What Unites the BRICs? Dollar Envy

By Mike Conlon

When Goldman Sachs coined the term “BRIC” (Brazil, Russia, India, China) for the fastest-growing developing economies in the world in 2001, I highly doubt that Goldman thought that within 10 years these countries would actually take its advice and form a coalition. And yet here we are. The first BRIC summit occurred this week and went largely unnoticed. More of a symbolic meeting than anything else, the one topic on everyone’s mind was what to do about the U.S. dollar?

Why was the meeting symbolic? Because the BRIC economies have absolutely nothing in common! The only common factor they have is that they hate having the U.S. dollar as the world’s reserve currency. Let’s face it, these countries speak 4 different languages and are on 3 different continents bordered by 3 different oceans. One country is communist, another formerly was, and the others are republics.

Half of BRIC are commodity producers (Brussia) and the other half are end users (Chindia). With this in mind, one would think they would have different reactions to the strength of the US Dollar. But surprisingly they all seem to be on the same page. Let’s take a look at the Claymore/BNY BRIC ETF (EEB) and compare it to the US dollar to get a picture of the full story.

Click to enlarge:

As You can see from the chart, the BRIC ETF (EEB) and the U.S. dollar have an inverse relationship; that is when the dollar is going down, the BRIC ETF is going up and vice versa. So it makes sense that some of the BRIC countries would like us to have a weak dollar. But yet we always hear that China is concerned about our weak dollar? What gives? What do they want from the dollar?

The short answer is that they don’t know. Brussia benefits the most when the dollar is weak as this tends to be inflationary which results in higher commodity prices. Chindia would rather see a strong dollar, so that the U.S. will consume more of their goods, their energy costs will be less, and they’ll get more interest on their dollar reserves.

So what did they hope to accomplish at their first summit? Basically it was a wake-up call to the U.S. and the rest of the world that these economies want to be players and taken seriously. After all, it wasn’t that long ago the China was accused of unfair trade practices and criticized for keeping its currency pegged, Russia was privatizing companies and blowing out foreign investor holdings, and Brazil was defaulting on its debt!

And they claim the problem is having the U.S. dollar as the world’s reserve currency! They wouldn’t even be having this summit if it weren’t for a guy sitting in an office at 85 Broad St!

So as we can see, the BRIC countries are nothing more than a collection of developing economies looking for a bigger place on the world stage. But rather than all of the negative talk about the U.S., they should be thankful that their past sins have been forgiven and that they’ve been encouraged to grow and become prosperous.

After all it could be worse. Emerging economies South Korea, Hong Kong, Indonesia, and Thailand could have been added to the existing Brazil, Russia, India, China. I’ll let you figure out what that acronym is!

Disclosure: The author holds a position in the securities mentioned in this article

Original article

Comments

[User 434602:]

What you are suggesting is that the existing FEDś Ponzi Scheme should be left alone and not discussed or challanged...??
As Bob Chapman puts it in his latest ïnternational Forecaster..

s their money is sidelined with the Fed to sterilize it (i.e. to keep it from stoking inflation) the smaller fry who depend on them for their supply of financial capital are being allowed to die of money and credit starvation so the anointed can purchase the most valuable parts of their financial carcasses at pennies on the dollar via bankruptcy auctions and fire-sales in a blatant attempt to eliminate their competition and consolidate their power. This deflationary contraction in the supply of money and credit due to the exposed loan, mortgage and derivative fraud is a strong undertow to our economy which threatens to drag it out to sea until it runs out of air and drowns. The Fed must therefore inflate and swim for shore, or die. And inflate they will. We can absolutely guarantee it. Obama will go down in history as the King of Stagflation, as he joins forces with the inimitable Gordon Brown, the King of Fire-Sale Gold.

Jun 21 08:00 AM

[Modal:]

"Emerging economies South Korea, Hong Kong" - Emerging economies??

Jun 21 09:02 AM

[Rhunzzz:]

Four months doth not an inverse relationship make.

Jun 21 09:46 AM

[Tony Daltorio:]

Where do I begin with this article? What arrogance, what hubris.......
Is it any wonder the BRIC countries and others are blowing past the US in the economic race?

Jun 21 06:44 PM

[snagglesnarf:]

Whether the BRIC's like it or not, there is nothing even close out there to replace the dollar. But multiple years of trillion dollar+ defecits can change that very quickly.

Jun 21 07:22 PM

[cameroni:]

They say opposites attract. Why should'nt a BRIC marriage work? Collectively they have plenty of clout. I can see plenty of reasons that union would work well on so many levels.

Jun 22 12:37 AM

[coreopsis:]

These guys -- with none too bright an air about them from their photos -- with their subtly titled moniker 'MyWealth' [no space] -- don't seem have the resources to back their position with substantive logic. Reader, beware.

Jun 22 09:31 AM

[Carlos Lam:]

The BRICs don't envy America; they're trying to save their collective butts as the dollar continues its long-term downward trajectory. Let's review:

America (us):
* federal obligations (debt+SS+Medicare) at 735% of GDP
* household debt at 100% of GDP
* <5% of income saved (was negative)

BRICs (them):
* federal obligations much lower than 735% of GDP
* household debt under 50% of GDP
* high savings (30-40% in China!)

With THOSE fundamentals, why would they envy us?

Jun 22 06:13 PM