The leaders of BRICS nations gathered last week in China for a one day summit. BRICS is an abbreviation for the five countries: Brazil, Russia, India, China and South Africa, they are seen as the dominant emerging markets today and what they discuss between them is important for various reasons, these meetings take place without any representatives from the U.S. or Europe. The five BRICS nations make up about 42 percent of world population and almost 20% of global GDP and these numbers are growing, so it is obvious that what they discuss is very important. To make the numbers look even more impressive we should maybe also say here that these five nations hold more than 40% of the worlds currency reserves. The term “BRIC” was originally defined by Jim O’Neill an economist at Goldman & Sachs. Currently, it is projected that the BRICS nations will be the dominant country block by 2050, with their economies expected to grow significantly in the next four decades. The following charts shows how the size of their individual economies will develop in the next forty years with China becoming by far the largest economy on the planet.
The ten largest economies in the world in 2050, measured in GDP nominal (millions of USD), according to Goldman Sachs.[27]
At their summit in Sanya/China last week, the leaders of the five BRICS nations discussed their involvement in world affairs. The main topic at this year’s summit was clearly their discussions about the future role of the U.S. Dollar as the world’s main reserve currency and there was mutual agreement that their U.S. Dollar dependence should be reduced going forward. Clearly, this needs to be seen as a first step away from the U.S. Dollar as the main reserve currency. The participating nations expressed their concern about the U.S. economy and the fiscal situation, which might become a large risk for BRICS nations that not only hold a lot of U.S. Dollar reserves but also do a lot of their business and trade in U.S. Dollars. The BRICS are now calling for a new global currency system to be established with a broader range of currencies involved in order to provide the necessary stability. This joint call for a new world currency reserve system only comes a few weeks after the Chinese president Hu Jintao said, when visiting the U.S., that the days of U.S. Dollar as the world’s dominant currency are over. The participating nations also agreed to grant each other credit lines for trade between each other and those credit lines are now held in local currency and not U.S. Dollar anymore. We think that it is really important that people understand the potential long-term implications of this. The currencies of Europe and the U.S. make up about 90% of the world’s currency reserves but a growing number of countries, like the BRICS, are viewing them as weak partners because of their large debts and the monetization of it, therefore forcing a devaluation of their currencies, this acts like an extra tax on everybody holding Euros and U.S. Dollars. It is almost a perfect storm brewing for the U.S. Dollar here, with the fiscal deficit and debt situation being out of control, rating agencies finally willing to consider downgrading the credit quality of the U.S. and the BRICS wanting to diversify away from the U.S. Dollar. Also the increased talk about the U.S. debt limit and its potential implications is adding more uncertainty. We have been talking a lot about the European sovereign debt crisis in the past twelve months, the chances are increasing that the next big market theme will be the U.S. Dollar crisis, this would have a much larger impact on markets than the European debt crisis.