Back on September 7, 2022, we wrote about the beginnings of a movement known as BRICS (Brazil, Russia, India, China, and South Africa) in an article titled BRICS and Yen. We also did an earlier financial article on July 25, 2022, titled Far Away Events Matter. In both articles, we cautioned that China and Russia were spearheading a movement to transition away from the dollar. There are several geopolitical reasons for them to go in this direction, and this movement is rearing its ugly head repeatedly.
Asleep at the Switch
Our U. S. Government financial experts dismissed the BRICS movement as a moribund and unproductive effort. They considered unseating the dollar as the world’s reserve currency idiotic and a waste of time. Yet, we must remember that these experts, despite their credentials, have had their fair share of misjudgments. They failed to forecast the recession, labeled it as transitory when it arrived, considered Modern Monetary Theory as plausible, and believe inflation will be tamed by the end of the year. The world of finance is a complex and ever-changing landscape, and it’s crucial to remain vigilant and open to new possibilities.
Unable to connect the dots with central banks buying gold in record quantities, sanctions against Russia, tariffs against China, the Silk Road Initiative, onshoring of technical production, the Inflation Reduction Act, record deficits, Ignoring threats against Taiwan, funding the Ukraine, and a whole host of other idiotic moves in Washington, these informed economists took the Alfred E. Newman approach to changes in world economic trends. I guess the economic analysis is beyond their spreadsheet!
BRICS Continues to Move Along
What has happened since we last wrote about BRICS? Many, many things have changed in the world order. The war in Ukraine has lasted much longer than Russia thought possible, pushing China and North Korea to aid Russia with military and raw materials and commodity purchases. The Silk Road Initiative has continued, with many countries in Africa and Asia becoming entangled in the Chinese lending web. Green initiatives keep ignoring the conflict with China and pushing for more transition efforts, with politicians in the west too frightened of children to push back. Add to this mix the economic woes in China and you have a toxic brew.
Additionally, our national debt has spiraled to a level where we and others are beginning to question the dollar’s long-term position and stability. The international rating service Fritch dropped the U.S.’s credit rating, citing long-term prospects and continued spending with increasing debt service loads. This move alone will add more to the taxpayer burden than the sum of many of the other missteps. Unlike other world events, this was entirely within our control, and we fumbled the ball.
Our politicians are always focused on the next reelection cycle and seem to forget that China is the master of the long game. China will sacrifice people and short-term treasures to achieve its long-term goals. As a totalitarian state their officials do not have to stand for reelection, so they do not care about internal or external opinions of their actions. Accusations of genocide, unfair trade practices, pollution, intellectual property theft, and false financial reporting are interesting but short-term inconveniences. The recent collapse of Evergrande is notable but a passing blip on their radar screen.
Friends of BRICS
Africa now seems to be the focus of the BRICS initiative, with meetings of the “Friends of BRICS” now becoming a catalyst for national interest. African nations are often corrupt, and many need financing for infrastructure projects. China stands ready to help with both, always with strings and long-term goals. There was a BRICS conference in Johannesburg, and it is no longer just the first five nations. Today, China and Russia aim to expand from the first five countries to include many others. India and Brazil may be hesitant, but they may also be dependent on China enough to go along. South Africa seems to be along for the ride as the supplier of precious metals and diamonds for monetary backing, and their recent elections will have them in a state of unrest.
The “Friends of BRICS” group may be as large as forty nations. Many of these have been allied with the United States for decades but seem receptive to change in the world financial order. To bring this into perspective Iran, Saudi Arabia, The United Arab Emirates, Cuba, and Kazakhstan all seem interested. Others, such as Egypt, Argentina, Bangladesh, and Indonesia are all showing interest.
I feel the slow tick of Chinese water torture. While we are sitting home worried about pronouns, gender fluidity, green energy, and Covid, world alliances may very well be reshaping around a BRICS-led coalition. I have seen estimates as high as 75% of the world’s population within the BRICS coalition if they expand. China and India alone comprise a significant portion of the world’s population. BRICS also gives China cover as just another member of this group, but it is China-led with Chinese objectives.
Currency Backing
Many see the possibility of any currency being backed by a precious metal as completely out of the question. I believe they are missing the point. With U. S. debt spiraling out of control, the dollar is vulnerable to new ideas and new forms of currency backed with something, anything. The massing of gold by central banks, and the addition of South Africa to BRICS is not an accident. There is the real possibility of a fractional backing of a currency or Government bonds. Either would bring into the discussion “Do I want a currency backed by nothing, or a currency partially backed by something?” For some of the younger generation, cryptocurrencies with no backing, no logic, and no country of origin are preferable to the dollar. There is a message for our politicians in there somewhere.
To make matters worse, Japan and France have hinted at an interest in the BRICS initiative. Japan’s economy has been on life support for decades with a manipulated currency and GDP. France, well is France, with socialists at the helm and no real financial direction. But a breakup of the EU would be possible with the right financial failures at the right time. The group of socialists across Europe has pushed many nations to the brink of financial collapse. If the EU were to break up, then some might lean toward BRICS as a solution, especially if China is offering debt relief. Many elections in Europe are now shifting individual nations back to the right, and this will create unrest.
Enter Our Friends at BIS
Another link in this chain is our friends at the Bank for International Settlements. We have reported on them in the past and know they are working on new international payment systems. Their current goal is to lead the charge for a Central Bank Digital Currencies (CBDC) electronic settlement system. They are already testing a swap of international settlements, and it looks like they aim to make the settlement instantaneous and currency-neutral. If they pull this off, the dollar’s reserve currency status is in real jeopardy because settlement can be in any instrument with no intervening common currency. They might denominate in dollars as purely a counting mechanism, but not the ultimate settlement.
It might not be the dollar’s stability but technological innovation that kills the need for any reserve currency. I feel an AI connection here, and it is unsettling. An AI international settlement system would be incomprehensible, subject to manipulation, and uncontrollable.
Basel IV
Another wild card that our financial leaders overlooked was the losing quadfecta of inflation, rising rates, bond values, and banking capital. Because of the flood of stimulus money, banks have been holding massive quantities of Treasury Bonds of various maturities. Everything was fine until Fitch started mentioning Basel IV, and the FED finally mentioned raising capital requirements in our largest banks by anywhere from 16% to 19%. The banks panicked and started a round of early talk show speaking sessions to convince the public and Wall Street that everything was fine. Nothing to see here!
Under Basel IV, banks would have to recognize unrealized bond losses. For some of our largest banks, this would wipe out a significant portion of their capital. This would require ceasing dividends, raising new capital, and other measures to raise the safety net for their losses. For some of the banks outside the top ten, this would close the doors for good. Throw in unrealized losses on commercial real estate and we will be in for another round of bank bailouts.
Washington Is Clueless
If we are looking for leadership from Washington, look elsewhere. I am convinced that most in Congress cannot balance a checkbook, much less understand international finance. The recent move to freeze Russian assets in the United States initially looked brave. It has triggered a new round of de-dollarization discussions and fear of the United States as a haven for assets. As much as we might dislike Russia, seizing its assets has recuperation far beyond that one nation. This fear and dislike is spreading throughout smaller nations and pushing them toward BRICS.
The dollar is king for now, but nothing lasts forever, as Janet Yellen and Jerome Powell seem to think, or at least gaslight in public. We have lost the major purchasers of our debt (bonds), and they are not returning. Smaller nations are not fleeing to the dollar; they are fleeing from it.
If Yellen and Powell are for it, be against it. These two do more gaslighting of the public on our national finances than any two in history.
Closing Thought
At the end of the morning briefing on the show Hill Street Blues, Sergent Phil Esterhaus (Michael Conrad) always closed with the phrase, “Let’s be careful out there.”
If there was ever a time for caution, this is it. I am just concerned that everyone sees it but Washington politicians who are preoccupied with everything but what is going on outside our borders. China has us where China wants us, and we need to wake up. Global shifts have recognizable trends, and BRICS is a good way to track and understand that shift. We will write more on this in coming weeks.
Resources
21 Countries, 200 Mayors To Attend BRICS Forum in June 2024, Cryptorank, cryptorank.io, June 18, 2024.
Bank for International Settlement BIS – All You Need To Know, Finance Management, efinancemanagement.com, Undated.
BRICS Draws Membership Bids From 19 Nations Before Summit, by Paul Vecchiatto, Bloomberg, bloomburg.com, April 24, 2023.
BRICS nations to meet in South Africa seeking to blunt Western dominance, by Tim Cocks, Reuters, reuters.com, August 17, 2023.
BRICS meet with ‘friends’ seeking closer ties amid push to expand bloc, by Wendell Roelf, Reuters, reuters.com, June 2, 2023.
China says it wants to expand BRICS bloc of emerging economies, Reuters, reuters.com, May 19, 2022.
More Than 40 Nations Interested in Joining BRICS – South Africa, by Reuters, usnews.com, July 20, 2023.
Over 30 countries queue up for BRICS membership, By Jai Hamid, Cryptopolitan, msn.com, February 12, 2024.
