Follow The Yellow BRICS Road (part 1)
Follow The Yellow BRICS Road (part 1)
Dollar Resentment And the Global South's Hopes
Media Overdrive
In some circles of the financial social media, a LOT of speculation is going on regarding the possibility of an “offensive” move of the BRICS group against the dollar.
It all started with regular mention by BRICS’s officials of a potential “commodities backed trade currency”, with Russia, followed by China, the most insistent on such eventuality.
What this would look like has been the topic of intense speculation. With the incoming extension of the BRICS and other China dominated association like the SCO (Shanghai Cooperation Organization), the BRICS are turning into a model of commodities powerhouses (Russia, Brazil, South Africa, Iran, Saudi Arabia, Argentina) + China + India.
I previously commented how India often turns out to be the odd man out in the BRICS alliance: not industrialized enough to take over the role of China nor a resource exporter. This is a topic I discussed in deeper detail in a previous article:
From BRICS to BRICA
With the coming BRICS meeting in early August, I think it is a good time to discuss this possibility, broken down in a few parts.
In the last part, paid subscribers will learn about the potential for success or failure of a new global trade currency and system and the golden brick road leading to it.
De-dollarization? What De-dollarization?
De-dollarization is happening, but it’s a process, not an event. This is why you can read polarized opinions that manage to be BOTH wrong.
Yes it is happening, following the seizing of Russia’s foreign reserves, making everyone in Asia, South America and the Middle East ask the uneasy question, “Am I next?”.
But it is also a slow moving thing, so most readers and commentators not seeing it happening 3 months later can claim it was overblown and will never happen.
While Russia losing most of its international reserves was the trigger, the root of the “Global South’s” disaffection with the dollar runs much deeper. It is due to how the dollar system works in cycles of dollar undervaluation followed by overvaluation.
The Dollar Crisis Cycle
I’ll explain the process briefly and in simplified terms.
The US manages its dollar with artificially low interest rates, which triggers a credit boom not only at home but worldwide, especially in countries with poorly managed currency.
This is because financing is hard to get for companies in Brazil, Indonesia, etc…, and they more often than not need dollars to acquire machinery, pay suppliers, acquisitions, etc… Cheap dollars are easier to access and reduce their cost on this capital.
After a while, the world is awashed in dollar denominated debt.
But this is especially true for “third world countries”, which need foreign capital.
And then the US decides unilaterally to rise its interest rates, usually in order to cool off a too hot domestic job market or inflation.
This is done to reach local goals, but has far reaching consequences.
The decision making process only looks at US metrics, and pretends that any effects happening to foreign partners are not the Fed’s or the US government’s problems. This mindset has been immortalized by the tactless but at least honest words of Richard Nixon's Treasury secretary John Connally Jr.: “The dollar is our currency but your problem”.
Suddenly, the flow of foreign investments and dollars debt stops for the companies and governments of the Global South.
Many emerging markets corporations have now a lot of dollar debt. But with the dollar strengthening, they see their debt increasing rapidly, at least in local currency terms. And with rates rising, the interests on that debt rises even quicker.
In parallel, the sudden drying up of foreign capital inflow causes a recession, reducing corporations’ earnings.
The combination of quickly rising debt, both principal and even more quickly interest payments, AND recession can push many companies into bankruptcy.
A falling national currency + recession + waves of bankruptcy means there are no local buyers for distressed assets, not even the state.
However, US corporations, and to some measure European corporations, with still good access to capital + earnings in USD + a strong dollar can buy foreign assets easily.
So what initially was looking like a good deal: “look, cheap capital to develop your economy” more often than not turns into a trap: “you’re now bankrupt, and we will buy your stuff at 30% of its value”.
It is worth mentioning that the last “side effect” is viewed by a majority of decision makers and economists in the Global South as anything BUT a side effect. To them this is the real goal of the dollar policy. It is often referred to as “harvesting”.
Pay attention that for the purpose of the South’s perception of the dollar system, it does not matter if this opinion is true or not.
This pattern caused repeated international debt crisis, sometimes turning into full blown security crisis or national collapses, including the 1970s Latin American debt crisis, the 1994 Mexican peso crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis and the 2011 Arab Spring.
More recently, the collapse of Sri Lanka and maybe soon Pakistan can be blamed on the same phenomenon.
Impossible To Break?
Now with that dollar cycle having wrecked in turn most of the world, is it really a surprise that a lot of resentment has built up against the Dollar system?
And from the South’s point of view, each time they complained about it, they received the response a bully would give: “So what? What are you gonna do about it? Pay up!”
And truly, this was THE question.
South American governments that turn anti-American tend to not fare well, just look at the long list of coups or the fate of Cuba and Venezuela.
Asian countries could not forgo the first destination for their export driven economies.
And both Saddam Hussein and Qaddafi tried to sell their oil in euros or turn to gold for trade, which, it turns out, is very, very bad for your personal health if you are a Middle East dictator.
And anyway, at the end of the day, these countries are really dependent on foreign capital to keep running smoothly. To stop this dependence, they would need to quit the dollar system. But to survive quitting it, they would need to not be dependent, a true egg and chicken problem.
A Dragon Challenges The Eagle
What changed is the emergence of serious challenger against the US. If push comes to shove, it is dubious that Brazil, Iran or even the EU could challenge the US power. They are either too weak, too divided or their elite too connected to Washington to mount any organized rebellion.
And they would always fail from strategic weakness, like completely nonexistent industries for air defense, space access, chips, advanced tooling, etc…
But through a remarkably inept series of geopolitical blunders, US/NATO diplomacy have managed to make Russia do just that. And the problem is that through even larger ineptitude, they convinced the Chinese leadership they are next, as soon as Russia is crushed. The persistent hostility to Iran for a few decades added a third player with nothing to lose.
Together, the Eurasian Tripod of Russia + China + Iran has not much to lose against a US empire determined to make them kneel.
In theory, this could be the trigger for a new Cold War, with the Eurasian Tripod remarkable similar to the old Soviet Union + China. The problem is that from 1945 to 1990, what Eurasia had to export was communism. Not really the most efficient of successful ideologies. So understandably, a lot of foreign leaders preferred a broken dollar system to the wonders of real communism: bloody revolutions, massacre of the national elites, labor camps, and famine.
This time, the offer is a lot more attractive: infrastructures, education and technology. From a leader, China, which has demonstrated that it was possible to go from rural and poor to industrial world superpower in less than 50 years.
And which is communist only in name at this point, the “Chinese characteristics” having almost fully dissolved communism.
Now every one in the Global South wants to learn from and imitate the Chinese dragon.
In the following parts, I will first discuss how the BRICS could challenge the dollar and actively try to break it.
Why it will most likely take longer than just the next August BRICS meeting to do so.
While also being a possibly unstoppable event, with only the scale of its success to be debated.