Posted by Larry Doyle on June 16th, 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.
Posted by Larry Doyle on June 11th, 2009 11:20 AM |
We have heard loud and clear from Chinese governmental officials about their concern over our growing fiscal deficit. Yesterday, Russia spoke out and announced their intention to diminish their holdings of U.S. Treasurys. Today, we see another BRIC (Brazil, Russia, India, China) nation announce intentions to increase holdings of IMF-issued debt at the expense of U.S. Treasurys. Bloomberg reports, BRICs Buy IMF Debt to Join Big Leagues:
Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said. The countries are seeking a stronger voice in international financial institutions such as the IMF, according to He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs.
Treasuries declined yesterday, pushing benchmark 10-year yields to the highest since October, after the government sold $19 billion of the securities and Russia said it may move out of U.S. debt to buy the IMF bonds. The so-called BRICs, an acronym coined by Goldman Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.
While those in the administration and select economists will discount these maneuvers by these nations, I beg to differ. The U.S. is very dependent on foreign investors continuing to purchase our debt. If these lead nations move away even marginally, I believe that provides incentive for other smaller nations to do the same. Why?
Nations around the globe are in dire need of financing. A surefire way for smaller antions to curry favor with these BRIC nations is to follow their lead in purchasing IMF-debt versus U.S. Treasurys.
The mere perception that these BRIC nations are purchasing fewer U.S. Treasurys is powerful. Perception very often becomes a widespread reality.