On June 16th, Brazil, Russia, India and China, four of the world’s fastest growing nations, will summit in Russia. The BRIC nations come in to the meeting producing about 20 percent of world GDP. Their economies have been growing, while developed Europe and the U.S., currently representing 28 and 25 percent of world GDP respectively, are in economic decline. After the current global slowdown, by the end of 2011, the BRIC nations will be producing closer to 25 percent of world GDP. The BRIC nations want more control and more global influence…but individually, their strengths and their goals differ.
China and India want to continue to export manufactured goods and services to the developed world, and while they desire more political power, they want to gather it slowly without a big show and certainly without bellicose rhetoric. China and India realize that with 35 percent of the world’s population between them their time on the world stage has come. They are confident of their growing economic and political power today and in the future, either alone or as part of the BRIC group.
Of the BRIC nations, Russia is by far the weakest economically. When commodity prices fell in the second half of 2008 and into 2009, Russia experienced a depreciation of their currency. Russia wants to be a political power and have influence in the development of global trade in commodities and energy. However, they are burdened with an ineffective an autocratic government. Many of the powerful and wealthy oligarchs who manage the country, manage it to benefit their own best interests, often ignoring the best interests of the Russian people.
Brazil desires to continue their exports, but China is their big customer, so they want to do more trade and economic joint ventures directly with China without having to go through multi currency protocols.
WHY BRAZIL, CHINA AND INDIA WANT A NEW RESERVE CURRENCY
Brazil, India and China wish to create a deep and liquid market for economic and business dealing without resorting to the use of the current world reserve currency—the U.S. dollar. In order to begin this process, they have done bilateral direct business and currency swaps, and would like to gradually create a new world reserve currency using a basket of several currencies to facilitate trade. Such a facility might be an intermediate step before the Chinese Yuan becomes the world reserve currency in the more distant future.
Economic theorists will disagree about the efficacy of a multi currency reserve currency. We will not argue on this point. However, there is no question that the eventual creation of a global reserve currency made up of one or several currencies other than the U.S. dollar would facilitate BRIC members’ best interests in both trade and the development of their political power. This is why articles like the following are appearing with more frequency.
In short, the world realizes that the U.S. dollar is in danger of losing the mantle of the world reserve currency at some future date, and these statements and articles are part of along process to sell the idea of another type of reserve currency to global decision makers. Each of the events described in this article represents a chink in the armor of the U.S. dollar.
CCB head looks at renminbi trade move
By Henny Sender in New York
Published: June 8 2009
Guo Shuqing, chairman of China Construction Bank, said his bank, the second largest in China, was exploring offering renminbi-denominated trade finance credit in a practical step that could make the Chinese currency more widely used internationally.
His voice, the first from the head of a large Chinese bank, joins a chorus from senior government officials on currency matters that together reflect concerns about the stability of the US dollar and several efforts to promote the use of the renminbi more widely.
On the eve of the G20 meeting about two months ago, Zhou Xiaochuan, head of the People’s Bank of China – China’s central bank – published a paper proposing to replace the dollar with an international reserve currency and expanding the use of special drawing rights, a unit of account of the International Monetary Fund.
Mr Zhou’s proposal came after Wen Jiabao, premier, called on the US to guarantee the safety of dollar-denominated Chinese assets. About 70 per cent of the $2,000bn or so in Chinese reserves are in dollar-denominated assets.
In addition, the Chinese have negotiated a series of currency swap arrangements with seven countries – including, most recently, Argentina – which would allow these trade counterparties to settle some trading bills in renminbi. China has agreements with other countries, including Iran, to not use the dollar in their trade.
While most developments have been theoretical, Mr Guo said he was in talks with the PBoC and others to develop the concept.
The Chinese desire to diversify away from the dollar comes as many oil exporters have expressed a similar wish. Venezuela has frequently complained about the dollar and last year Kuwait abandoned its currency peg with the dollar.
A RESERVE CURRENCY…SO WHAT?
Although it is a complex subject, we will touch lightly on the requirements of being a reserve currency. Historically, being the world reserve currency has had major benefits and major costs. The country is in a position to influence world events and the outcome of world conflicts. This has required maintaining a big military and covering big military expenses. As a result, the country is in a position to spend money with more influence than others, and it is more likely than others to overspend beyond its income. These characteristics have been present for the U.S. for some time.
We expect the coming BRIC summit to provide some verbal fireworks. The fireworks will come primarily from Russia, which likes to make the U.S. look bad whenever possible, and Brazil who exports mostly to non-U.S. customers and wants to be respected for the better economic management they have displayed in recent years. China and India will be more circumspect and will be careful not to say anything so inflammatory as to anger their good trading partners in Europe, Japan, and the U.S.
Should current growth trends continue, it is obvious that the in a decade, BRIC could have close to 30 percent of the world output. In our opinion, there are three well managed BRIC economies which will grow much faster than the developed world. China and India could replace Europe and the U.S. as the world economic engines later this century.
Russia is the weakest of the four BRIC nations and we do not look for them to have good economic growth until they get away from the corrupt and badly managed oligarchic structure they currently employ.
INVESTORS AND CAPITAL FAVOR BRICS IN 2009
Along the same lines, investors are quite aware that emerging stock markets, including the BRIC markets, have greatly outperformed the developed stock markets of Japan, Europe, and the U.S. thus far in 2009. Capital goes where stock markets are rising and thus Brazil, China, and India are finding no shortage of capital while the developed nations are experiencing shortages of capital for many projects.
GM —AN AMERICAN POLITICAL FOOTBALL
President Obama paid a political debt and in our opinion, made a political mistake by favoring the workers and forcing the bondholders of GM to lose 70 percent of their value, without the benefit of bankruptcy court proceedings that would surely have allowed them to retain more value. The president should have remembered that many government employees, city and state governments, and Democratic voters owned GM bonds in their retirement accounts. They resent the fact that their tax dollars were used to bail out GM and now they are paying a double price. Obama is now closely attached to GM in the public mind, and if GM fails, his political capital will be seriously impaired.
WORLD OIL DEMAND IS RISING, AND SUPPLY SIMULTANEOUSLY FALLING
It was reported on June 6th by the Associated Press “World demand for oil to double by 2050 according to Jeroen van der Veer CEO of Royal Dutch Shell”. We could not agree more. The article states that
“Despite the current economic crisis he said demand was projected to double by 2050 as the world population grows from 6 billion to 9 billion by that time. He said oil corporations should invest now in technology and develop new sources to reap benefits when the recovery comes.” “The oil and gas industry cannot supply all this additional demand… this means the next price spike is in the making.”
We have reported many times that world oil supply has peaked and will continue to decline for the foreseeable future. With rising demand and declining supply all available sources of energy must be considered and, when economically feasible, employed.
Thanks for listening.
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