If you hear the financial and economic news, you’ll periodically hear the term BRICS. It doesn’t pertain to a building material – although they are trying to build something – and it isn’t something with which to hit – although we’re likely to get whacked. BRICS is an acronym for a five nation consortium, each of which has significantly growing economies as well as a wealth of natural resources, such as people, oil, and gold. These five are Brazil, Russia, India, China and South Africa and while each is a regional power in its own right, they are now cooperating to further their own interests and create a new monetary system that removes the dollar as the global reserve currency – the linchpin. While the most recent meeting in Hainan, China on April 13 didn’t gain huge press, there are distinct consequences that people should understand and these revolve around the dollar.
Remember that the dollar is both the global reserve currency and a fiat currency. That first means that since the end of the Second World War, all of the world’s international transactions and business have been settled in dollars, even when they’re between two entirely different countries. This has given us a freedom from the kind of worry with which other nations must contend in terms of their currency’s strength and has made international business that much easier. There have been other global reserve currencies throughout history, such as the English Pound and the Roman Denarii and what also tends to accompany a global reserve status is military power. In the other cases, think of the Royal Navy and the Roman Legions.
What a fiat currency means literally is there is nothing backing the currency except for the user’s faith (the Latin fiat) that the money has any value. There’s neither gold nor silver nor any other natural resource backing the dollar, except perhaps for the American taxpayer. Literally, what gives the dollar value is the belief among the rest of the world in that phrase on the buck backed by the full faith and credit. These words have been on the dollar for a long time, certainly longer than we’ve had a $14+ trillion national debt and annual deficits in excess of $1.2 trillion, and because we Americans generally suck at math, the rest of the world has already figured out what we’re now starting to understand: how in the hell do we actually pay this back, ’cause God knows we can’t agree on where to cut anything without upsetting somebody.
What’s now apparent to the world is that the US Federal Reserve plans to handle this nominal debt load by repayment with greatly depreciated dollars and since they’re giving us stuff like oil for what they consider to literally be worthless promises, they’re all starting to look around for the exits so that they’re not left holding a flaming bag of horsepuckey. This is where the BRICS come into play as they are growing national economies with abundant natural resources, whether it’s oil (Russia and now Brazil), gold (China and South Africa), minerals (South Africa, China, Brazil, Russia, India) or people (China and India). They don’t want to give away their resources for flaming bags of horsepuckey and they’ve also come to realize that because they collectively hold so many dollars and US Treasury bonds in their foreign exchange reserves, any sudden moves that tank the dollar will literally wipe out their foreign exchange reserves in a heartbeat.
So what to do? Their response, provided last week, is to stop settling their mutual transactions with dollars. If China buys oil from Russia, the transaction will be settled in Rubles and Yuan instead of dollars. When Brazil sends raw materials to China, the transaction will be settled in Reales or Yuan. Because these five nations are going to account for an increasing share of the global economy in the next twenty years – and China is expected to overtake the US as the lead economy in about fifteen years – the defacto effect is to grow their way out and render the dollar meaningless. It’s akin to a half-drowned and freezing Kate Winslet telling Leo DeCaprio I love you and I’ll never let you go…as she lets go and he begins his slow descent to sleep with the fishes. As this occurs, expect other nations to begin settling their debt in other currencies until the US is left having to settle debts in other currencies as well; the painful moment will occur when the oil producing nations no longer settle oil transactions in dollars, at which point we’ll truly be in a world of hurt.
Remember that capital is the blood flowing through the global economic body. What doesn’t receive blood withers, and those entities that can’t obtain capital wither likewise. But what scientists have understood for quite some time is that when there’s a blockage that prevents the efficient flow of blood in the body, the body can respond by creating capillaries and routes to bypass the area and deliver the blood. In effect, this plan by the BRICS is precisely that: the creation of new financial capillaries to assure that capital flows to the remainder of the global economic body.
While you can become angry with the nasty furriners for their tricky ways, the reality is that they’re doing what they must to protect themselves from our own foolishness. We’ve permitted our government to live far, far beyond our means and we’ve sat back while the Federal Reserve System – which is actually owned by the banks and not the government – has been allowed to flood the world with dollars that are increasingly worthless. Indeed, what’s the point of having a signed Babe Ruth card if all that Babe did in his retirement was sign cards like bankers signing foreclosure documents – quickly and in volume? Everybody has one and you might as well clip it to your bicycle spokes.
So what does this mean for us?
- In the next number of years, expect that inflation really does take hold. Oil, and all things oil-related, will rise. Likewise with other products, such as clothing made from cotton, leather products, metals and all the way down the line. This will also be the case for food.
- Don’t look for any serious rises in wages since we’re going to be competing with lower cost labor in these other countries, and there is alot of labor there.
- We have to seriously review how we travel and our mobility. At this moment, we’re paying just below $4/gallon and Europe is paying the equivalent of $9/gallon and even if we get a handle on our use, the cost will rise significantly still.
- As our dollar decreases, and we have to pay higher interest rates to attract lenders, government spending will be so taken up by interest payments that there will be no choice but a significant retrenchment of government spending. We’ll have to fully redefine the social contract amongst the various interest groups and decide what we can and cannot afford. Regardless of what you think of Paul Ryan, his recent budget plan is a first crack at this nut.
- We’ll have to rethink our consumption based economy model. Do we really need to spend this for something in order to be happy? Is there something besides stuff that gives us meaning?
- We’ll have to reconsider the meaning of the term middle class. I increasingly think that we’ve lost sight of the real meaning of the term and have simplistically equated it with consumption and the ability to consume.
- We’ll have to review our currency and our monetary authority, the Federal Reserve System. Should we place something as crucial as the nation’s monetary policy and supply in the hands of a privately-owned body such as the Fed? (And if you wonder, think about a good part of what’s gotten us here in the first place).
There are a massive number of issues to consider, so many that the body politic is going to truly undergo a shock in the next number of years. The changes will be serious and frequent enough that the American family is going to be buffeted as it hasn’t been since the years of the Great Depression, so hang on and put on your helmet.
The BRICS are going to hurt.