates are zero in the West and high in BRICs countries they will be bombarded with capital seeking a higher return. This causes their currencies to appreciate, jeopardizing growth. Or, the BRICs countries must intervene domestically to force banks to slow credit growth as these banks fill with cash. Either way they encounter forces which cause their currencies to rise and credit growth to accelerate. This is a classic cocktail for a real estate bubble and accelerating inflation.

Brazil and China are experiencing the same phenomenon now. Both are essentially trying to slow down their respective economies, although China has been more successful.

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Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans

Summary:  A crisis strips away our pretences, the no longer true beliefs to which we clutch out of fear — from our unwillingness to face the future.   Today we have a fine example as Europe begs for loans from China and the other emerging nations.  The new world order emerges before our eyes.

America loves our status as a superpower.  Europe and Japan relish their status as great powers.  We are all broke.  America has borrowed trillions from the emerging nations, but retains the delusion of hegemony.  Now Europe faces its test, and turns to the new great powers for aid.  Not Japan.  Not America.

BRICS in Talks to Buy Euro Bonds to Help Ease Crisis “, CNBC, 13 September 2011 — Opening:

The BRICS major emerging markets are in initial talks about increasing their holdings of euro-denominated bonds in an effort to help ease the euro zone debt crisis, a Brazil government official told Reuters on Tuesday. The talks are still in a “preliminary stage,” said the source, who asked not to be identified because the negotiations were ongoing. The BRICS countries are Brazil, Russia, India, China and South Africa.

With almost 3 trillion euros in reserves, the BRICs have the ability to rescue the European Monetary Union (i.e., BRICs means China plus the others; China’s reserves are almost 3x the other’s combined total).  Doing so would rebuild the global financial system, creating at last a system to replace the long-dead Bretton Woods framework.  But what would the BRIC nations get from this deal?

What do they want?  Probably leadership, or at least a voice commensurate with their growing power.  The BRICs have 14% of the votes in the IMF.  Increasing that would be a logical step, one that’s inevitable eventually.  That’s probably the least they will ask for.  As Europe’s crisis seems almost certain to deepen in the next few months, we (or at least western governments) will soon see their demands.

My guess:  the price might be hidden (much like the deal settling the Cuban Missile Crisis), but it will be high.  Perhaps very high.  The BRICs have no need to hurry, as Europe’s need for loans will only grow — unless (until) its leaders abandon for now the unification project.

Putting the above in perspective

The BRICs are a disparate group.  Very different internal conditions, few common interests, no signs of acting together.

China remains a poor nation, despite its rapid growth.  For example, despite China’s high levels of investment (too high say critics) it’s per capita capital stock is aprox 1/8 that of the US (at PPP, per GaveKal), aprox 1/5 that of Japan (where Japan was circa 1970).

The growing in the BRICs –esp China — lies in the future.  The shift of power has just started.  America’s political dysfunctionality accelerates that process (as our rich increasingly work to further concentrate power and wealth rather build America).

For more information

For all posts about this, see the FM Reference Page End of the post-WWII geopolitical regime.

About China:

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China moves to the center of the world. America moves to the edge

American tend to see ourselves as white knights.  Selflessly defending nations like the EU and Japan that will not defend themselves.  A force for morality — banning bribery, pushing feminism and other western values (which we call “human rights).  Meanwhile we beg for lower oil prices and borrow like an tramp on a street corner.

Much of the world finds this a pain in the ass, but until now has had no alternative leader.   Someone to provide leadership — political and economic coordination, loans and aid, military protection — without America’s moralizing, without America’s erratic behavior.  Just business.

There was no alternative leader.  Until now.  And the shift of leadership has already begun.  In the daylight.  In the news papers.  Today’s reading is from the Financial Times.  As usual it accurately reports events but remains clueless about the deeper causes.

America is losing the free world“, Financial Times, 4 January 2010 — Excerpt:

Ever since 1945, the US has regarded itself as the leader of the “free world”. But the Obama administration is facing an unexpected and unwelcome development in global politics. Four of the biggest and most strategically important democracies in the developing world – Brazil, India, South Africa and Turkey – are increasingly at odds with American foreign policy. Rather than siding with the US on the big international issues, they are just as likely to line up with authoritarian powers such as China and Iran. The US has been slow to pick up on this development, perhaps because it seems so surprising and unnatural.

… The latest example came during the Copenhagen climate summit. On the last day of the talks, the Americans tried to fix up one-to-one meetings between Mr Obama and the leaders of South Africa, Brazil and India – but failed each time. The Indians even said that their prime minister, Manmohan Singh, had already left for the airport.

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Today’s hot rumor: Fisk’s story about a conspiracy to wreck the US dollar

The demise of the dollar“, Robert Fisk, The Independent, 6 October 2009 — “In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.”

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within 9 years.

This is unlikely for many reasons.  A few quick ones…

  1. Some of these nations have no reason to risk destabilizing the USA.  Esp the Saudi Princes.
  2. Some of these nations have no reason to risk destabilizing the global financial system. Esp.  Japan.
  3. Many of these nation have leaders who are some combination of cautious, slow, reactive, and incrementalists.
  4. Something of this scale would be almost impossible to keep secret 2 days after the first discussions.
  5. If multiple Hong Kong banking sources knew it, their fingerprints would be all over the US dollar — as they shorted it to the max.

The only thing giving pause is Fisk’s reputation.  While strongly anti-American, he is no pilgrim — and he’s well-wired in the Middle East.

(2)  Memos from the 1970’s, similar fears

At Zero Hedge are two memos from the Carter Administration discussing the possibility of oil being priced no longer in US dollars, but the IMF’s special drawing rights.   The authors:

  • Henry D. Owen, Special Representative for Economic Summits
  • Anthony Solomon, former Undersecretary of the Treasury and President of the New York Fed

During this period there were concerns that the US debt could no longer be financed in dollars, but that (like 3rd world nations) we would have to borrow in real money.

(3)  Recommendations

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