BRICS? No, CRISIS
Economics / Emerging Markets Nov 16, 2015 - 09:52 AM GMTBy: Raymond_Matison
On Monday, October 23, 2015, the Iranian news agency Tasnim cited its Deputy Minister of Economic Development who announced that Iran would seek to become a participant in the BRICS New Development Bank (NDB). The NDB was officially created by the BRICS nations of Brazil, Russia, India, China, and South Africa - in July of this year, with an initial capitalization of $100 billion. Iran’s participation would allow it, or any other participating country, to develop closer economic, trade and international policy ties with the BRICS nations, and utilize NDB funds for economic development.
This new bank can be seen as both a complementary and competing organization to the U.S. and European dominated International Monetary Fund (IMF). The IMF started operations after WWII in 1945 with 29 initial country participants. Today almost every country in the world has chosen to become a member of the IMF, which has become a formidable global institution. According IMF’s official web site, and its Consolidated Statement of Financial Position for its General Department as of April 30, 2015 it has total assets of $295 billion. However, its accounting is intentionally conservative and opaque. For example the IMF carries its 90.5 million ounces of gold at a historical cost of just $3.2 billion, whereas its market value would add another $100 billion to its real value, vastly expanding its influence.
Each of the BRICS countries is already a member of the IMF. IMF’s financial resources are based on contributions of member nations roughly based on the size of their individual economies. Furthermore, its voting power is distributed on the size and basis of its contributions.
A number of countries, including China, have desired increased voting representation in the IMF based on the substantial increase of its economy over the last two decades. This inability to have influence at, or cause change or reform of IMF policies is ultimately the reason why selected nations formed an alliance which became the BRICS organization. This is also the reason why the BRICS nations felt compelled to set up their own development fund. The NDB will allow these five countries not only to expand their domestic development, but also to expand their influence among other countries that will seek to join the NDB. As their membership, resources, or contributions grow to increase the size of their projects, the global influence of the NDB will expand.
Events Leading to launching IMF and World Bank
With widespread destruction of WWII in Europe and Japan, the United States became leader and arbiter of the Western World. Previous imperial governments had fallen to fascism, socialism and international communism. England lost the status it had held for two hundred years as the global colonial power, as many of its colonies became independent and self-ruling. The only challenger to its global rule was the economically weak but militarily dangerous Soviet Union. China did not appear to be a notable military power or an economic challenger. Everyone looked up to America, its military and economic success, the increasing wealth of its citizens, and its ideals of liberty and democracy.
At the conclusion of the Bretton Woods Conference in 1945, the dollar backed by gold became the new global reserve currency, and means of exchange for international transactions. Two important institutions were also established at that time, the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (World Bank) to “support the public good of financial stability and prosperity”.
With the fall of the Soviet Union in 1989, it seemed that the U.S. would be unchallenged leader in the new global order. It also seemed for America easy to fulfill the shoes of England’s previous role, and to become the new colonial power. Neither England nor the United States embraced policies of an equal sharing of developed resources for colonizer and colonized alike, but took for oneself an ever increasing portion of world resources at the expense of poor nations. This resentment is another driving force for the world’s newest established development funds.
Functions of the IMF and World Bank
Among the laudable goals of the IMF are promoting monetary cooperation among nations, improving their financial stability, facilitating international trade, and assist with balance of international payments. The IMF can also make loans for stabilizing developing nation’s currency which can be open to massive speculative inflows and outflows that in the process of destabilizing currency create financial crisis. All these activities on behalf of the IMF are intended to promote employment and decrease poverty.
There is one rather amazing, additional activity that the IMF performs that converts its fund to that of a global central bank. It can conjure a fiat global reserve currency in essentially unlimited amounts by allocating it proportionately to its members. As long as members are willing to use and accept this currency among themselves for settlement purposes it is a viable global currency and will count as a bank reserve asset. The IMF has issued this global reserve currency called the Special Drawing Rights (SDR) on three previous occasions. These SDRs have been issued in times of financial crisis, when trade declines, credit contracts and banks lack liquidity. Its most massive creation was in 2009, when SDR’s with a dollar value of approximately $300 billion were issued to alleviate the then global financial crisis.
Formation of BRICS
The BRICS countries would gladly add funding to the IMF, if their voting rights were increased. Any such a proposal has to be rejected because the U.S. is the only country with voting rights above 15% (at 16.75%) of the total. In as much that voting for any changes in the IMF Agreement affecting major issues requires an 85% voting majority, the U.S. is the only country that has veto power. The next highest holder of voting rights is Japan with only 6.23% of the vote. If other countries, by adding more funds would increase their voting shares, the U.S. could lose this veto power, and influence.
In 2006 the foreign ministers of Brazil, Russia, India and China first met to consider improved economic ties. Issues debated included their lack of ability to influence or reform the IMF, and the need for a stable new reserve currency. Jim O’Neil a partner of Goldman Sachs created the chic acronym of BRIC nations. As South Africa was invited to join their group, the new acronym became BRICS. Eventually, many developing countries may join this organization as indicative by Iran’s recent announcement.
When the original four BRIC countries decided to expand, they invited South Africa to join. They had the whole world to choose from – why South Africa? After all, S. Africa is a much smaller and less powerful country by any measure than the first four countries. For those who follow countries which have significant precious metal mining operations, and are consistent buyers of gold - no more needs to be said. Russia, China, and India are at the forefront of these activities on a global basis. Once that fact is considered, the choice of South Africa becomes easy to understand – it is a gold producing nation, and influential on its continent. While Brazil is not a major precious metal producer it does have significant mining operations. It was Brazil’s Finance Minister who alerted other BRICS countries in 2011 that the U.S. was conducting a global financial war with its fiat currency printing.
Activities of the BRICS nations
The best guide for the functions or activities the BRICS new development fund is to reflect on what functions the IMF performs, for it is not unreasonable to expect that the NDB will aspire to reproduce eventually most of the activities of the IMF.
In addition, BRICS countries progress in setting up an equivalent of the West’s SWIFT (Society of World Interbank Telecommunications) system will greatly facilitate trade payments among their members who would be less exposed to U.S. or European dictates or control. One such system is named as the Chinese International Payment System (CIPS), which apparently is now in a testing phase. Russia is also setting up an alternative payments system. Both countries are utilizing coding similar to the SWIFT system in order to facilitate global use. Thus, funds would flow between countries in any currency, while Western sanctions would have a reduced or minimal effect.
The IMF’s complementary organization, The International Bank for Reconstruction and Development (World Bank), which also was chartered at the Bretton Woods Conference in 1945, makes loans for the construction of massive infrastructure projects in countries that are trying to bring abundant natural resources or products of a country to the world market. Last year the BRICS nations announced the formation of their own version of an international development fund called Asian Infrastructure and Investment Bank (AIIB). Thus, while being deprived of an increasing role in the IMF and World Bank, the BRICS countries have finessed this impediment by creating their own alternative entities. These three non-western institutions, when fully functional, will make those countries desiring to escape dollar’s influence entirely possible.
China has initiated currency swap operations with international banks in selected cities so as to make the yuan currency convertible and available at key world trade and financial centers. It is noteworthy that the U.K. not only agreed to join AIIB but also has a currency swap agreement facility with China, much to the chagrin of its American ally.
Current global financial problems
The weak global economy, now being supported on the false pillars of overbearing debt requires ever increasing, drastically repressive financial measures at home including essentially zero interest rates. As these measures penalize domestic savers, create inflation in foreign countries, the future role of the global dollar reserve currency, will become the main event, its central focus. The dollar will need to be replaced by a currency that is not backed by a country which is the largest debtor in the history of mankind.
America’s mountainous debt and money printing has not inspired a great deal of confidence in other countries holding dollars. It is their previous real experience of losing purchasing power held in dollar assets, and dollar driven domestic inflation, that motivates them to protect themselves against further disgorgement. Forty four years since denying conversion of dollars for gold with the closing of America’s gold exchange window, conflated with excessive credit and money printing over that period is more than enough.
When the global community demands that the dollar must be supplanted, America’s solution will be to call on the IMF. In Jim Rickard’s highly insightful book “The Death of Money” it states that the “IMF makes no secret of its ambitions to transform the SDR into a reserve currency that could replace the dollar. This was revealed in an IMF study released in January 2011, consisting of a multiyear, multistep plan to position the SDR as the leading global reserve asset.” And “ … on many issues the United States and the IMF see eye to eye – including the dollar’s eventual replacement as the global reserve currency.” He also notes that “The future monetary system will not be based on dollars because China, Russia, oil producing countries, and other emerging nations will collectively insist on an end to U.S. monetary hegemony and the creation of a new monetary standard. The IMF will rise to the occasion with a towering issuance of SDRs, and this monetary operation will effectively end the dollar’s role as the leading reserve currency”.
Because the IMF holds in excess of $100 billion in gold, and has a strong balance sheet, it certainly is possible that the IMF, concomitant with the demise of the current international dollar financial order, could issue the SDR as a new global currency. Clearly, the U.S. would prefer this solution, in which the dollar remains a significant part of the new SDR global currency, rather than have the dollar more completely rejected by other nations. The SDR’s constructed value is based on the four largest economies currencies, with the dollar having the largest share. The eventual new SDR would include the dollar, yuan, Euro, yen, pound sterling, and possibly other currencies.
IMF Customer experience
Over the years a multitude of nations have utilized loans from the IMF and World Bank, often with disastrous results of defaulted loans, unfavorable loan renegotiation, loss of internal control of one’s financial sovereignty, open trade agreements promoting loss of control over one’s economy and its industry, severe austerity measures, and currency devaluation. To quote a passage from David C. Korten’s book “When Corporations Rule the World” in reference to the IMF and World Bank he states “They have arguably done more harm to more people than any other pair of nonmilitary institutions in human history”. Countries having experienced these depredations did not previously have any alternative choices – but they have not forgotten their degrading experiences.
In addition, loans made to help poor countries develop infrastructure and trade have been seen as a means to exercise economic control. American dominance of these institutions revealed that it was a modern way to conduct England’s old colonial policy without a conquering army or without firing a single shot. Michael Chossudovsky, Professor of Economics at the University of Ottawa in his book “The Globalization of Poverty and the New World Order” states “The imposition of macro-economic and trade reforms under supervision of the IMF, World Bank and the World Trade Organization (WTO) purports to “peacefully” recolonize countries through the deliberate manipulation of market forces. While not explicitly requiring the use of force, the ruthless enforcement of the economic reforms nonetheless constitutes a form of warfare.”
The IMF and the World Bank became effective tools for waging a trade or financial war. Well known Canadian politician Paul T. Hellyer, author of “The Money Mafia” states: “What became clear, however, was the extent to which the IMF had been reduced to a tool of U.S. foreign policy, as determined in the Treasury Department”. As this awareness grew, there was a growing resistance to these two organizations, and the need for a credible and more favorable or benevolent competitor. In fact Mr. Hellyer states: “As for the IMF, it should be wound up, and the sooner the better.”
None of these authors address any reasons why these and other U.S. organizations would have been involved or supportive of foreign regime changes over the last half century. It is easily forgotten today that wars were fought to contain expanding international communism and socialism. Europe, South and Central America even today have left leaning presidents, prime ministers or substantial socialist parties with considerable influence in their governments. International communism seems to have abated, but socialism appears to have spread everywhere. While America remains nominally a republic, socialist influence has grown here to the extent that we now have a socialist openly running for the office of president on the Democratic ticket.
Use of the SDR as global currency
Given their commonly-shared but harsh experience at the hands of the IMF and the World Bank, it is unlikely that these countries would accept or utilize the SDR, if there was a safe way to avoid it. The developing payments system and the starting operations of the NDB and AIIB provide this alternative basis. Indeed, a dollar currency collapse will be the litmus test for the IMF. Acceptance by member nations of the SDR created by the IMF would negate serious critics showing that member countries do have faith in the procedures and policies promoted by the IMF. Alternatively, it would signal that the IMF’s power is so pervasive that other nations, despite their mistrust, will be required to use it. Rejection by member countries of IMF’s SDR would confirm that having alternatives, they choose to avoid an organization that they do not trust or one that has taken egregious advantage of them previously.
It is possible that such nations, members of the NDB, could produce a new gold-backed BRICS currency, or even a BRICS version of an SDR to supplant the international dollar or the IMF version of the SDR that their members would embrace. It is not a given that the IMF’s SDR will become the new global currency after the eventual unavoidable dollar crisis as everyone expects. It is entirely possible that the disaffected nations large in number will actually endorse and use a BRICS established currency backed by gold, or its own version of the SDR.
CRISIS not BRICS
Iran is a country which is strategically placed geographically in the Middle East, roughly surrounded by Russia, India, and China, and has the world’s fourth largest oil reserves and a population of approximately 80 million. Its people have the education and demonstrated ability to develop nuclear power and ballistic missiles. But even without counting Iran, the BRICS nations now comprise a population of nearly 3 billion people, with a combined gross national product (GDP) comparable to that of the United States. It is expected, that as these countries develop trade amongst their grouping, their GDP quickly will surpass that of the United States.
Similar to the growth in the number of countries becoming members of the IMF, we can anticipate that with time the NDB may also include most of the countries of the world. According to Wikipedia, countries expressing interest at this time in becoming members of the NDB include Indonesia, Turkey, Egypt, Argentina, Nigeria, Sudan, Bangladesh, and Greece. However, if we look at the potential countries that could join the NDB or the AIIB, it could readily include the majority of nations in the world.
The “B” representing Brazil in the BRICS acronym is but one of many South or Central American nations who are eager to escape their current controllers of the north. Argentina, Venezuela, Ecuador, Bolivia, Chile, Columbia, Ecuador, Paraguay, Peru, Uruguay, Panama, Costa Rica, Guatemala have been at odds with dominating U.S. policies and are likely to join what they expect to be a fairer or more considerate alternative to the IMF and World Bank. Thus, it is appropriate in the current environment to substitute the letter “S” representing South America for the more outdated and singular “B” for Brazil. Finally, giving account to the very recent Iran announcement to join the NDB, we have the basis for a new and meaningfully more appropriate acronym. Reflecting their geopolitical and economic heft we would list the countries, and grouping of countries, in the following order: China, Russia, India, South America, Iran, and South Africa (CRISIS).
It is foreseeable that implementation by BRICS of their New Development Bank, the Asian Infrastructure and Investment Bank, and their own trade payment system and currency swap facilities will provide a full alternative to western based dollar system. This means that countries utilizing these new international entities may thrive and develop their economies, improving employment, incomes, and wellbeing. Note that this development will now happen whether or not there is a dollar crisis or further erosion of the dollar in global trade settlement. This development also will happen whether or not, belatedly, the IMF acquiesces to anoint more influence to China and the other BRICS nations.
It is equally foreseeable that Federal Reserve policies will not be able to revive domestic growth and employment, as these do not address reducing burdensome debt, low foreign wages, and automation. Increased credit and continued money growth cannot cure the problem of a mountainous amount of credit and money already in existence. When the current imbalances between the enormous amount of outstanding credit and ability to repay it begin to be balanced by default and loss of confidence in the dollar, the global depression will become finally acknowledged, and real policies to redress the calamity will finally be addressed.
In this environment the expanded list of the original BRICS nations with its acronym of CRISIS is more appropriate to describe the growing list of nations dissatisfied with the current world order. Additionally, the acronym of CRISIS better reflects their capacity, even without any actual deliberate intent on their part, to become a catalyst for the next financial crisis. Their NDB, AIIB, and money transfer system will all grow in utilization, success and global influence. The CRISIS nations are not conducting a financial war against the dollar; quite contrary, they are trying to diverge from the dollar to avoid its destructive features.
Over the last four decades our politicians, the FED, and government have promoted and practiced destructive economic policies, and socialistic wealth distribution schemes destroying the middle class and our productive capacity. Our policies increasingly embrace socialism even as China and Russia have learned from their prior mistakes and are embracing their version of capitalism. The Western World can no longer avoid the coming global dollar centric, exploding credit, derivative enhanced collapse. The CRISIS nations cannot escape this global financial meltdown either. But the coming financial crisis will not be due to CRISIS.
Raymond Matison
Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience. First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics. He can be e-mailed at rmatison@msn.com
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