Another BRIC in the Wall

On July 17, 1918, in a basement near the Russian city of Yekaterinburg, Czar Nicholas II, his wife, and all of his children were murdered by the Bolsheviks and buried in a makeshift grave. Yekaterinburg was later renamed Sverdlovsk under Soviet rule, and was notable as the fiefdom of Boris Yeltsin during the final years of his communist career.

Almost ninety-one years later, Sverdlovsk is once again Yekaterinburg, and the city is playing host to a summit that would scarcely have been imaginable during the seven decades of communist rule. A new international political grouping consisting of Brazil, Russia, India, and China — and commonly referred to as BRIC — is meeting this week in Yekaterinburg to discuss the mutual interests of its members, with a special focus on common strategies to be pursued in the face of the global financial crisis.

Although the BRIC countries contribute less than 11% of the world’s GDP, they provide 42% of its population, and are a force to be reckoned with. In coming years the economic power of the four nations, particularly India and China, can be expected to increase, especially in relation to the waning hegemonic influence of the United States.

The primary concern of the BRIC group — and indeed of any country, corporation, or individual holding wealth denominated in dollars — is how to shift from assets based on the dollar to something less vulnerable to the coming inflation.

The Obama administration’s recent injection of liquidity into the global financial system — whether via bailouts or stimuli — has required additional borrowing on an unprecedented scale. Even though the prices of bread and shoes have not yet skyrocketed, it’s obvious that an inflation is well underway. There are now ten to fifteen times as many dollar-denominated assets spread throughout the global system as there are dollars in circulation.

If these obligations were somehow never called in — if investors continued to swap them among themselves and buy more, rather than converting them to another currency, gold, or silver — the global shell game could continue indefinitely. We could maintain the fantasy that all these dollars really mean something, that somehow the United States will be able to pay off its debts and keep the dollar strong and stable.

Unfortunately, it’s obvious by now that this is not going to happen. At some point major investors are going to stop betting that the dollar will maintain its value. The process of inflation can proceed gradually when ordinary people use dollars to buy gold, silver, or mining stock. But when sovereign nations or international mega-financiers like George Soros decide that the dollar is no longer safe, the gold rush will begin and the value of the dollar will plummet.

The large investors will play chicken with their dollar stocks, holding them as long as possible so as to milk the last drop from them. Then someone — China, Russia, Soros; who knows? — will go first. They will dump billions of dollars and buy gold or other inflation-proof commodities, and then the run on the dollar will begin in earnest.

When the time comes, what can the USA do besides print more money to meet its obligations? Except for defaulting on its enormous debts, it will have no other choice. The Great Inflation is all but inevitable. Sometime in the next two to five years, everyone whose assets and savings are tied up in dollars will become much, much, poorer overnight.

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The countries in the BRIC group are well aware of all this, and that’s the primary reason they met this week in Yekaterinburg.

They flexed their muscles by announcing in advance that they would be discussing the establishment of an alternative to the dollar as a reserve currency. Needless to say, as a candidate for the new international standard, the Russians prefer the ruble and the Chinese the yuan.
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But BRIC backed off from this idea just before the meeting convened. They emphasized instead the urgent necessity of reform in the global financial system. Well, duh — we all know that. The problem is how to do it without inducing catastrophic instability in the world’s markets. Extreme price instability, whether deflation or inflation, is a political depth charge. The results are inherently unpredictable, and could lead to war, revolution, regime change, and massive social upheaval. No country’s leadership — with the possible exception of Iran’s — wants to enter that territory voluntarily.

Obviously the BRIC group was unable to agree on which currency would have the privilege of replacing the dollar. Or perhaps the whole idea was a feint, a shot across the bow of the United States and the EU to drive the dollar down and provide a good initial bargaining position for future G8 and G20 meetings.

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In the end, the BRIC nations settled on a joint statement that called for a “more diversified international monetary system” without actually mentioning the dollar. But the dollar is the elephant in the room — the system can’t become more “diversified” without dethroning the dollar and choosing another currency to act a globally recognized reserve currency.

To do this will require quite a bit of ugly political sausage-making. And — to mix metaphors — someone’s oxen will inevitably be gored, while other oxen will be cosseted and well-fed when the new dominant currency finally emerges.

The primary issue is the decline of the United States as the pre-eminent world power. The rest of the world can feel the breeze blowing in the direction of the coming power vacuum, and the BRIC summit is one symptom of the changes that are now beginning:

A common thread running through the Shanghai Cooperation Organization (SCO) summit in the Urals city of Yekaterinburg, and the Brazil, Russia, India, and China (BRIC) meeting which followed it, was discussion about a new world order less dependent on the United States.

So what will an America-free New World Order look like?

That’s the big question. It must surely give pause to even the most hardened loathers of the Great Satan. Whether you love it or hate it, up until now you could count on the United States to intervene in certain ways in certain situations so that the international political system remained more or less intact, and the global engine of power, patronage, and commerce could keep on chugging along in its accustomed fashion.

But all that has to end, and we’re about to enter a period of turmoil at best, and violent chaos at worst, before a new system finally shakes out.

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Why BRIC? Why Brazil, Russia, India, and China?

What happened to Japan, the EU, and Canada?

The fate of all of these other economic powers is chained fairly closely to that of the United States. The euro and the pound are as deeply leveraged as the dollar, and the banking systems of the United States and Europe are fully intertwined. That’s why the federal government is bucking popular opinion to bail out European banks — the nabobs of high finance on both sides of the Atlantic will rise or fall in tandem.

So sterling, the euro, and the dollar are eventually going to be humiliated in the world’s financial markets. The bloated and sclerotic welfare states of Europe and North America will collapse soon afterwards, pauperizing millions of elderly and disabled dependants of the state almost overnight. After that — who knows?

China, India, and Russia would all like to come out on top, but none of them wants to see the USA or Europe become poverty-stricken economic backwaters. All of them depend to a large extent on the purchasing power of the American and European consumer. When that evaporates, so do their exports, and they will confront hundreds of millions of their own unemployed citizens, with all the political danger that entails.

Russia is already heavily in hock due to last year’s decline in the price of oil. The price has risen recently, and the coming political instability will tend to drive it even higher. Over the long term, however, with the United States economically moribund and the wheels of Indian and Chinese industry spinning ever more slowly, stagnant demand will inevitably force the price of oil back down into the cellar.

The USA will still have the world’s largest and best military, but will find it hard to wield it effectively when the dollar becomes worthless. What strength we have left will be tied up coping with Mexico, Nicaragua, Cuba, Venezuela, and all the other festering sores south of the border, which will be facing their own fiscal and political crises.

At that point the rest of the world will be up for grabs. If one of the larger powers covets the territory of its smaller neighbor, when its leaders make their political calculations they will no longer have to factor in the arrival of the Sixth Fleet or a sustained attack by the U.S. Air Force.

The result will be a huge incentive for all the smaller nations to acquire nuclear weapons. Poland, Latvia, Ukraine, Hungary, Turkey, Thailand, Ireland, and Colombia — any one of them might find it in its best interests to acquire nukes, and you can assume that Iran, Pakistan, and North Korea will be out there peddling the hardware and renting out the technicians.

Or there may be some other unforeseen condition that eventuates in the post-American World of Tomorrow.

One thing is for certain, however: things won’t stay the way they are. The existing system cannot survive the stresses that will face it in the near future. Whether it’s inflation, war, revolution, or general collapse — you will know changes soon.

We have made our bed, and we shall surely lie in it.


For the full articles cited above, see tonight’s news feed, and also the news feeds for June 12th and June 14th.