The BRICS Bank: An International Anti-Dollar Alliance?

In a New York Times editorial, we read:

On July 15, the leaders of Brazil, Russia, India, China and South Africa — the BRICS group of nations — announced the creation of the New Development Bank aimed at challenging the American-led global economic order. The United States and Europe should take note that these nations are determined not to be constrained by Western institutions that fail to accommodate their ambitions.

The BRICS contain 40 percent of the world’s population and account for 20 percent of global economic output, yet only Europeans and Americans have led the I.M.F. or the World Bank.

The bank will begin with an initial capital of $50 billion, rising to $100 billion, with a separate $100 billion Contingent Reserve Arrangement. The BRICS plan to bring in other developing countries in Africa and Asia, and they are talking about creating a regional-security alternative to NATO.

Perhaps you’ve read about this: the BRICS nations – Brazil, Russia, India, China, South Africa – are attempting to band together in support of a new monetary and trade union that will leave the West, most specifically the USA, out in the cold. Some have sounded the alarm, calling out the rise of BRICS as the decline of the West.

For example, in this article posted to Zero Hedge:

Soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington’s bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.

This is nonsense. I have absolutely zero concerns over the BRICS bank. Anyone fretting over the rise of the “anti-dollar” BRICS alliance is wasting their time.

Let’s think about these nations. The Brazilian Government is known for military coups d’etat, defaulting on the national debt multiple times, massive inflation, and socialist politics. Russia is an impersonation of a Western-style democracy and economy, but in reality is a bureaucratic kleptocracy with practically no economic output beyond what they can pull out of the ground. China is the World’s Largest Bubble, and the Chinese government cooks all the books; their economy is a basket case. And South Africa is a 3rd world nation, plain and simple, with little to offer beyond gold and gems.

India is the only nation in BRICS that I attribute a lot of optimism towards, as long as they don’t again significantly deviate towards Socialism in the future. India is growing. Indians are brilliant people. They work hard. They work off an established legal tradition. They don’t trust their own government or the government currency, which is why Indians buy gold in large amounts, and one reason why the Indian Rupee is such a troubled currency (It’s a marvelous thought process that I recommend heartily to the American citizenry). But India still has a long way to go. It’s not enough to carry BRICS.

Conclusion 1: A bunch of basket cases strapped together, which is what the BRICS banks will be, is still little more than a basket case.

What do the BRICS nations have to do with each other? How, if at all, do they interrelate?

Canada and the USA, each other’s largest trading partners, have over 200 years of freely conducted trade under our belts. We have similar culture. Our economies run similarly. There is complete trust between the two nations, in terms of defense. We share one of the world’s longest continuous borders. We have a lot to do with each other, and very little of it has had anything to do with direction from American or Canadian bureaucrats. It has been a highly successful mostly-Free Market arrangement.

None of the BRICS nations have anything comparable to this. Russia and China are neighbors, both of their governments share some level of moderate antipathy to the West, and that’s about it. Russia and China have very little to do with each other in any other way. In fact, I see mild enmity there; within the century, there is a genuine possibility that Chinese immigrants will simply take over Siberia. The Russian population of Siberia is dwindling, while the Chinese population is growing briskly.

India and China a share a border and some mild trade; otherwise, they’re geopolitical rivals. They both consider the other to be a nuclear threat. They both seek to become the dominant regional powers. This is not the basis for a sound economic partnership.

Brazil and South Africa, meanwhile, produce very little anything of value that is manufactured. Their major exports are agricultural and mineral. These things have value, but they aren’t unique to specializations within the Brazilian or South African markets. For that matter, neither does Russia. None of these nations are known for quality goods. Only China and India manufacture anything of value.

Conclusion 2: These nations are not very interrelated, outside government direction; in fact, there is enmity in a number of ways. This is not based on a Free Market arrangement, which is the only arrangement that can generate wealth.

At a meeting between BRICS leaders in Brazil, Russian President Vladimir Putin said “the international monetary system itself depends a lot on the U.S. dollar, or, to be precise, on the monetary and financial policy of the U.S. authorities.” No, it doesn’t. The US monetary establishment is not a unilateral hammer of God that can do whatever it wants. When discussing international matters, the issues always have two sides, and the dollar is no exception. The reason the dollar holds such a dominant position is because nearly all other central banks of the world want to keep their currency low against the dollar. It’s all about Mercantilism: the desire to stimulate one’s export sector.

All of the BRICS nations do this. All of them. All of their Central Banks buy IOUs from the US Treasury Department and hold them as reserves. It is their own choice how much they want to buy and hold. The more of these they buy, the less valuable their own currency becomes against the US dollar. This makes it cheap for the USA to import products from these nations, which is good for their export sectors, and is the essence of Mercantilism. They don’t have to do any of this. The Central Banks in these nations could stop meddling with the currency, at which time they would probably rise against the dollar and harm their export industries. Do you see what I’m getting at? These other nations are the ones who control the strength of the dollar, not the US government. Them, and the Federal Reserve.

The BRICS political leaders talk a big game against the dollar. But the monetary leaders at the Central Banks are working towards the complete opposite goal: keeping their own currency weak against the dollar. This is schizophrenia. The political leaders are espousing competition to the dollar, while the guys who are actually in a position to do something about it espouse submission to the dollar through their actions. The governments in these nations apparently do not know what they really want.

We always see photos like this in relation to BRICS:

BRICS

These are the political heads of these nations. But where are the guys who really matter: The heads of the Central Banks? When I start seeing photos of the BRICS Central Banking leaders holding hands and declaring an end to Mercantilism, then I’ll start taking it seriously.

Conclusion 3: All of the BRICS nations are dedicated to Mercantilism and are not serious about attacking the dollar. All of this big talk we hear from their political leaders is hot air.

Nothing about the BRICS alliance is based on a free market arrangement. It’s about Central Banks inflating their currencies away to stimulate exports. It’s about bureaucrats swapping commodities because they think they can allocate resources better than private owners can (“the fatal conceit”). Advocates and alarmists say they see the rise of a new monolith in BRICS; all I see is a hodge-podge collection of politicians and bureaucrats, attempting to centrally plan their international trade.

Do not be phased by anything BRICS-related.

 

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