The BRICS Are Cracked

Boy, the news this week couldn’t be doing a better job right out the gate in aligning with the “Deeper Dive” I published yesterday about last week’s news on China. (See: “Chinese Ghost-Town Economics Tears Down the BRICS Façade.”) The core theme there was that the BRICS (Brazil, Russia, India, China and South Africa) are far from supplanting the US dollar with a global trade alternative. As today’s headlines now reveal, they are so far away that advance of a BRICS gold-back currency — touted in the alternative press by nearly everyone but me — has been taken off the agenda. It is not even going to be talked about!

The “Deeper Dive” laid out many reasons China and Russia’s decline and their corresponding deep currency troubles are rapidly undermining their desire to undermine US hegemony by replacing the US dollar with their own global trade currency. The stories this morning about this week’s coming BRICS conference in South Africa, while they talk about that core intention of the BRICS, also lay out, for the first time I’ve seen in news, how the BRICS troubled efforts to do that are falling apart as their economic façades now crumble. Even more, they talk about something I didn’t go into, which is how disparate the BRICS are as nations in terms of their cultures and objectives.

Here are some of the points in the headlines below that already affirm the many points made in that “Deeper Dive”:

China’s state bank, again, refused to prop up the crumbling Chinese housing market. As I wrote in “The Deeper Dive,” Xi is intent upon letting the air out of the enormous bubble he inflated that built literally millions of housing units that remain unoccupied as Chinese ghost towns. The conundrum for Xi is that the only way he can save massive financial institutions from crashing and massive property developers from collapsing is to go back to propping up the bubble.

I said he would not do that, and today’s news lays out in detail how The People’s Bank of China (not as independent as the Fed) lowered one interest rate just a tad to help China’s collapsing economy but deliberately avoided lowering the one rate that is the benchmark for home mortgages, thereby selectively avoiding any possibility of aiding the housing market, which also took a step back into decline in pricing today, having seen a solitary minimal rise last month.

Xi will let the housing market sink. He hopes, as Powell does, to engineer a soft (or at least non-calamitous) landing for the housing market, but how often have we seen major bubbles gracefully deflate? I can only remember the collapsing catastrophically once national leaders start trying to let the hot air out.

“The Deeper Dive” also pointed out how almost every day last week, the PBOC had to intervene to save the falling yuan and to try to prop the Chinese economy (two opposing goals). You cannot very well prop up the value of a currency, which requires economic tightening, while loosening finance to prop up the economy. That, I explained, was why the PBOC’s efforts to save the economy have been far too tepid for investors and why every effort to prop the yuan failed.

This week opened with more of the same news this morning. China again had to buy up off-shore yuan in order to support its endlessly sinking currency. This certainly doesn’t help going into a BRICS summit where the primary goal of the organization is to supplant the US dollar. Perhaps that is why talk of a new BRICS currency is no longer even on the agenda, though some prognosticators were saying, counter to my beliefs, that such talk would take the world by storm this week. The major players in the BRICS are too busy rescuing their own currencies to risk laughter at the moment from talking about their long-wished-for new currency launch.

China's major state-owned banks were seen actively mopping up the offshore yuan on Monday, three people with knowledge of the matter said, as the currency comes under growing pressure from a darkening economic outlook and strain in the property sector.

State banks often act as agents for China's central bank in the offshore foreign exchange market…. Tightening up offshore yuan liquidity could also act to stabilise the yuan…. The move effectively raised the cost of shorting the Chinese yuan, at a time the local unit is facing mounting depreciation pressure…. The yuan has weakened more than 5% against the greenback so far this year, reflecting growing concerns about the outlook for the world's No.2. economy….

The need for China to focus on rescuing its own currency from the darkening economic outlook for its economy and the strains from its property sector were the main points laid out in that “Deeper Dive.” You cannot very well launch a new global trade currency when you are that busy mopping up the damage to your existing currency. You must first get your own house in order. Unfortunately, you also cannot save your currency on foreign exchanges and create major financial economic stimulus at the same time. So, the Chinese government is trapped, and that is why its responses appear to be paralyzed and ineffectual.

Earlier on Monday, China cut its one-year benchmark lending rate as authorities seek to ramp up efforts to stimulate credit demand, but surprised markets by keeping the five-year rate unchanged amid broader concerns about a rapidly weakening currency. “Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the RMB (renminbi)…. Chinese authorities care about currency market stability….”

"The PBOC … has visibly stepped up its efforts to restrain the renminbi's [yuan’s] depreciation trend lately, but Beijing's unwillingness to countenance more radical monetary and fiscal stimulus implies that the exchange rate will necessarily need to bear some of the burden of supporting the floundering economy through further depreciation."

The same thing appeared in today’s news regarding the dismal failure of the ruble and Putin’s efforts this week to mop up damage there (as also talked about in that “Deeper Dive”):

The ruble is slumping, the shock of a failed mutiny has yet to fade and the war in Ukraine has crossed the 18-month mark with no end in sight…. The Bank of Russia’s emergency interest rate hike this week was not just a response to the latest fall in the ruble but part of a wider effort to subdue inflation before the vote, said one of the people and a second person close to the government. 

Without the election to consider, the central bank may have waited for the next scheduled monetary policy meeting to take action. As it stands, it’s facing open pressure from Putin’s aides to stabilize the exchange rate and prevent any further erosion of real household incomes….

“Domestic political considerations favor tighter monetary policy,” said Alexander Isakov, Russia economist at Bloomberg Economics.  “If the ruble were to continue losing value it would have lifted inflation by 1-1.5 percentage points with price growth peaking at exactly the wrong time —  in the run up to March elections.

The result of the all-year decline in these two currencies and particularly of China’s badly crumbling economy, which China’s government and central bank are in no position to rescue (because doing so would bring the yuan down harder and re-inflate the horrendous Chinese ghost-town housing bubble), is that the BRICS hopes for a new currency have gone back on hold as they have been for decades.

BRICing up

The idea of a new currency to compete with the dollar is far from new. It has been around since, at least, 2006:

A group of world leaders is meeting at the BRICS summit in Johannesburg, South Africa this week. BRICS is a group of five countries with emerging economies that want to instate their own world economic and trade systems and has discussed creating a new currency. Dozens of other countries want to join the group….

The acronym, which was originally BRIC, was coined in 2001 by Goldman Sachs analyst Jim O'Neill, who wrote a paper on emerging economies. O'Neill said Brazil, Russia, India and China – the countries that make up the acronym BRIC – had GDP growth that would exceed that of the G7 countries. 

As I’ve long argued, people once believed Japan would dominate the world economically, too. The BRICS became Japan’s replacement for the roll of dominating the US, and they were the rising sun back in the early 2000s as Japan’s sun set:

The four original countries formed an informal group in 2006 as allies that contribute to the world economy. In 2011, South Africa joined the group, and so the acronym became BRICS.

In 2023, BRICS surpassed the global GDP contribution of the G7 countries, according to the group, which says BRICS accounts for nearly 1/3 of the world economic activity.

My argument has been the BRICS will fail just as Japan did. Now we see China falling apart because of its dictator’s deleterious Covid lockdown policies and other central-planning failures, and we see, as I laid out in the “Deeper Dive,” Xi actually reverting to his old Commie ways.

The group aims to reshape the political economic landscape to benefit themselves and they have created the BRICS Business Council, the Contingent Reserve Agreement, which provides short-term liquidity support, and the New Development Bank, which supports development projects in BRICS countries. 

The New Development Bank is their version of the IMF. While this year’s summit will still focus on replacing the dollar, the talk of a new currency is suddenly off the agenda. Instead, they are going to focus in increasing the use of their own individual currencies in trade with each other.

BRICS countries aim to create new economic and trade systems separate from the U.S.-led Western systems, according to the group….

BRICS has discussed ways to expand trade between their countries as a way to rely less on the dollar. …

Russia and China are especially eager to weaken America's standing in the world economy and at a June meeting of BRICS countries, South Africa's Naledi Pandor said the bloc's New Development Bank would look for alternatives "to the current internationally traded currencies…."

But while the group has considered creating its own currency as part of the solution that is not on the agenda for the summit, the group says. 

So, the point of that “Deeper Dive” is now confirmed: the faltering of Russian and Chinese currencies has taken the launch of a dollar replacement — or even talk about it — off the table for now.

(None of that, of course, is to say that the dollar will not replace itself down the road with some ill-begotten global cooperative digital currency or that the US isn’t riddled with its own economic destruction while the Fed is befuddled by its own traps. The point I made in that “Deeper Dive” was just that leading contenders are doing even worse with greater currency troubles of their own. China even looks to be on the verge of a major financial and economic collapse. The US will collapse, too, but it still benefits from being the best horse in the glue factory, and there just aren not any competitors that are even remotely in a position to launch a replacement for the dollar as a global trade currency for the many reasons noted in that “Deeper Dive.”

The focus of this week’s BRICS meeting has changed away from launching their own currency to expanding BRICS membership as a path to diminishing dollar hegemony by creating more cooperation between each nation’s individual national currency:

The BRICS bloc … will use an annual leaders' summit in Johannesburg this week to begin the process of enlisting more members to bolster its global heft, a push driven mainly by Chinese President Xi Jinping but also backed by Russia and South Africa. There will also be talks on how to accelerate a shift away from the dollar, in part by increasing the use of local currencies in trade between members, which is surging, according to a draft agenda seen by Bloomberg.

This is like retrenching back to what they already had but giving it a membership boost. Now some of the articles that talk about the BRICS sunrise years and their ascendence to economic dominance, talk about their decline:

The bloc has failed to convert its growing economic might into significant political clout since it began holding summits 15 years ago. But the current splintering of the world order amid rising US-China frictions and the splits over Russia's invasion of Ukraine provides a fresh opening for it to become a louder voice of the Global South and potentially to challenge the US and its allies.

"We want to make the BRICS very strong politically, very strong financially," said Brazilian President Luiz Inacio Lula da Silva….

An expanded group would represent about half of global output by 2040, Bloomberg Economics estimates show, double the share of the Group of Seven, a reversal from the turn of this century. A bigger BRICS would account for almost half of the global population, up from 42% currently, according to Anil Sooklal, South Africa's ambassador to the bloc.

"These countries have risen economically, they have voiced their concerns, they're now capable of offering alternatives if their voices are not heard," said Karin Vazquez, a Shanghai-based associate professor of diplomatic practice at India's O.P. Jindal Global University.

However, there is a lot more talk about boosting their clout by boosting their membership than there is success in their actual integration:

To date, deep divisions among members have limited the consensus-driven bloc's ability to increase its sway at institutions such as the International Monetary Fund, the World Bank or the United Nations Security Council. A BRICS development bank has lent only $32.8 billion in eight years in operation, a tiny fraction of the amount the IMF and World Bank have disbursed over the period. Suggestions that the bloc introduce a common currency haven't gone anywhere.

The BRICS are disjoined

It really shouldn’t be a surprise that the BRICS nations are more disparate than the nations of the eurozone, so any effort to create a unified currency is going to fraught with even more trouble than the euro, which still remains a marathon of miles ahead of the yuan as a global currency — fractured as it is — while the dollar remains a good distance ahead of the euro.

The European Union sees the BRICS as primarily a talk shop – which could be weakened rather than strengthened by expansion.

The EU ought to know about how wider inclusion makes for a much more fractured currency since that has been the euro’s problem from day one. The choice for more clout in size comes at the cost of less cohesion and can easily become self-defeating and fall off the global scene just like Japan did because of its own mismanagement reasons.

The bloc has been a "big disappointment," said Jim O'Neill, the former Goldman Sachs Group Inc. chief economist who coined the acronym BRIC in 2001 to highlight their rising global heft. "China and India rarely agree on anything, which is a fundamental problem.''

Talk is cheap, and ideas can be found for the price of a cup of coffee; but getting heads together from competing nations with vastly different cultures (far more different than Europe’s cultures) may be next to impossible in reality, as even the guy who coined the term now admits that the actual realization of the BRICS has been a “big disappointment.”

In fact, the two largest economies in the bloc are practically mortal enemies, long on the verge of war with each other:

The world's two most-populous nations have been locked in a border dispute for years…. India is wary that expanding BRICS will transform the group into a mouthpiece for China, while Brazil is also worried about alienating the West, according to officials familiar with the bloc's internal negotiations. But they are resigned to admitting new members

Each of the BRICS is crumbling financially, and the mortar holding them together is mud. More members to gain more clout means more dispute and less likelihood a new currency will survive the rapids that the euro has often barely managed to survive because of the differences economically and even socially between the member nations.

"Since BRICS was founded, China's become not only more aggressive regionally, or even along the border with India, but also it, too, wants to be the standard bearer for the Global South…. India doesn't want that."

It doesn’t want that at all!

So, the road to the dollar’s replacement as a global currency is a long path, if it ever happens. It, of course, could happen someday. It is not as if the Fed is doing a bang-up job, but the dollar’s replacement is far from reality today and even faded a little this morning when the prospects of a BRICS competitor that some thought was going to debut this week didn’t even appear on this week’s BRICS agenda!

The fact is, any global currency that is controlled by multiple nations is going to be distressed by deep divisions and internal troubles and will fracture and bust apart as monetary policy that is good for one nation clubs a neighboring nation over the head. We have seen that in Europe and have all noted the US dollar does better because it does not have those sharp national divisions in the control of its currency. It is a single-nation currency with a multi-nation outreach and use.

Any truly global currency (as in owned and managed globally) is doomed due to national divisions and will only be held together by austere dictatorial policies, as we’ve seen in what it takes to hold communist blocs together. It takes force by a single strongman leader like Stalin or Mao Tse-tung.

One article in the headlines of The Daily Doom today questions the ability of the BRICS to carry out such a unified goal. (After all they are very, VERY far from having a single dictator to force their socialist cooperation upon them.)

The global south is hungry for an alternative to the Western-dominated order, but BRICS may not be up to the task.

The next test of whether top U.S. adversaries can erode its role as the leading global superpower will come in the form of a major diplomatic confab in South Africa….

There’s no clear answer yet. And experts don’t expect one to emerge from the upcoming summit, with few details yet released on the agenda or real deliverables. Complicating the matter is the fact that BRICS countries have vastly disparate national interests, and vague proposals to expand the bloc’s membership and economic influence seem poised to stumble out of the gate.…

All BRICS countries, even China, face economic headwinds that make any future plans to challenge the U.S.-led Group of 7’s spot at the top of the global economy more pipe dream than reality.

The grouping is currently in a “sweet spot, where it’s fulfilling its role, it helps members constrain the United States to some extent, [and] it strengthens ties between the BRICS,” said Oliver Stuenkel, a professor at the School of International Relations at Brazil’s Fundação Getulio Vargas. “But I think if there’s more ambitious projects, then it will inevitably strain this grouping and expose the divergences.”

I’ve felt like a lone voice in the alternative press declaring for a long time that the BRICS will fail to replace the dollar … unless far down the road in a much different set of circumstances that no one can foresee. Now, however, we see the strains showing and the rollback of the dream starting to show.

“China is the only country that is not concerned at all about diluting the prestige of BRICS” by expanding it to more countries, Stuenkel said. “For China, I think it really makes sense to expand so that the BRICS can become an element in a more China-centric order—a Chinese-led system of different structures like the One Belt, One Road….

Yet Beijing has had a harder time getting the other BRICS members on board, further underscoring their competing visions of the group’s future. The idea of expansion has worried India and Brazil in particular…. “Brazil is very proud of its BRICS membership,” Stuenkel said. “If you’re part of a very exclusive club, it makes sense that you don’t want to see the club becoming open to everyone….”

“The idea that five countries with very divergent interests and trajectories can somehow form a coherent enough union to expand its membership and stand up this hare-brained idea of a BRICS currency seems really far-fetched to me,” said J. Peter Pham, a former U.S. diplomatic envoy to African regions during the Trump administration.

We already know how nearly impossible that is from watching decades of the euro struggle because it disproportionately hurts some member nations with its monetary policy more than others. So, for now, the BRICS have settled back to looking at ways of ramping up the use of their own local currencies in global trade, rather than attempt to create a single contender for the US dollar.

Talk of a BRICS common currency is “really a reflection of a desire among some segments of the world to have some counterweight to the U.S., the U.S. economy, the dollar,” said Daniel McDowell, an expert in international political economy at Syracuse University. But “I think most of this is just in fantasy land, because I don’t see any world in which it is really going to emerge in the way some people might hope.”

I agree. The idea is disjoined from human reality and everything we know about international politics. It thrives only in denial of that reality due to a dream of seeing the dollar beat (even among people on the alt right) because the political reality is that creating a new BRICS global trade currency would be monumentally more difficult than creating the euro was among nations that have two millennia of Roman history forcing them together.

(To read more about how China’s current economic problems have deeply diminished those prospects, read “The Deeper Dive: Chinese Ghost-Town Economics Tears Down the BRICS Façade.”)

Outside the BRIC walls

Other points made in that “The Deeper Dive” of great importance to the US economy were the impact of China on US bonds as well as the impact of massive US Treasury issuances during a time of Fed tightening when the Fed is not there to soak up all those Treasuries.

Other headlines today back that up, too: the market went on a bond-burner this morning that sent 10-YR yields all the way back up to the highest they’ve been since 2007 (even higher than they went last week). The failure of Chinese rate cuts to be anywhere near sufficient to prop up China’s flagging economy also helped levitate US bond interest for the reasons stated in that “Deeper Dive” about China pulling the entire world deeper into recession, rather than helping it out of recession as it did back in the Great Recession.

And those rising bond yields pose all kinds of trouble for the US in stocks and finance and defaults that will further impact banks and other financial institutions. The US is no longer the only nation that can give the rest of the world pneumonia (or COVID) when it sneezes.

So, parts of that “Deeper Dive” also covered how China’s economic woes were impacting US stocks all of last week, and today didn’t look a lot better as the market gyrated like a drunken sailor who couldn’t make up his mind where he wanted to go.