BRIC Is for Real

The world has changed. The change was coming anyway, and the United States just helped it along. Globalization was going to happen. The United States pushed it along for its own benefit and now the United States is, itself, seeing what globalization is going to mean for everyone.

Brazil is now riding high like other emerging countries, commodities are driving the engine. However, Brazil is just one among several.

BRIC: Brazil, Russia, India, and China are a group of dynamically emerging countries.

Sovereign wealth funds: Brazil is joining China and Middle Eastern oil states.

Canada and a few other countries are being recognized as the ‘next wave’ of countries that are emerging economically.

This is the world of the future. It is a world in which the United States is still the superpower, but it is a world that cannot be dominated by the one and only super power. And, these people are talking with one another. For example, the countries that make up BRIC are meeting this weekend in Russia. They are “taking awareness of (their) own influence in world affairs.” It is expected that this talking will continue and spread.

However, the United States cannot just do, what it wants as it pretty much has tried to do over the past seven and one-half years, economically as well as in foreign affairs in this world. The United States is going to have to consider itself as a member of the world community and learn to work with others as well as encourage and help others if it expects other to respect and listen to its views.

The United Nations is outdated and unrepresentative; the leadership of the World Bank and the International Monetary Fund is too ‘Western’; and the G-7 or whatever does not contain some important players. The world is in transition and the United States is going to have to be an integral partner in the transition. In the past seven and one-half years, in too many areas, the United States has taken the position that if it didn’t like what was going on, it just removed itself from the picture.

As a consequence of such action, the United States lost any ability it might have had to influence outcomes. Also, in the process, other countries learned how to ‘go it alone’ and work out the best solution they could. The United States lost respect while other nations gained in wealth and confidence and the knowledge that they did not need the ‘big guy’ around. They would like the ‘big guy’ there, but their work continued without that input.

Economically and financially, the United States is going to have to become a full member of the world community once again. This administration will not do it - they have neither the time nor the will to do it - but the next administration should. Most of all, the United States must start talking with these nations, not as their superior but as their partner. The United States must not be selfish in this partnership, as it must help the emerging powers to become strong, while at the same time firmly advocating its own position.

Where does this process start? The United States must begin the process by bringing under control its monetary and fiscal policy. It must play by the same rules that the rest of the world plays by.

Why is Brazil considered a part of BRIC? It paid the price of bringing its inflation and its economy under control. Brazilian president da Silva ‘bit the bullet’ and made the central bank independent and let it bring inflation under control. Its economy improved, productivity increased, and, financially, Brazilian debt has been rewarded with an “investment grade” rating. It was not easy, but it was done.

Brazil is currently riding the crest of the commodities boom and is trying to make good use of the funds coming into the country: hence the formation of a Sovereign Wealth Fund. And, in the last two years or so, the Real, the Brazilian currency, has even outperformed the Euro relative to the dollar. But, Brazil needs the United States to be strong financially, and it needs the United States to be a partner.

Brazil is not the only country that has gone through this cycle. Most major nations, as well as many of the emerging nations have made their central banks’ independent and allowed them to contain inflation. And, this does not help the value of the dollar, given the current stance of the United States with respect to its monetary and fiscal policy.

Listen to the stern words of Mervyn King, the governor of the Bank of England, at a news conference on Wednesday where he said:

England is traveling along a bumpy road as the economy rebalances. Monetary policy shouldn’t try to prevent that adjustment.

He further stated that inflation is expected to accelerate and the central bank must continue to combat this inflation and this means that the Bank of England will not make further cuts in interest rates. This, of course, does not help the position of the United States and the value of the dollar. But, the Bank of England does not stand alone in taking this stance.

The world has gotten to where it is faster than it otherwise would have. The United States has contributed to this accelerated pace by creating large fiscal deficits underwritten by extremely low interest rates. The mountains of debt, both public debt as well as private debt, that have resulted have been spread throughout the world. The fact that the United States has no energy policy has also played its part in the changing world and has helped along the explosion in commodity prices. Before these events, the world was globalizing, and these events just sped the effort along.

Where does this leave the United States economically and financially? It leaves us in a position in which we must stop pointing at others and placing the blame on them. As Steven Covey wrote:

If you think the problem is out there…that is the problem!

When there is dislocation and dysfunction, behavior must be adjusted to re-establish some form of unity and wholeness. Most often, dislocation and dysfunction come about due to the strict adherence of ‘ideology.’ The United States, once one of the more realistically pragmatic countries in the world, has been compromised by a rigid pursuit of an ideology that has had little connection with the real world. It cannot afford to continue behaving in this way.

BRIC is real. The wealth and power of a dozen other countries is real. And, this change is going to continue. If the United States doesn’t accept this fact, and what it means for its own behavior, disruption and volatility will continue in world markets and may even increase. How one constructs an investment strategy for the future depends upon how one sees this situation working itself out.

Comments

[richjoy]

It is not pleasant reading...but we do need to hear and process these thoughts.

It is clear that the USA has veered from its former path, and someone (i.e.; a strong president and congress working together, instead of non-stop partisan bickering) has to put us back on the proper path.

[cncntrt]

I agree with the basic premise of the article as far as monetary and fiscal responsibility are concerned. I will also agree in terms of energy policy.

I would add that I would draw sharp lines politically even though many would like to leave this aspect out of the picture.

Politics influence economics and never forget that. The reverse is true as well.

While helping other nations we must NEVER forget who we are and what we represent.

As for whether we are friends with everyone or not is not what we shuold grope for. Neither are cheap shots at this administration.

What plagues us has plaged us for decades!

We have needed an energy policy for decades! We need an infrastructure policy and have needed one for decades.

If we had the two, we would not only find ourselves more economically independent, but more politically powerful as well.

If being friendly with everyone is what it is all about wake up and smell the coffee. We make mistakes and so does everyone.

Does Russia or China or the middle east have a better policy on human rights? Have they dome more for their people and the world around them than has the USA?

My point is we must remain strong and independent and not allow ourselves to capitulate politically in the name of economics.

Be careful who we choose as friends and the long term implications and ramifications those friendships bring.

The sooner we initiate a huge infrastructure project here, in conjunction with a huge energy infrastructure project, the sooner we can take advantage of our greatest assest, and that is our creative forces.

We can create new industry while reviving existing ones. This will provise jobs in labor and in technology.

We will revitalize growth. With our people resources we can blast ahead and become a world leader in NEW ENERGY.

Not to sound cold, but we need to send the middle east a message. Let that message be that we are in the drivers seat and not the other way around.

I believe the American way of old is the best way!

We have the best political system like it or not, and the most diverse society on the planet. More freedoms and rights are granted here than anywhere.

We need a leader who will tell folks to stop the "What about me" syndrome while leading from example.

Forget blaming this administration. It is the whole of our political leadership.

We need oil and gas NOW and should start by allowing what other nations are doing NOW. We talk about what this or that other country is doing but we fail to mention the environmentalists who stop us every step of the way.

We can and should drill off the east and west coast, up in Alaska and what have you. We should have a few additional refineries and nuclear plants while at the same time, begin our massive infrastructure play on new cleaner and safer energies.

This way we attack the present while stimulating jobs and we put the same effort or more into our future. The new refineries can incorporate technologies that can transition as well to newer alternative forms of energy proscessing as it moves to the fore.

We need to put pressure on the CONGRESS and the SENATE and the Environmentalists. The environmentalists should not control our whole present, but simply help guide us along with industry to a cleaner tomorrow.

We need to also call the politically motivated press to account for pushing their biases more than the truth.

The press makes it all seem like magic. Other nations can do this or other nations can do that. The press fails to put the environmentalist and their influence machine front and center for doing this nation a great disservice. Ditto for the politicians that have caved in.

We can use our technology to build our infrastructure to fill our present energy needs as well as our future energy needs. We can do it better than we have done in the past. Most of all, we MUST do it.

Without the press reporting on the adverse impact environmentalist are having on us, the nation is in the dark.

Turn the lights on America!

[User 143167]

So please tell me why the US equity market still has the highest PE over all BRIC countries excluding mainland Chinese A share?

[barnburner]

cncntrt, I forget, who are we and what do we represent-especially during the last six years?

[RichardSchweitzer]

Many readers may not be aware of the concept of "Open Access Orders," as defining the social organizations of nations, such as the the U S , U K and France.

None of the BRICs are open access. They are all Limited Access Orders. See, NBER Working Paper 12795.

Unless one understands the the risk factors of an LAO, as compared to those within an OAO, there is no limited to one's loss exposures.

Russia in particular has become (and shows no trends for change) a strict LAO. Brazil may be capable of becoming a "threshold" economy (transitioning to OAO) but has a high burden "public" sector - but is stable. India and China are not yet at Threshold.

It is not simply a question of the existence of "Rule of Law." But, for whom do the "Rules" work. It is an issue of how their societies are organized and function (as well as why they are so).

It is not simply a matter of what pots are boiling, but what ingredients are in them - and - who's doin' the cookin' to what purposes.

Disclosure: Long RSX; EWZ; MTL; VWO (retired from International Law).

[Marvin]

There are three areas comprise the USA's long-term competitive advantage:

1. Dynamic business/capital formation and ability to attract the best minds.

2. An ability to project power with a highly-trained military comprising professionals who understand the implications of using force.

3. A system of laws and values that fosters individual freedom, self-reliance, and accountability.

Any administration or legistlature that acts to erode these core principles serves only to chip away at chip away at the very foundation of our Republic.

[iThinkBig]

America spearheaded globalization and we run it as we run all domestic business, as a business. This means giant gobs of offshoring and outsourcing and it means at the expense of American jobs/infrastructure. This is only wrong when those in charge do not appropriately tax multinational corporations whom get benefits of being an American company but have no envrionmental or cheap labor restrictions.

It indeed is the job of the Congress and Administration to ensure we have fair trade provisions in place. Our objective should be to trade as a partner with evereone on the globe and give incentives to some, tariffs on others. This current Congress is a joke and the current Administration has absolutely zero leverage over the ME to influence oil.

Becoming energy independent is a MUST, but I see 18 cent gas tax holidays only and of course it's just prior to election season. The biggest political mouths in Washington are stuck on global warming, limiting our ability to create our own energy while expecting those around the globe will play fair and always develop clean energy sources while competing in the global market. This is foolish, elitist thought process from individuals whom do not bother conducting global research to at least how the United States can ever compete economically as it once did. You compete in a market by giving the customer what it wants to grow, right now that is energy, food and metals. Exporting more food and metal relies on cost-efficient energy. I feel our nation will slowly go down the cliff and be 10 feet from earth before opening the parachute. Such is the nature of our overburdening legal and political system.

[mlyn]

Good article and good comments. China's long-term strategies puts American capitalism and "Democracy" to shame. All Americans need to sacrifice, including the environmentalists. We have been living "high on the hog" for years with cheap oil--somebody else's oil. We need to develop our own and/or live conservatively. The bottom line is that we need political leadership. Our political parties sold us down the river through greed, bickering, and neglect. The American people need to be responsible and better informed.

[irondoor91]

There is one undeniable fact of life regarding energy/oil as it moves around this planet on tankers, and that fact is that the free and unhindred transhipment of that oil is guaranteed by the US Navy. Our carrier battle groups and submarines guard and protect the strategic choke points around the world. You can look it up at any time and see where each CBG is located, and where the carriers are headed next. This is the case now, and will be the case no matter who is the next President. Just remember, the US taxpayer guarantees virtually every country in the world free access to the oil market, both to sell and to buy. And it will be this way for at least 2 generations, which is the amount of time that it would take for another country to develop the capacity to challenge us there.

Nobody else can do it, no matter the whining about "American Hegemony". How would you like to see the Russians or the Chinese in charge of the high seas?

Imagine the price of insurance premiums on tanker coverage. As soon as President Obama gets his first security briefing, I suspect that his tune will be a-changin and he will soon enough have the gray hair of his Uncle Tom. But, in the interest of fairness, maybe he will give the Iranians and the N Koreans a carrier or two just to make friends and appease them for our past wrong-doings. Might as well go all out for equality, you know.

[curious cat]

the american people do not have the time or the inclination to be informed. jeez, they barely have time to read people magazine. besides, lots of americans are sacrificing, or rather, are sacrificed all the time. they are called the middle class. they work their butts off and have all their efforts diverted into supporting undeserving social misfits.

i know 'cause i am related to a few misfits. they can't help themselves either. they see people on tv getting free prizes on game shows, other people in sports or the movies getting paid handsomely for doing nothing, casinos advertising winners on the side of the road, etc. then they compare that to all the hard work, extra school and the financial burden of becoming a doctor or engineer. they decide whether they want to wake up for emergencies in the middle of the night or hit the snooze button. they decide whether they want to worry about being sued or pretend they were injured in a car accident.

i can't always fault them for their decisions. (excuse me while i take an antacid for my ulcer.) we need a better school system, one that teaches rational and legal behavior and reminds kids that they are part of a larger system, a structure that functions on capitalism, the way the real world does. pay teachers more when their students advance and pass standard exams. put police in schools, put metal detectors at the doors, create courses that are related to the real world, so students can think, read, write and balance a checkbook when they get out.

we need a better legal system, one that has fewer lawyers, screening of law suits and tort reform.

we need a fairer tax system, one that remembers that small business cannot fill out as many forms as large business, even better, one form for all the taxing entities. we have computers now, that should be possible and mandated. one tax that the city, county, state and federal gov't share-just one.

we need to help doctors perform the best medicine without worrying about being sued. that's right, no fault medicine. if they make a mistake, you get a predetermined flat amount for the injury, pain and suffering. i don't want my doctor losing sleep because they are being sued. i don't want them worried, nervous, sleepy, anxious, bitter, traumatized, delusional when they are deciding my diagnosis or getting me ready for surgery. maybe it's just me, but i'd rather they got all their school loans paid by the state in which they were going to practice. i'd rather they got a house, a maid, a gardener and a masseuse for putting in the extra 12-20 years of study.

now, some of you think that all doctors are rich and come from rich families and have perfect lives. that's because there are some, and some that do unnecessary procedures and some that abuse the insurance system. i would guess there are very few, cause most of the doctors i know were not.

i do know that half of all doctor's offices are embezzled and that many get divorced, become drug users or have other problems.

we need a police force that is trained and allowed to use modern surveillance techniques. we need to compensate them well for risking their lives every day. we need to thank them when we see them and buy them a lunch when the opportunity arises.

we need to put ourselves in each other's shoes every once in a while. thanks for putting yourselves in mine.

[X-15]

Beyond oil debt, deficit spending, out of control personnal debt, and a FED that pumped up real estate till it burst- better be thankful we have some other nations now that can keep our boat afloat.

[E Nuff Sed]

Americans (esp of the conservative ilk) are upset that their hegemony is declining and soon will be history. But they fail to appreciate how long has it has lasted. For centuries much of the world (with the exception of America) was devastated by slavery (America being a major perpetrator) and colonialism (which was not much better than slavery) followed by the world wars and later by the cold war. It has taken this long for the rest of the world to get up and hit its stride.

If current trends remain, sometime during this century China and Europe will replace the US at the top of the economic totem pole, followed by India, Brazil, Japan, Canada etc.. Russia and the Arab world will fade away along with their oil.

In the age of proliferation of N-weapons "carrier battle groups" are useless. A single N-missile launched from a yatch can obilitrate and entire battle group.

The limits to conventional miltary power has been demonstrated in stark contrast in Iraq where the sole super power has been ground into exhaustion by a rag tag insurgency and is is on the cusp of an humilating retreat.

A multi-polar, trade and economic driven world beckons. The best Americans can do is embrace it as equals and good neighbours. The time of looking down on the rest of us from that shining house on the hill is slipping away; other houses are being built which as as grand.