Re: Geopolitics/Oil/USD - BRICS-a-Brac?
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Re: Geopolitics/Oil/USD - BRICS-a-Brac?
De-dollarization hysteria is all the rage these days; as always, I'm happy to debunk it with cold, hard logic and empirical evidence to the contrary.
Dictionary.com defines “Bric-a-Brac” as “miscellaneous objects and ornaments of little value.”
Despite all the recent hyperbole about the BRICS (Brazil, Russia, India, China, South Africa) nations forming a challenger to the USD, I believe it will amount closer to "Bric-a-Brac” than GRC contender.
Let me make several points in no particular order:
The idea of a supranational currency is not new. Keynes championed the Bancor, and Harry Dexter White championed the Unitas around the time of Bretton Woods Conference. SDR’s were tried and went nowhere. I recommend a book entitled The Battle for Bretton Woods by Benn Steil for a detailed historical perspective.
The world organically chose the USD because of faith and trust derived from National Power despite lack of Gold convertibility. We detailed the rise of Eurodollar banking long before the 1971 Nixon abandonment of Gold convertibility in our West Point Paper:
Settlement of commodities in Non-USD has been happening for decades. INVOICED AND SETTLED is a whole different story, and to my knowledge, that just has not happened. The world chooses USD for its STABILITY and LIQUIDITY.
USD share of global FX reserves may be off its highs, but it has consistently stayed at or above 60% for decades even in the face of its stiffest competition with the birth of the Euro in 1999. The Euro is the most successful challenger to the USD to date by far, yet it still has not penetrated 20% of global share of FX reserves. One of its biggest shortcomings — it’s very difficult to have monetary union without political union.
Network effects of the USD system also include the DEPTH and LIQUIDITY of USTs as a reserve asset that can sop up global surpluses. Even the Eurozone lacks a deep pan-regional sovereign bond market, and Band-Aids like the TPI (Transmission Protection Instrument) are just kludgy ways of holding together a “bucket of bolts,” to quote Han Solo.
A true challenger to the USD/UST system must have a DEEP, LIQUID, ELASTIC SOVEREIGN BOND MARKET able to sop up foreign savings. See this Tweet and focus in on:
“For example, as emphasized by the IMF, the size of life insurers assets is more than 10 times the size of their respective domestic corporate bond market."
Despite the Eurozone’s shortcomings, at least most member states are geopolitically aligned. Contrast that to BRICS which not only does not constitute a formal alliance, but its primary nations have constant tensions with each other.
China is notorious for stoking border tensions with its neighbors by renaming border provinces with Chinese names. Not a big deal? What about decades of overt border clashes? India, Russia, Vietnam all come to mind, and two of those three are in BRICS.
There is current outright border hostility between India and China — the two countries within BRICS with the most economic clout by far. Derek Grossman’s paper highlights the significance of the 2020 border clash breaking 45 years of peace; the last clash just happened in December, 2022 when 300 Chinese soldiers tried to cross the border into India.
India doesn’t just have border issues with China. According to one on-the-ground expert, Corporate India hates dealing with the Chinese. He cited India’s increasing counts of reneging on “Model BIT” (Model Bilateral Investment Treaty) deals between India and China due to a panoply of concerns: geopolitical border tensions, national security concerns, concerns over IP theft, trade imbalances. Any of these concerns sound familiar? Chinese business practices are not just US concerns — not by a long shot.
China, the primary driving force behind the recent BRICS PR blitz, wants to “paint a picture” of solidarity precisely because it is precariously short of both Natural Resource and Geographic advantages. Here is an old but relevant thread that details the Geographic differences between the US and China:
China has expended great national treasure on OBOR/BRI projects to recreate natural Geographic advantages (like Deepwater Ports) and to hedge itself against Natural Resource Choke Points (like its crucial Oil route through the Strait of Malacca). Most of these projects have resulted in proverbial “bridges to nowhere.” Geography and Natural Resources are two of the economic pillars of National Power that our West Point paper highlights as key underlying sources of faith in the USD.
More than 80% of China’s Oil imports passes through the Strait of Malacca; China’s “Malacca Dilemma” forces forays into geographically and culturally inhospitable regions that further fracture BRICS cohesion.
China’s failed forays into Sri Lanka and Pakistan stand out. The map above highlights why China wants Deepwater Ports in Sri Lanka as well as the CPEC (China Pakistan Economic Corridor) / Gwadar Port initiative in Pakistan.
Sri Lankan ports have been in Chinese crosshairs for some time, but according to Sri Lankan expert Jigz, China’s hopes for Sri Lankan ports (like Hambantota) have flopped. China spent $1B+ for Hambantota, but to paraphrase a famous stormtrooper, “These are not the ports we’re looking for.” Instead, China gets a very expensive gas station for their base in Djibouti.
The US is not standing still either. If anything, US-listed companies like New Fortress are working with India to actively diminish the Chinese presence. Here are 2 articles about China’s failed Sri Lankan forays, courtesy of Jigz:
https://reconasia.csis.org/the-secret-history-of-hambantota/
China’s forays into Pakistan have also flopped, according to India/Pakistan expert Vivek Kelkar. CPEC and the Port of Gwadar are not taking off as China had hoped. The local population is inhospitable to the Chinese, and there were even some recent rebel killings of Chinese workers. Don’t forget about the fact that any Chinese-Pakistani cooperation also angers India. This article sheds light on the challenges that China faces in an increasingly unstable region:
China’s remaining hope to skirt Malacca seems to be in the Kyaukpyu Port in Myanmar. Similar to CPEC, China has established the CMEC (China Myanmar Economic Corridor) to link Kunming to the Indian Ocean. Never mind the political instability of Myanmar (like the coup in 2021) or the fact that China already had to write off over 80% of its ~$7.5B price tag, take a look at a map of the terrain, and one wonders about the land infrastructure required to pass through a territory and population that does not view China hospitably. You get the picture of why China’s “Malacca Dilemma” is still very much an Achilles’ Heel.
China’s OBOR/BRI initiatives have collectively cost China ~$1T; not only have these projects been funded primarily with USD-denominated debt, most have led to proverbial “bridges to nowhere” and have been restructured. Where are all of those losses hidden?
China’s clout in Africa is faring no better than Sri Lanka/Pakistan:
The chart above was taken from this article which gives a global report card for China’s OBOR projects:
These attempts by China to bolster its Geographic shortcomings show that while China understands that Geography is a critical foundation for a country’s National Power and faith in its currency, recreating what Mother Nature has naturally endowed the US with is extremely difficult and expensive.
And then there’s the problem of OBOR/BRI’s reliance on USD-denominated debt funding. As this article points out, “If the [CNY] was a global currency and BRI could be wholly funded in the currency, the government could technically print [CNY] as it saw fit. Instead, the BRI is tethered to something Beijing does not directly control.” Hat tip to Tony Nash, who has personally worked on BRI initiatives, for pointing this out:
https://www.ft.com/content/2524222a-b66b-3605-a6f6-bc496787f0bd
China has expended tremendous national resources to shore up its Geographic deficiencies but has largely failed, and its reliance on USD-denominated debt financing threatens to set off its Debt Bomb at a time that the Fed still has a global Stagflationary backdrop to worry about:
If geopolitical concerns alone weren’t enough, the final nail-in-the-coffin for a BRICS-based commodity-backed currency is Supply INELASTICITY. Unless we live in a “Star Trek” utopia where nation-states with differing political objectives/constituencies have disappeared (if anything, the world is moving to a more fractured state), NO SIGNIFICANT ECONOMIC BLOCS WILL BE ABLE TO ENFORCE AN INELASTIC MONETARY STANDARD GIVEN THE BRAKES IT WOULD PUT ON GDP GROWTH. I wrote about that here:
IF YOU BUY INTO THE THESIS THAT MONETARY SUPPLY ELASTICITY IS A PRIME REQUISITE FOR GLOBAL ADOPTION IN A WORLD ALREADY PRIMED FOR FIAT, THEN THERE SIMPLY IS NO SAFER / MORE LIQUID FIAT THAN USD.
I also want to point out the TRUST / RULE OF LAW factor behind fiat currencies and why the USD, despite the recent seizure of Russian reserves, is still the only game in town. Don’t get me wrong; I oppose the over-reliance of financial sanctions adopted by the US in recent years. Yet even so, when you consider the list of actors in the BRICS countries, you will be hard-pressed to claim the “grass is greener.” Part 3 of my West Point Paper covers this topic extensively:
Finally, consider the long-term track record of BRICS countries’ currencies. In each case, the underlying currency is expressed against USD in the denominator, so UP = CURRENCY WEAKNESS AGAINST USD.
Brazilian Real (BRL):
Russian Ruble (RUB):
Indian Rupee (INR):
Chinese Yuan (CNY):
South African Rand (ZAR):
Despite all of the hoopla and the sensational, coordinated PR blitz, if any BRICS countries actually wind up conducting more than a token amount of trade in their respective currencies, I predict that there will be a behind-the-scenes game of “Hot Potato” in terms of who dumps the other’s currency first — most likely in exchange for USD.
I always go back to my “Amazon Credit” Analogy: if you get a $50 refund, you’re willing to keep it in the Amazon ecosystem, because you know you can easily spend $50 on “Bric-a-Brac.” But if it’s a $5000 credit, you’re likely going to want your USD back.
The thinking is no different for MbS of Saudi Arabia or Lula of Brazil. They’re happy to make headlines to appease their big customer Xi, but let’s see them put their money where their mouth is. Color me highly skeptical especially in Saudi Arabia’s case. Do you really think MbS would trade the Saudi Riyal’s HARD-PEG to the USD for a currency with a closed capital account which would likely devalue by over 50% upon any relaxing of capital controls?
In summary, for all of the reasons I have highlighted, I believe that any BRICS initiative will be stillborn and as useless as “Bric-a-Brac” much less a credible challenger to the USD.
I hereby name this new GRC contender “BRICS-A-BRAC.”
Re: Geopolitics/Oil/USD - BRICS-a-Brac?
Another issue with EU, China, or BRICs to be real currencies. They would have to radically realign their economies so that they didn’t run huge trade surpluses and instead ran huge trade deficits. I just don’t see any of them wanting to or able to do this. In the long run though, the USD can’t keep this up. We will continue to shrink as a % of global GDP. Can we just run infinitely higher deficits? How do we finance the entire world if we are 20% or 15% of total GDP?
You’ve given me some respite when it comes to BRICs --because Saudi invitation to Syria (Iran) along w changes in Yemen has my eyes. I keep thinking about Israel and what’s next. Lots of majors with a seat at the BRICs table but doesn’t mean they will be able to overcome the power and control paradigm. Watching India very closely.