BRIC Nations: Buddy, Can You Spare a New Reserve Currency?

By Neena Mishra

The leaders of Brazil, Russia, India and China (BRIC) are meeting today in Russia to discuss issues ranging from the financial crisis to climate change. The US Dollar's role in their foreign exchange reserves and cross-border trade is also on the agenda of the meeting.

Recently Russia, China and Brazil have expressed the need for having an alternative to the US Dollar -- in view of the soaring US debt -- and have decided to invest in IMF bonds, a move to diversify their dollar-heavy currency reserves. IMF bonds are denominated in Special Drawing Rights, or SDRs. India has so far been non-committal on this issue.

BRIC nations hold a total of $2.8 trillion in international reserve assets (excluding gold) -- about 42% percent of the world's total. Further, these countries comprise about 15% of the world economy, 40% of the world’s population and output (in purchasing power parity terms), and thus there is a thinking that the group has the potential to lead global economic growth.

Brazil, India and China have also weathered the global financial crisis better than the rest of the world.

China is U.S.’s biggest foreign creditor, holding an estimated $1 trillion in U.S. government debt. In view of their large holdings, the Chinese have been considerably more careful than the Russians in talking about potential alternatives to the dollar, since such comments could undermine the value of their dollar assets. China continues to add dollars to its reserves in order to prevent the appreciation of its currency, which would hurt its exports.

In addition to discussing how to reduce dollar assets in their existing reserves, the BRIC nations are also trying to limit the use of the dollar in their bilateral trades. China signed a deal with Brazil last month, which would allow some bilateral trade transactions to be conducted in their respective currencies.

While these nations seem to be united in their apprehension about the dollar, there are a lot of conflicting interests and disagreements over various other issues. The nature and composition of their economies are also very different.

China and India have sizable labor resources, while Russia and Brazil are rich in natural resources. China is the main importer of natural resources, while Russia and Brazil are the main exporters. While China and India benefit from lower oil prices, Russia and Brazil seek higher oil prices. There is also a huge competition among the BRIC nations for foreign capital and investment.

Further, even taken together, BRIC economies are smaller than the US economy and as such their influence is rather limited as of now -- though it is rising rapidly. Also, the reality remains that there is no immediate alternative to the US Dollar, as no other markets in the world have the depth and liquidity of those in the US.

Emergence of an alternative reserve currency or a basket of currencies could take many years. So, there is no immediate threat to the US Dollar’s role as the world reserve currency, and any outcome of the meeting will be more symbolic at present.

However, if there are significant negative comments on the dollar or signals of shifting the reserves composition away from the dollar (which seems to be a less likely outcome in the present circumstances), it could weigh on the US currency. Companies that derive a significant portion of their revenue from their overseas operations, like McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Procter & Gamble (PG) and Colgate-Palmolive (CL) benefit from any weakness in the US Dollar.

Comments

[Jade Bearer:]

I thought as of last month China only hold around $765 billions in U.S. debt, not $1 trillion.

Jun 16 04:07 PM

[Mad Hedge F...:]

This has a snowball chances in Hell of happening. Will people pleeease stop incessantly talking about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps? At nearly $2 trillion, the Middle Kingdom’s reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but Treasury bills. Chinese attempts to buy anything in size causes its price to immediately skyrocket, such as we saw in the relatively Lilliputian commodity markets last year. And really, how like is it that China embarks on policies that quickly halve the earnings of the country’s exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft’s Windows as the global PC operating system, and is just as likely. Hate the greenback as much as you like, but there just isn’t any other alternative. I have been hearing these arguments ever since the US went off the gold standard in 1973. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the “Yen Block”, in the eighties, back when Japan was dominating international trade and the yen was bumping up against ¥80 to the dollar. Remember the book “Japan as Number One? Ha! Double Ha! Then we got all that European whining after the launch of the euro when the weak dollar was everyone’s one way trade. Let’s face it, Europeans hate using someone else’s currency as the primary reserve instrument. Before the dollar, sterling was in widespread use and was equally despised. So rather than waste time discussing this issue anymore, let’s talk about something more important, like which of those two flies over there will jump off the wall first.

Jun 16 04:12 PM

[PainfullyAware:]

Change Is The Only Constant In The Universe.

I think that more and more are waking up to the fact that Uncle Sugar has a Gambling Problem.

The world watched Russia Financially Implode and thus they have a better grasp of what to watch for.

Servicing The Debt Is Suspect - Reserve Currency Or Not.

No, None Will Abandon The Dollar Quickly - It would be too difficult to achieve without raising alarms and risking devaluation on assets still held. However, the reasonable fear of inflating away the "Value" of the Debt will prompt slow liquidation of dollar assets to "Jump Out" levels in the future. I would estimate two years - the direction is set and the move is in progress.

The interests of America and its "Shop Till You Drop" attitude toward "Buy Now And Pay Latter" are not aligned with the rest of the world.

Would you loan your "Drunk Uncle" more money after watching the "Latest Binge"?

Jun 16 05:35 PM

[contracontr...:]

BRIC dollar talk is ridiculous rhetoric,it's like a mouse in a trap,pretending she's in control,they're not.

There is no other country except US,which can afford and is willing (so far) to run a huge trade deficit against BRIC. Trying to reduce their dollar reserves would kill their economies for decades,and they know it,their local entrepreneurs have influence in politics and will secretly oppose it.

Jun 16 06:06 PM

[grey road:]

Of course this will not happen tomorrow .. yes 2 years is about right. What don't you understand about what they are saying and why it is to be taken seriously. Just because the USD has shown corrective strength the last few days is irrelevant. They are moving out of USD , thye do have much power but will not shoot themselves on the way out. THe dollar is going down and nothing will stop it, and there will be a new reserve currency at some point in the not too distant future. It will not be an existing currency,. thats what you miss. Yes we could use monopoly money really , what difference will it make. My prediction .. a new currency based on currencies and commodities and i say it will be in less than 5 years. Its why gold always has, still does and always will be an important metal, and a value of store. Really there is no other way without leading to where we are now.


On Jun 16 06:06 PM contracontrarian wrote:

> BRIC dollar talk is ridiculous rhetoric,it's like a mouse in a trap,pretending
> she's in control,they're not.
>
> There is no other country except US,which can afford and is willing
> (so far) to run a huge trade deficit against BRIC. Trying to reduce
> their dollar reserves would kill their economies for decades,and
> they know it,their local entrepreneurs have influence in politics
> and will secretly oppose it.

Jun 16 06:29 PM

[Tick Talk:]

Neena, Excellent insights. Thank you. A new reserve currency was suggested at the G-20 and was shot down. Therefore, the next question is unity. Will BRIC organize to act? Yes. They just did. The historical citations by Mad Hedge Fund are irrelevant for one reason: The U.S. has never deliberately betrayed the trust of foreign buyers of U.S. treasuries to this magnitude.

Because the U.S. willfully debased its currency by increasing the supply of the medium in which its debts are denominated, it literally robbed treasury bond holders. This tactic is a political and financial tactic and the offense that broke the BRICs back - hence the summit. As inflation proceeds, all permanent relations between debtors and creditors becomes catostrophic chaos and almost meaningless. A debauched currency is the surest sign of a crippled society and a new, even deadlier government regime.

The U.S. has lost the trust of BRIC nations and U.S. citizens. Both groups will be wise to remember this treachery and fortify themselves against future harm.

Jun 16 06:51 PM

[Rollerball:]

Walk in Chinese shoes: what if ... NATO takes out my bipolar little cousin NK? Then what? Throw a BRIC at 'em? Invade Taiwan?Dump treasuries and dollars? Oooo, scary. Then what? Kill your best customers? Not if we kill you first. Hypothetically, that would save US a lot of money. So laugh all you want. Get ready for your QE haircuts.

Jun 16 08:18 PM

[dybydx:]

QE haircut doesnt work.

while the US gov CAN print money out of its debts, its also telling everyone that US dollars are worth as much as your AAA rated CDO mortgages. then, americans will be paying an arm and a leg for every barrel of oil.

Jun 16 11:44 PM

[Peter Cooper:]

Did you see the sensational proposal by Russia to include gold in a new IMF SDR reserve currency? This has huge implications for the gold price - and the dollar - see:
arabianmoney.net/2009/.../

Jun 16 11:54 PM

[Missing_Link:]

On Jun 16 04:12 PM Mad Hedge Fund Trader wrote:

> This has a snowball chances in Hell of happening. Will people pleeease
> stop incessantly talking about the possibility of China dropping
> the dollar as a reserve currency? What else are they going to use?
> Monopoly money? Taiwanese dollars? Collectable postage stamps? At
> nearly $2 trillion, the Middle Kingdom’s reserves are so enormous
> that no other currency in the world could accommodate the switch,
> and no other security offers the necessary depth and liquidity but
> Treasury bills. Chinese attempts to buy anything in size causes its
> price to immediately skyrocket, such as we saw in the relatively
> Lilliputian commodity markets last year. And really, how like is
> it that China embarks on policies that quickly halve the earnings
> of the country’s exporters, as well as its 30 year hoard of accumulated
> savings? The demise of the dollar has been predicted more often than
> the ditching of Microsoft’s Windows as the global PC operating system,
> and is just as likely. Hate the greenback as much as you like, but
> there just isn’t any other alternative. I have been hearing these
> arguments ever since the US went off the gold standard in 1973. First
> there was a perennial Arab threat to price crude in a basket of currencies.
> Gee, they never seem to complain when the buck is going up. Then
> there was the speculated emergence of the “Yen Block”, in the eighties,
> back when Japan was dominating international trade and the yen was
> bumping up against ¥80 to the dollar. Remember the book “Japan as
> Number One? Ha! Double Ha! Then we got all that European whining
> after the launch of the euro when the weak dollar was everyone’s
> one way trade. Let’s face it, Europeans hate using someone else’s
> currency as the primary reserve instrument. Before the dollar, sterling
> was in widespread use and was equally despised. So rather than waste
> time discussing this issue anymore, let’s talk about something more
> important, like which of those two flies over there will jump off
> the wall first.


Mad, you really need to learn to use carriage returns.

Of course China's not going to drop the dollar tomorrow. But between all of the countries that have been screwed over by Obama's money printing and their increasing coordination on this issue, it's very clear that they're starting to give themselves the tools to make the switch IN THE LONG RUN.

Not in 5 years, not in 10, but I could see it happening in 15 or 20 depending on what happens to the dollar in the meantime. Your historical precedents are irrelevant -- it's a different world now, one that's much more capable of kicking Uncle Sam in the nuts.

You're foolish to discount the possibility that this could someday occur.

Jun 17 12:26 AM

[beijingpaddy:]

I posted this elsewhere but thought it was relative to the discussion on this thread too.

Some thoughtful comments upthread. thanks.

Last night while making something to eat, I listened to the Evening News in Chinese on a local Beijing radio station. This was for the domestic and not foreign audience. They interviewed some economics professor from one of the universities in town. There has been a lot of pressure from ordinary citizens and mid-level government Ganbu (cadres) to sell off some of the US Treasury holdings these last months, so it was interesting the spin the professor put on the news of the sell down. Basically he pitched the long-term desire to move to some alternate sources such as the IMF reserves. But he also made it clear that there was not going to be any rapid and broad sell off any time soon. He was obviously trying to walk both sides of the street. These kinds of folks don't get on the news in China without official blessing, so I would have to imagine his comments reflect the consensus within the State Council.

The Chinese are not famous for doing bold things suddenly. They are constantly quoting Deng Xiaoping's famous saying about the need to make one's way across the stream by feeling for one stone at a time. This reflects nicely the Chinese temperament. But I think we can get a sense from recent government comments where they want to go long term, conditions allowing. The best thing would be for the US government to begin preparing for this and start the orderly transition to an internally accepted alternative. This way they would be coming from a position of strength and keeping some overall control of the process. But this is not likely. We should instead expect the US to fight the entire global transition away from the USD, forfeiting good will and wasting both US taxpayers time and money. Too bad.

Jun 17 01:22 AM

[Moon Kil Woong:]

Diversity doesn't mean abandonment. The US$ will continue to play a major role in the world economy. However, all transactions and debt does not need 1 principal currency. In fact, naysayers to the dollar would say it adds elements of instability. Especially if the country issuing the principal currency decides it can start playing games with it including debasing its currency to put the onus on debt holders and foreign nations to take the brunt of any global recessionary pain.

Although the IMF is a joke as a secondary currency (it depends on the US, has to forgive huge amounts of debt constantly, and can't stand on its own) that doesn't mean that other arrangements can't inevitably be designed to compete with the dollar be it the Euro or another currency. In fact, if Asia could ever get its act together, a unified Asian currency could probably compete with the dollar in ways the Euro could never do. Of course asking Japan, Korea, and China to unify currencies right now is a bithard to conceive but at least they are already giving each other currency swaps.

Jun 17 01:36 AM

[HaavBline:]

China 'only' hold around $765 billions in US Treasury bonds. Including other dollar-denominated assets, such as 'agency bonds' guaranteed by the US goverment (Fannies and Freddies), it is well over $1 trillion, even after China's reported recent selling of those agency bonds.


On Jun 16 04:07 PM Jade Bearer wrote:

> I thought as of last month China only hold around $765 billions in
> U.S. debt, not $1 trillion.

Jun 17 01:48 AM

[HaavBline:]

American pride? The proudest deadbeat the world has ever seen?


On Jun 16 08:18 PM Rollerball wrote:

> Walk in Chinese shoes: what if ... NATO takes out my bipolar little
> cousin NK? Then what? Throw a BRIC at 'em? Invade Taiwan?Dump treasuries
> and dollars? Oooo, scary. Then what? Kill your best customers? Not
> if we kill you first. Hypothetically, that would save US a lot of
> money. So laugh all you want. Get ready for your QE haircuts.

Jun 17 02:22 AM

[Clive Corcoran:]

US dollar bypass strategy - not a replacement but an alternative
"There is nothing more powerful than an idea whose time has come."

Jun 17 04:52 AM

[Dave Wrixon:]

Come on. Lets have a bit of honesty here.

The US is completely skint. It is just the message has yet to get through to some of the less initiated populus.


On Jun 16 06:06 PM contracontrarian wrote:

> BRIC dollar talk is ridiculous rhetoric,it's like a mouse in a trap,pretending
> she's in control,they're not.
>
> There is no other country except US,which can afford and is willing
> (so far) to run a huge trade deficit against BRIC. Trying to reduce
> their dollar reserves would kill their economies for decades,and
> they know it,their local entrepreneurs have influence in politics
> and will secretly oppose it.

Jun 17 04:53 AM

[Clive Corcoran:]

Re comment from Peter Cooper
Why stop at just adding gold to the basket underlying the SDR - should also include other strategic commodities as well?
seekingalpha.com/artic...

Jun 17 05:10 AM

[nobby73:]

I think there is an attempt to force some fiscal discipline on the US. Although there is concern about the monetization of debt we have seen through FED purchases of ABS and Treasuries, there is an acceptance that the US has the right to try this tactic, within limits.

However, looking down the road, we have the US govt debt shortening in duration and foreign holdings switching as well. This creates plenty of leverage and if we do not see a sharp rebound in the economy in the next couple of years, they will want to see real efforts to reduce the budget. If the politicians do not have the guts to make the necessary changes, this could lead to an acceleration in moves out of Dollar assets, but we shall see.

Jun 17 05:15 AM

[cameroni:]

This is really interesting thinking Clive. (Thinking outside the basket in a way). If the BRIC wants a new reserve currency basket then why should there not be a reserve currency based on proven resources and commodities in the ground and on the soil? Certainly the Americas would still hold a lead at the table no matter how devalued the US dollar becomes.

And in essence then, if a country has no commodity of value then it has no money and by that logic no hand in the formulation of world currency policy. The BRIC, while influential as a group do not have the pull of the Americas for one reason.

They consume domestically almost everything they produce (with the exception of Russia) in support of of their own populations.

Gold may not be enough to formulate the basis of a new world reserve currency but from a larger commodity resource base there exists the possibility to determine the true strength of nations and this could be a key to why the US Dollar will hold it's position for many, many years and decades to come.

Dollar devaluation does not for a second imply weakness.


On Jun 17 05:10 AM Clive Corcoran wrote:

> Re comment from Peter Cooper
> Why stop at just adding gold to the basket underlying the SDR - should
> also include other strategic commodities as well?
> seekingalpha.com/artic...

Jun 17 08:51 PM

[Rollerball:]

To dybydx: we "own" Iraq and Saudi Arabia, and will be "partners" with Russia if we secure a warm weather port for their exports (pipeline) when (not if) we take Afghanistan.

To HaavBline: would you lend money to a mob boss and not expect to have your arm twisted (and possibly broken)?

Jun 17 09:20 PM

[Sovestor:]

Investing is easy now if you want to keep it simple. The trends are very obvious: emerging markets and small caps. All you need to do is invest in low-cost index funds and hold them for the long-term....keep it simple....enough with complexity.

Jun 18 03:57 AM

[coreopsis:]

A quite inane and incoherent comment. Obviously the writer is unfamiliar with Adam Smith's Wealth of Nations (1776) where the WoN lies in land, labor and capital. But this is why a college education should be the goal of everyone!


On Jun 17 08:51 PM cameroni wrote:

>
> This is really interesting thinking Clive. (Thinking outside the
> basket in a way). If the BRIC wants a new reserve currency basket
> then why should there not be a reserve currency based on proven resources
> and commodities in the ground and on the soil?

Jun 19 10:20 AM

[cameroni:]

Old ideas are not bad ones Coreopsis.

And I am familiar with Adam Smith. Now I want you to consider for a moment though that in a world of rapidly depleting resources and growing populations where real economic strength is to be found.

Do you really think Adam Smiths arguments about how the economy functions have become totally invalid over the years? Or are we really just going back to the future as Adam Smith saw it in his day.

America has strength, despite it's massive dollar devaluation because of it's great depth of "real" resources, it's brilliant pool of talented workers, a military second to none and corporate global reach.

You are very mistaken to discount the validity of physical wealth in the ground and on the land at a time when the worlds population is expanding out of control and so many countries are competing for the same limited resources.

The times they are a changing Coreopsis. But they are changing back to the past. Give Adam his due please.

Jun 20 01:21 AM

[User 357705:]

Jingoistic tripe.


On Jun 16 04:12 PM Mad Hedge Fund Trader wrote:

> This has a snowball chances in Hell of happening. Will people pleeease
> stop incessantly talking about the possibility of China dropping
> the dollar as a reserve currency? What else are they going to use?
> Monopoly money? Taiwanese dollars? Collectable postage stamps? At
> nearly $2 trillion, the Middle Kingdom’s reserves are so enormous
> that no other currency in the world could accommodate the switch,
> and no other security offers the necessary depth and liquidity but
> Treasury bills. Chinese attempts to buy anything in size causes its
> price to immediately skyrocket, such as we saw in the relatively
> Lilliputian commodity markets last year. And really, how like is
> it that China embarks on policies that quickly halve the earnings
> of the country’s exporters, as well as its 30 year hoard of accumulated
> savings? The demise of the dollar has been predicted more often than
> the ditching of Microsoft’s Windows as the global PC operating system,
> and is just as likely. Hate the greenback as much as you like, but
> there just isn’t any other alternative. I have been hearing these
> arguments ever since the US went off the gold standard in 1973. First
> there was a perennial Arab threat to price crude in a basket of currencies.
> Gee, they never seem to complain when the buck is going up. Then
> there was the speculated emergence of the “Yen Block”, in the eighties,
> back when Japan was dominating international trade and the yen was
> bumping up against ¥80 to the dollar. Remember the book “Japan as
> Number One? Ha! Double Ha! Then we got all that European whining
> after the launch of the euro when the weak dollar was everyone’s
> one way trade. Let’s face it, Europeans hate using someone else’s
> currency as the primary reserve instrument. Before the dollar, sterling
> was in widespread use and was equally despised. So rather than waste
> time discussing this issue anymore, let’s talk about something more
> important, like which of those two flies over there will jump off
> the wall first.

Jun 20 04:14 AM

[User 357705:]

Jingoistic tripe.

US will be handed its hat in Afghanistan as have everyone else who sent troops there.

US doesn't own ANYTHING as its the biggest debtor nation in history and doubling down on its debt to stave off the inevitable.


On Jun 17 09:20 PM Rollerball wrote:

> To dybydx: we "own" Iraq and Saudi Arabia, and will be "partners"
> with Russia if we secure a warm weather port for their exports (pipeline)
> when (not if) we take Afghanistan.
>
> To HaavBline: would you lend money to a mob boss and not expect
> to have your arm twisted (and possibly broken)?

Jun 20 04:41 AM