BRICS Call For Dollar’s Demise

by Kevin D. Freeman on April 15, 2011

One of the hot investment trends of the past decade has been focused on the BRIC nations (Brazil, Russia, India, and China). The term was supposedly coined in 2003 by Jim O’Neil in a Goldman Sachs in a research report that suggested that these four nations would outgrow the United States economy by 2050. In hindsight, the call is considered prescient because these four nations have experienced dramatic growth even as the developed world has stagnated. The four began meeting together regularly even as Western investors provided significant investment capital.

The most recent summit just concluded in China. South Africa was added to the group, so now they are now as the BRICS. The five BRICS nations released a joint statement today taking firm aim at the U.S. dollar. Their stated goal is to replace the dollar as the world’s reserve currency according to a report by CNBC (http://www.cnbc.com/id/42584668):

“In a statement released at a summit on the southern island of Hainan, the leaders of Brazil, Russia, India, China and South Africa said the recent financial crisis had exposed the inadequacies and deficiencies of the current monetary order, which has the dollar as its linchpin.

‘The era demands that the BRICS countries strengthen dialogue and cooperation,’ Chinese President Hu Jintao said.

The BRICS are worried about the long-term fate of the dollar because of America’s large trade and budget deficits. They also begrudge the privileges that come with being the leading reserve currency – hence the call for a revamped system that is more stable.

In another dig at the dollar, the development banks of the five BRICS nations agreed in principle to establish mutual credit lines denominated in their local currencies, not the U.S. currency.”

Without a bit of perspective, this may all seem normal and expected. After all, the U.S. economy is moribund by comparison. We do have excessive government debt and the Dollar does appear to be at risk. The BRICS nations even blamed the rapid swings in commodity prices on the failure of the Dollar as reserve currency.

Take a step back, however, and examine some key facts:

  1. The excessive U.S. government debt now totals well over $14 trillion. Of that amount, however, nearly $4.5 trillion of that was accumulated AFTER the financial collapse in 2008. Prior to that, the rate of debt growth was substantially lower.
  2. Contrary to the claims being made, the dollar actually performed very well during the immediate crisis. In addition, the U.S. government and Federal Reserve made serious efforts to bail out many foreign banks, supporting the global economy at U.S. taxpayer expense.
  3. As we have demonstrated, much of the swing in commodity prices has been the result of foreign speculation. We have documented where Sovereign Wealth Funds were very active in the energy markets.
  4. The commodity speculation created a good deal of the weakness leading up to the 2008 economic collapse was clearly the result of rapidly escalating oil prices. The price of oil tripled in eighteen months, from January 2007 to June 2008, hurting the economy already hurt by the collapsing housing bubble.
  5. Much of the U.S. debt has gone directly to China. Yet, the Chinese have artificially pegged the Yuan to the Dollar resulting in huge trade surpluses.

What’s important to recognize is that this BRICS summit is following precisely what we predicted as a Phase Three attack on the U.S. Dollar. We said this in 2009 and the BRICS are following the script we expected. The summit confirms our concerns.

We believe that the addition of South Africa to the group is a clear signal of intentions. It’s not as if South Africa has the same economic characteristics or growth rate as the BRIC countries. From 1993 to 2010, the rate of South African economic growth averaged 3.27%. This is substantially below the 8%+ average long-term growth rate for the BRIC nations. So why include South Africa? Perhaps the strongest reason has to do with the fact that South Africa has about half of all the world’s gold resources according to estimates from the U.S. Geological Survey  (http://minerals.usgs.gov/minerals.pdf). If you were planning to replace the Dollar, it’s not a bad idea to have the world’s top gold resource on your side.

The official narrative is that the BRIC concept began as a spontaneous response to the fact that these nations were separately enjoying superior economic growth. Then, the global investment community took notice with the aid of Goldman Sachs. The reality, however, is a little different according to reports published in ISN Security Watch:

“A ‘strategic triangle’ between Russia, India and China was first suggested by former Russian prime minister Yevgeny Primakov in 1998. Initially, the “strategic triangle” concept was dismissed by Beijing, while New Delhi’s response was muted. Subsequently, the RIC foreign ministers have met five times in the past: twice on the sidelines of the UN General Assembly in 2002 and 2003; in Almaty in 2004; in Vladivostok in June 2006; and in Harbin in October 2007. However, repeated meetings of RIC top diplomats have brought very limited practical results.

In the wake of the Yekaterinburg meeting, Russian officials reportedly argued that BRIC could have the potential to provide a new global leadership. Brazil’s Amorim, likewise, reportedly said that the BRIC nations were ‘changing the world order.’

Cornered by NATO’s eastward expansion, notably attempts to bring in Ukraine and Georgia, Moscow has sought new alliances, but so far the RIC/BRIC alliance is embryonic and has not been able to back its rhetoric with practical moves that would provide alternatives to western policy.

This sheds new light suggesting that the creation of BRICS was for geopolitical reasons as much as for economic. [Thanks to Jeff Nyquist for alerting us to this.] There are even hints and suggestions that the Russians developed the BRIC concept in retribution for economic warfare initiatives undertaken by the United States during the Reagan years to bring down the Soviet Union.

For new readers of the Blog, take some time and dig through the older posts. You will see that the current attack on the dollar fits precisely with what we have termed a Phase Three attack on the U.S. economy. We documented Chinese PLA (People’s Liberation Army) military doctrine included attacking another nation’s currency as a new era weapon. We further documented that this is the current thinking of the Chinese Communist Party leadership. We also demonstrated that these efforts would be masked to appear as normal and inevitable market forces to avoid military retaliation. We also demonstrated that jihadists have adopted these same tactics.

So, we have further evidence of the Three-Phased attack described in the 2009 report for DoD. It appears that the elements are in place for the Phase Three to begin in earnest. If we are right (and I sincere wish we weren’t), this will be the most dramatic attack on our way of life in history. The worst part is that the global PR machine has been quite successful in convincing most of America that we did this completely to ourselves.

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved

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