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More BRICs Through Our Financial Window

Posted by Larry Doyle on June 16, 2009 2:49 PM |

In the process of rebuilding a home, let alone an entire financial industry and national economy, the last thing the United States needs are BRICs flying through our living room windows!! Well, get down and be careful because more financial shots from the BRIC (Brazil, Russia, India, China) nations are headed our way!

These salvos from the BRIC block started shortly after Turbo-Tim launched a barb in January about Chinese manipulation of their currency. The “incoming” escalated prior to the G-20 when Chinese Premier Wen Jiabao railed on the United States as having been the centerpiece of global economic problems. Jiabao then called for the development of a separate reserve currency in lieu of the greenback.

A few weeks back, I referenced trade discussions between Brazil and China in which U.S. dollars would not be used as the currency of choice. That shift was not highlighted by our national media outlets but is very meaningful. TCW strategist, Komal Sri-Kumar, highlighted this issue in writing The Dollar as World Currency: A Turning Point?

A week ago we witnessed Russian central bank Deputy Chairman Alexei Ulyukayev indicate that Russia will reduce its holdings of U.S. Treasuries.

Russia did temper that message by having a spokesman indicate that they still support the dollar as the world’s reserve currency. In my humble opinion, I take that statement as akin to “sending in the clowns” for a fabricated financial transaction. Why? The trend from BRIC nations away from the dollar is too strong.

We see more “incoming” again today, as Bloomberg reports BRIC’s May Buy Each Other’s Bonds in Shift From Dollar:

Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar as their leaders meet for a summit in Russia’s Ural Mountains

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.

What we’re seeing is a continuation of discussions to find an alternative to the dollar, yet nobody is going fundamentally to alter anything yet.”

Medvedev is hosting back-to-back summits of developing economies in Yekaterinburg as he seeks to ease the world economy’s dependence on the U.S. dollar. Medvedev began talks this afternoon with Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva.

The Russian leader reiterated his intention to push for the creation of a “supranational currency” to challenge the dollar and encouraged China and called on other Shanghai group members to use each other’s currencies for trade.

“There can be no successful global currency system if the financial instruments that are used are denominated in only one currency,” Medvedev said. “Today this is the case and the currency is the dollar.”

We can manage the BRIC activity as it comes through our financial window at this point in time. The risk we run as a nation, though, is that at some point in the future, the BRIC activity may also include the equivalent of financial Molotov cocktails that spark a significant decline in the value of the U.S. dollar and a concomitant inflationary inferno.

LD






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