Frustrated with what they viewed as being ignored by the West and not having a prominent role in institutions like the World Bank and the International Monetary Fund, Brazil, Russia, India, China and South Africa (also known as the BRICS countries) held their first summit in Russia in 2009 to discuss their common interests.
Just three short years later in 2012 in New Delhi, the BRICS countries emerged from their meetings to declare that trade between their countries would take place in their own currencies, doing away with the use of the reserve U.S. dollar.
Just to be clear, dear reader; it takes time, money and effort to set up bank exchanges that would allow them to trade in their own currencies. It is much easier to trade in the world’s reserve currency, the U.S. dollar, than take this route.
This is significant as well because the BRICS countries represent 40% of the world’s population and 20% of the world’s gross domestic product (GDP). There is no question however, that the BRICS countries are growing their portion of world GDP faster than the West, which means that, even in a decade, the BRICS countries are going to represent a lot more than 20% of the world’s GDP.
Another major objective that was announced at this year’s summit was to increase trade among the BRICS countries themselves, in order to reduce the influence of exporting to countries in Europe and to the U.S. Trade among the BRICS countries is growing at a 28% annual rate and is expected to double in just a few years from the $230 billion worth of trade being transacted today in the BRICS countries, increasing their GDP influence.
The most startling announcement to come from the summit was the formal proposal for studying the creation of a BRICS development bank that would offer an alternative to the U.S.-dominated World Bank. The finance ministers of the BRICS countries were asked to study the possibility and report back with a proposal at next year’s summit.
The proposed development bank would allow not only member BRICS countries to apply for loans for infrastructure projects and other development initiatives, but also all developing countries in the world.
Of course, should such a bank be created, it would need to be denominated in a reserve currency, so that loans could be issued in that reserve currency to developing countries around the world.
As a surprise to no one, even though the subject has not been discussed, there is no doubt that China wants its yuan to be the reserve currency for the BRICS development bank, as China continues its quest to have the yuan become an international currency, on par with the U.S. dollar and the euro. However, considering how culturally diverse the BRICS countries are, they may develop a new currency, which will still require that China significantly back it with its yuan.
The BRICS countries represent the fastest growing countries in the world. Although only 20% of the world’s GDP today, this GDP number is rising rapidly and, as a consequence, so will the BRICS countries’ influence. The agreement to trade in their currencies and to create a BRICS development bank is a direct assault on the U.S. dollar.
As I’ve said all along, dear reader, the reserve currency status is earned, not given. This is not a good sign for the U.S. dollar longer-term, ensuring its decline and placing its reserve currency status in jeopardy.
As well, the possibility of China having its yuan as the reserve currency of choice among the BRICS countries or having the yuan back a new currency means that it will need more gold bullion to back its currency. China has only a fraction of the gold bullion that Europe and the U.S. currently hold, pushing China to be an active and aggressive buyer in the gold bullion market today.
Where the Market Stands; Where it’s Headed:
Last year, I made a crazy prediction that I believed stocks would start heading south on April 13, 2012. Looks like I was a few days early! Since Monday of this week, the Dow Jones Industrial Average has lost 581 points, a fall of 4.4%. In fact, yesterday was the worst day for the stock market since November of 2011.
We are getting close to the end of the bear market rally in stocks that started in March of 2009. (See: The Makings of a Classic Bear Market Trap.)
What He Said:
“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major home builder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.