The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- One week ago, the countries hailed as the new engines of economic growth, the BRICS, held their third annual summit in China. An agreement to facilitate the settling of intra-BRICS transactions using their national currencies rather than the U.S. dollar was a huge slap in the face to the U.S. No one can say they weren't warned.
In the G20 meeting in Seoul last November, the BRICS arrived whopping mad because the
had just uncorked another round of quantitative easing (QE). They weren't placated by the Feds response that these measures were needed for the U.S. to recover: The BRICS, after all, have driven 45% of global growth since the financial crisis began. In 2010 they accounted for 22% of global GDP on a purchasing power parity basis, versus 19.7% for the U.S. (This is nearly four times their purchasing power in 2001.) They probably figured, since they were this recovery's economic locomotive that the health of their economies should count, too.
To the BRICS, every round of quantitative easing depreciates the dollar, which drives commodity prices. Commodity increases decrease development funds and drive inflation.Right now Brazil, Russia, India and China are all sporting unhealthy inflation levels between 5.4% and 8.8% that were inspired in part by the U.S. and its diminished-value dollar.
Food-based commodity inflation is especially damaging for the BRICS because they inspire unrest, malnutrition and poverty. Food represents just 13.7% of per capita income in the U.S. according to Nomura, but in India it is 49.5%, China 39.8%, Russia 34.4%, South Africa 25% and Brazil 20.8%.
These are not the only beefs they have with the Fed and the dollar. Money freed up by the U.S.'s QE often bypasses U.S.-based investments and flows into economies with superior yields (the carry trade). Significant inflows, left unchecked, appreciates currencies and makes exports more expensive. Currency appreciation has been a problem in Brazil, India and South Africa. To the BRICS all of these unwanted effects are occurring because the U.S. is trying to engineer a recovery with little regard for its effect on the developing world.
For these reasons alone, you can't blame the BRICS for trying to distance themselves from the greenback. Add to this that they hold 40% of the world's currency reserves, of which 61.4% are denominated in dollars, down from 70.9% in 1999. With the paltry measures taken by Congress to rein in the deficit, union protests that are reminiscent of those in Greece and the Feds commitment to more quantitative easing, these foreign bond holders fret about a downgrade, just like the one
Standard & Poor's
warned about on April 18, because it would exact a heavy toll on their holdings. China and Brazil the first and fourth largest holders of treasuries, in particular, are anxious to be a lesser participant at future U.S. Treasury auctions.
The IMF stands with the BRICS in wanting to lessen use of the volatile dollar. The origins of the U.S. dollar as the defacto reserve currency occurred when the U.S. was the largest surplus nation in the world and the undisputed economic superpower. Now the U.S. is the biggest debtor and China is the largest surplus nation.
Less demand for U.S. dollars will naturally affect interest rates as can increasing supply or a ratings downgrade. Based on current forecasts,
estimated that the U.S. will owe $5.5 trillion in interest in the next ten years. That's 14% of tax dollars going to interest. In 2010 it was 6%. If interest rates were to rise 1%, interest expenses rise to $6.8 trillion or 17% of tax dollars. What if the U.S. had to pay rates like other debt-soaked countries like Portugal paying 5.9% on one year debt, 23 times what the U.S. is paying or Greece where ten-year government bond yields recently hit 13% or 3.7 times current U.S. yields?
Right now, five countries with 43% of the world's population and 22% of global purchasing power, have already said no to settling trades with the dollar. Intra-BRICS trade in 2010 was just $230 billion but it has been growing at 28% a year since 1999. With their new collaboration efforts it is likely to increase. China reported that intra-BRICS trade surged by 45.8% in Q1 of 2011. But what if some of their trading partners follow suit? In 2010 The BRICS accounted for $4.6 trillion in global trade.
BRICS-related trade won't be slowing either. It is destined for healthy growth. The developing world has populations that are younger and growing faster, and they are not carrying a giant debt noose around their necks. By 2050 the population of the G7 is expected to grow by 68 million while the BRICS are expecting an additional 513 million. G7 debt levels, with the exception of Canada are 19-166 points over the world average of 59.3% of GDP. Meanwhile Brazil and India are close to the world average and China, Russia and South Africa are 25 to 50 points lower.
The economic heft of the BRICs is already surpassing projections. In 2007, Goldman Sachs forecast the GDP of the BRICs overtaking the G7 by around 2035. In 2011 PwC suggested that this would occur around 2025. What a difference a financial crisis that hammers the developed world can make.
Last week's BRICS meeting was the first with the relative minnow but Africa's economic giant South Africa. The BRICS are now present on every continent where developing countries are the rule.
WWII was the catalyst for the last world order change. The end of the Cold War and the rise of the internet initiated the economic rise of the developing world. The causes and reactions to the Great Recession put the brakes on the economies of the developed world. The combined effect is powerful and it is shaking up traditional thoughts on short- and long-term opportunities, risks and rewards and safety and volatility.
Readers Also Like: