The Brics currency ignores all the traumatic lessons of the half-baked euro
Story by Ambrose Evans-Pritchard, 8/24/23
Dollar hegemony has become a curse for the global economy. It serves the interests of no country, least of all the US itself.
The frenetic monetary lurches of the US Federal Reserve are transmitted worldwide in disruptive cycles of dollar liquidity, and amplified through the $12 trillion market for offshore dollar loans and a vast nexus of debt contracts linked to US borrowing costs.
When the Fed giveth by means of zero rates and money creation (QE), it floods the international system with cheap funding and sets off destabilising credit booms.
When the Fed taketh by driving real rates through the roof and destroying money (QT), it drains global liquidity and tortures dollar debtors everywhere. It overwhelms other central banks trying to navigate the reefs – even in Europe or China – and imposes a de facto monetary policy on countries whether they want it or not.
The effects can be violently pro-cyclical and malign. Ultimately it “blows back” into the US economy. That is the risk we face now as the Fed pushes half the world into a credit crunch by the most aggressive monetary tightening in 40 years.
We badly need other currencies to step up to the plate. None is fit for purpose. As the saying goes, Europe is a museum; Japan is a nursing home; and China is a prison.
“I ask myself every night why all countries have to base their trade on the dollar,” says Brazil’s Lula da Silva. The answer is that the US is the world’s only full-spectrum, military, energy, agricultural, economic, financial, technological and scientific superpower.
Lula has fixed fervently on his Brics currency, “just like the Europeans created the euro”. In theory it is to be launched by a coalition of the willing, drawn from Brazil, Russia, India, China, South Africa and – following the 15th Brics summit this week in Johannesburg – Saudi Arabia, the Emirates, Argentina, Iran, Egypt and Ethiopia.
The painful lessons of the half-formed euro seem to have been entirely forgotten or never learned. Few Brics ideologues recognise what it takes to forge a monetary union and – much harder – to make it work.
The key eurozone states are all democracies. They are broadly aligned on foreign policy, and all are Nato members. They have a shared legal and commercial Acquis, drafted by a shared parliament and a shared executive, under a shared supreme court, in a union with collective institutions dating back to 1957. Member states have no veto over swathes of policy.
Yet even this level of integration proved too little for a functional currency.
One-size-fits-all interest rates for economies with moderately different structures and trend growth rates led to massive intra-EMU trade and capital imbalances. The bloc lurched from one crisis to another, dividing Europe into hostile camps of creditor and debtor nations, all ending in an investment collapse and an economic lost decade.
The Brics have infinitely less in common.
Some are commodity importers, some are exporters. Some are democracies, some are dictatorships at daggers drawn with democracy. China and India are on opposite sides of Asia’s strategic divide. None is willing to submit to joint laws, joint courts and anything like a joint executive, all sine qua non for the management of a currency.
The debate is surreal. The Brics bank itself operates in dollars and is a struggling credit risk, compelled to pay 100 basis points above World Bank rates to raise funds on global capital markets.
“The New Development Bank has the US dollar as its anchor currency. We are firmly embedded in the US dollar hemisphere,” said Leslie Maasdorp, the bank’s chief financial officer, speaking to Bloomberg.
Every Brics member knows that the project has evolved into a front for Chinese ambitions. For all the talk of “multipolarity” in Johannesburg, China’s internal strategy documents leave no doubt that it seeks to replace the US as global hegemon, establishing its own dominance over the economic and technological structures of the 21st century.
It is odd that the Brics idea has become so fashionable at this juncture, especially since Russia has destabilised the world food supply and launched a reactionary imperialist war, revealing in the process that it is a military paper tiger.
The downfall of the American liberal order certainly looked plausible 15 years ago when the US banking system blew up, the dollar was in free-fall, and the US was running out of energy.
The Brics boom was at its apogee. People could argue that compound growth rates would lead to a definitive Chinese sorpasso in the 2020s and from there to a new post-Western order revolving around the rising industrial powers of Asia. It was wrong but not absurd.
Needless to say, this narrative was based on the fallacy of extrapolation. China was by then already walking into the stagnation trap, pursuing the policies that would cause a collapse of total factor productivity growth and therefore trend growth of circa 2.5pc by the late 2020s.
These policies were not a “mistake”. They were and are an inescapable feature of Communist Party ideology and control. China cannot give up its top-down Leninist model of credit allocation and social control because to do otherwise would lead to political revolution.
Both Brazil and Russia fell into economic depressions after the commodity supercycle peaked in 2011. By then the resource curse of overvalued currencies had hollowed out their industrial cores. Over the last 12 years their combined GDP has fallen from 30pc to 15pc of US output (World Bank data). Every Brics economy has run into trouble, with the signal exception of India.
It is the US that has refused to validate the prophets of decline. America is again the world’s largest combined producer of oil and gas. It commands the digital world. The Biden dollar is on steroids.
The Brics process is no longer driven by US weakness but by US strength, above all fear of the US Treasury’s long reach through the world’s dollarised payment system, though the export of Western woke moralism also stirs the pot.
For the same reason, today’s Brics posturing has its limits. How many countries really want to join the Sino-Russian quarrel with the G7?
The addition of Saudi Arabia sounds glamorous but its economy is not much bigger than the Dutch economy, and oil is yesterday’s business model. The bigger the Brics family, the more incoherent it becomes, and the more ridiculous it is to think of monetary union.
A Brics coin or not, the world still needs a better currency system. The euro is condemned to second-tier status until Germany bites the bullet on fiscal union, which it refuses to do. The Chinese yuan cannot be a global reserve currency until it is fully convertible and until China accepts a structural current account deficit, needed to supply yuan liquidity.
Charles de Gaulle thought America enjoyed an “exorbitant privilege” as the reserve currency hegemon. It is better described as an “exorbitant burden”. America must run large deficits to keep the game going. This is the Triffin Dilemma. If it ever stops, the dollar shortage will cause the international finance system to seize up.
This may well happen if a re-elected Biden persists with Buy American protectionism, or if a Trump II opts for sweeping tariffs and incipient autarky.
We should stop wasting breath on a Brics currency and worry more about what awaits the global economy if the US refuses to carry its Triffin burden any longer.