The Zoltan Poszars of today have either skipped all their lessons in their 20th-century history class, or they are missing out on the most basic and fundamental facts of the global economy. Either way, they are wrong as they have always been.
There is a lot of hype on BRICS and this hype has been going on since early this year with a campaign against the US Dollar and Russia’s proposal to create a new BRICS-gold-backed currency. The proposal didn’t go through for many obvious reasons, but India’s opposition to it was public. I’ve previously written about how China’s economic growth will slow down while India’s will increase. India has rejected Russia’s proposals for a new BRICS currency and has also opposed Russia’s requests to pay for its oil purchases in Rubles. The logical choice for the world’s global trading currency is the US Dollar and this will not change. For all the talk and bluster, US government debt is still the most popular and biggest asset in the world and BRICS nations love it.
Meanwhile, capital outflows from China are still going strong while China is facing an economic downturn and the Hang Seng stock market index is at the same place it was in 2006.
No one is excited about BRICS except for the political leaders promoting it. According to markets, BRICS is more of a non-event than anything else.
Let’s make something clear. BRICS is not a new invention. For those who don’t know history and are seeing the world through the lens of Zoltan Poszar, maybe you should know that in the 20th century, we had something called the Cold War, and during this Cold War, there were times, such as in the early 1980s when people believed the official statistics of the USSR that their economy was as large as $2 trillion in GDP, close to the US at 1980 at $2.87 trillion. The USSR ended up collapsing.
The charts with China’s GDP per capita and their comparison to the US are also similar visually.
And there wasn’t just China and the USSR. During the Cold War, we also had the Non-Aligned Movement which included India, Indonesia, Egypt, and sometimes even China trying to bring in its influence, and of course many African countries. All of them ended up turning to the common denominator: the US Dollar.
Has anything changed since the Cold War that would make an international coalition against the US Dollar feasible and potentially successful?
The simple answer is no. The US Dollar has only grown in strength since then and China’s rise comes only thanks to its access to US Dollars and Western free markets. China is not an economy that can stand on its own as a gravitational political and economic center. China has used more Yuan than the US Dollar in its foreign trading for the first time in many years, this year, but this is only because Russia is selling its energy to China for Yuan with China also re-selling some of this to third parties. So, Russia is basically exchanging its foreign US Dollar and Euro inflows for Chinese Yuan. Guess how good that change has been for Russia. The Ruble has crashed.
India is smart enough not to follow suit. Those who trade with China in Yuan like Pakistan is because they have restricted options. The best option remains the US Dollar which gives you a global reach and access that the Yuan can never give you. What can Russia do with its Yuan? Buy Chinese products. What can you do with a US Dollar? You can buy everything and basically, everything you would like.
The Chinese Yuan is not competing with the US Dollar. The Chinese Yuan is competing with the Indian Rupee and India would like the Rupee to be a new global currency. The Rupee can dominate the Yuan if India’s economy keeps growing and this is logical. The Rupee is floated freely on the exchange rate while the Chinese Yuan is not and the Yuan is also restricted with tight capital controls. The Chinese Yuan is a currency designed for the Chinese in China – it is not a global currency and doesn’t have those characteristics.
Let’s say, Saudia Arabia, India, and Russia have a lot of Chinese Yuan. What will they do with it? They would have to spend it in China – they can’t buy products from Europe or the US with it. What does China do with that Chinese Yuan? It spends it again in its own economy – no one accepts the Yuan for their products except for Russia and the countries that do so because they have no other options. Apparently, China is a global economic leader, but a leader of rogue states that don’t have access to the US Dollar.
Would speculators and capitalists buy the Chinese Yuan if China lifted capital controls and floated the Yuan freely? Maybe so, but that would be a radically different China from what it is today. China is currently going through a very aggressive authoritarian phase, with Xi Jinping purging his internal critics including the Foreign Affairs Minister himself. New controls on the gathering of information by companies have been put in place, while China is also banging the drums of war. China is an increasingly authoritarian country and this will not bode well for foreign capital investment and more economic growth. India and other South-East Asian countries like Vietnam and the Philippines will keep stealing the show.
I could go on, but my dogs need their walk. In conclusion, BRICS will not change the dynamic of global finance and trade, and watch out for China’s economic descent while India rises. Here below I attach the new BRICS logo.
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