One of the most unfortunate acronyms ever invented was BRIC. It supposedly embodied an epoch-defining ignition of capitalist growth and prosperity in Brazil, Russia, India and China. And these leading paragons were held to be emblematic of a general economic awakening in the EM.
But it was no such thing. The BRIC countries were actually economic cripples riven with socialist and statist policy afflictions that had the good fortune to hitch a ride on the central bank fueled credit binge of the last two decades.
Not surprisingly, the term was invented in 2001 by Goldman’s London based stock peddler and propagandist, Jim O’Neill. The latter’s patented slideshows about the awesome BRIC advance were typically bulging with charts and data. But what O’Neill failed to comprehend was that these bounteous curves and soaring CAGRs were tracking a metastasizing monetary bubble, not a miracle of capitalist prosperity.
And there is an unheralded reason for this epic error. O’Neill is economically unchurched, which is to say, a Wall Street heathen. The righteous capitalist doctrines of sound money, fiscal rectitude and markets' free of state intervention and bailouts are completely unknown to him. Like his ex-Goldman compatriot, Mario Draghi, his creed is “whatever it takes." That is, whatever action is required of the state and its central banking branches to keep financial asset markets inflating is deemed to be per se legitimate and urgent.
After all, in the age of central bank driven bubble finance the purpose of Wall Street and its equivalents elsewhere is to scalp profits from the expanding bubble, not to discover honest securities prices, allocate capital or transform real economic savings into productive long-term investments.
These latter functions are what brokers and investment bankers accomplish in a free market. But after two decades of bailouts and gross financial repression by the central banks, these functions have become vestigial. What is left is the machinations of day traders and gamblers who are pleased to have Wall Street “economists” and “strategists” like O’Neill and the legions of copycats rationalize their plunder with pettifoggery like the story of the BRICs.
Stated differently, Goldman head Lloyd Blankfein was completely wrong when he declared his firm was doing “god’s work." That couldn’t be. In fact, Goldman and its principal competitors have become nothing less than the devil's workshop during the modern era of Keynesian central banking instigated by Alan Greenspan.
With discretionary petty cash flows in the billions, they have marshaled and financed a small army of economic Mephistopheles who spin theories and narratives which dominate mainstream media and shape and prime the perceptions and worldview of establishment officialdom and elected politicians. The force of their “whatever it takes” propaganda has become overwhelming. As a result, there is no longer any meaningful separation of the state and the market; and there are no principles to govern state action.
If the market is rising, the interventions of the state are deemed good, appropriate and successful. When the market is faltering or falling, more action by the central bank and other agencies of the state is held to be urgent and imperative. The measure of economic success is the height of the S&P 500; and the sign of danger is any policy action which might endanger today’s trading gains.
Should the budget be hammered into balance during the 6th year of an expansion, for example, in order to leave headroom for the next downturn? Forget it - the “economy” is held to be too weak to chance it.
Should the brutalization of savers - after 72 months on the ZIRP torture racks - be abated? Not a chance. The “economy” is still too weak to tolerate even a smidgeon of normalization.
Should a super-Glass-Steagall be enacted and a break up of the TBTF mega-banks be undertaken in order to mitigate against another Wall Steet melt-down? Even Obama thought so— that is, until he was over-ruled by Tim Geithner and Larry Summers in their role as conduits for Wall Street’s “whatever it takes” mantra.
Indeed, Wall Street is run by a generation that has thoroughly imbibed this mind-set. You can’t really call it a doctrine, however, because it is based on nothing more consistent than the momentary exigencies of the stock market averages.
Accordingly, Wall Street heathens like O’Neill cannot even recognize the obvious when it comes to the BRICs, as a case in point. In truth, it does not take a great deal of investigation to see that the red capitalists of China, the thieving oligarchs of Russia, the corrupt labor socialists of Brazil and the Fabian apparatchiks of India did virtually nothing during the last two decades to change policy direction or inaugurate free market policies that could unlock true growth and wealth.
Instead, they simply figured out that in a world economy driven by money printing central bankers at the Fed, ECB, BOE and BOJ - the only smart thing to do was join the party. So they commanded their central banks to operate their printing presses in overdrive mode, and this was highly convenient.
In the process of printing massive amounts of the 4Rs - new RMB, real, rubles, and rupees - the BRIC central banks ignited enormous credit expansions internally, while using their printing press proceeds to peg their currencies down low. That is, to create false demand for the Fed’s proliferating dollars and other DM currencies by accumulating what were euphemistically called monetary “reserves."
They were no such thing. The effect of continuous and massive currency market intervention by the BRIC central banks was that they pegged their exchange rates at sub-economic levels. Especially in the case of China this permitted explosive growth of exports and the embrace of a variety of other statist tools to facilitate an export-mercantilist model of economic development.
The graph below of China’s staggering 11X expansion of exports since the year 2000 is generally well known. But what O’Neill and the Wall Street heathens totally ignored is that 11X in 14 years is impossible in an honest free market.
No real world economy, even one teeming with hungry peasants desperate to work at quasi-slave wages, can expand that rapidly for the simple reason that honest, risk-fearing capital could not be accumulated and put into efficient operation on the scale now extant during that short of time span. China’s anomalous explosion of foreign trade was thus enabled not just by the cheap labor that flowed out of China’s rice paddies after Mr. Deng pronounced that it was glorious to be rich; it actually flowed from the endless, cheap, state-distributed credit that flowed out the People Printing Press in Beijing.
And there was a second driver of the BRIC advance that also had nothing to do with honest money and markets. That was central bank generated cheap debt in the US and other DM economies that permitted domestic demand for consumer goods to soar far beyond what could be supported by current domestic incomes. Indeed, the 3.5X expansion of household debt in the US, which occurred after China officially launched its export machine in 1994 by devaluing its currency by 60% and adopting a plethora of additional subsidies and mercantilist policy tools, is the other side of the China export coin shown above.
During this period, Greenspan continuously took bows for his alleged acumen at financial management of the US economy. What he was actually doing, however, was quite destructive. By arbitrarily pegging interest rates at FOMC determined targets, domestic interest rates were prevented from seeking their natural, much higher levels, as was warranted by the global economic circumstances. As a result, income constrained domestic households went on a borrowing binge, supplementing the limited spending power from their earnings with a prodigious increment of consumption from expanding their balance sheet leverage.
On the margin, much of this false buying power went to the purchase of low-cost or “china price” exports from Mr. Deng’s subsidized factories. Accordingly, Greenspan’s “committee to save the world” did no such thing. What it did was bury the American middle class in debt, while massively outsourcing US goods production capacity to China and elsewhere in the EM.
Stated differently, what the US economy needed during the 1990s in response to the vast mobilization of China’s previously inert rural masses was domestic austerity. That would have involved reduced borrowing and more savings for reinvestment in a competitively challenged economy; and not just in the manufacturing sector but, as the explosion of off-shore call centers and computer programming operations would soon show, for outsourced service functions, as well.
Stated differently, under the circumstances extant after 1990 the free market would have driven a deep reduction of US domestic wages, prices and costs to remain competitive in the world economy. What the Maestro delivered, instead, was a cornucopia of credit-fueled false prosperity; an artificial ballooning of demand for BRIC exports; and a lesson to BRIC policy makers that money printing is an endless elixir of growth.
The cascade gathered momentum from there. As China’s export factories grew by leaps and bounds, so did its consumption of petroleum and every kind of industrial raw material. Among other things, this led to a giant pricing anomaly in nearly every resource category. That is, credit fueled demand for petroleum, iron ore, copper, nickel and numerous other raw materials initially, and vastly, outpaced the rise of supply fueled by cheap capital and debt. Accordingly, vast windfall “rents” were captured by companies and countries which were fortunate enough to be sitting on lower cost hitherto unproduced reserves.
That’s Russia in a nutshell. Its economy is essentially a giant oil and gas patch and open mining pit. Its now rapidly fading prosperity had nothing to do with O’Neill’s rubbish about the miracle of BRICs; its prosperity was derived almost entirely from the global commodity bubbles fueled by the first round effects of massive money printing.
That much should have been obvious. But what is even more damning is that the BRIC celebrants did not even notice that the crony capitalist financial system superintended by Putin and his inner circle of thieves was every bit as distended, anomalous and unsustainable as that run by the red capitalists in Beijing.
As shown below, for instance, loans outstanding to the private sector in Russia grew by a factor of 6X just during the last 7 years. It cannot be gainsaid: nothing grows by a factor of 6X in seven years under a regime of honest money and functioning free markets.
Accordingly, the “R” in the BRIC had nothing to do with capitalist prosperity; it was ground zero for the monumental plunder of central bank driven windfall rents extracted from what had actually been “god’s work” several hundred million years ago. Undoubtedly, Goldman scalped its share.
And it wasn’t just the rest of the world and its leading central banks pumping the energy/resource bubble on which the Russian economy gorged. Russia’s central bank went all-in on the money printing party, too. Only economic heathens could believe that an economy driven by a central bank balance sheet that has exploded by 26X in the last 14 years represented a miracle in the making.
The same story pertains with respect to all the BRICs. When China’s export explosion came to an abrupt halt in the fall of 2008, did Beijing’s “whatever it takes” infrastructure building and investment spree have anything to do with sustainable capitalist prosperity? Was it really possible to double the amount of private debt outstanding in the course of just 60 months and then call the resulting GDP “spend” actual economic growth and new wealth?
The entire China scam is blatantly obvious. Is there any known principle of sound money and honest markets that would accommodate a 25X growth of total credit outstanding - that is, from $1 trillion to $25 trillion - in just 14 years? Needless to say, that can only happen when central banks are running their printing presses at warp speed. And that’s exactly what the People's Printing Press of China has been doing ever since Mr. Deng launched his export machine.
Indeed, just since the turn of the century, the balance sheet of the PBOC has expanded by 9X. But that should not be surprising. It’s the exact mimic of the Fed’s balance sheet which grew from $500 billion to $4.5 trillion during the same period.
Then there is the Brazilian boom purportedly superintended by outright labor-socialist governments - regimes that did exactly nothing different than their predecessors have done for decades. Namely, they operated a statist economic system of rampant dirigisme and corruption, fueled by state subsidies, discounted lending and money printing of gargantuan scale.
As shown below, the “B” part of O’Neill’s miracle was just the same old massive credit inflation story. After labor took power in 2004, bank loans grew by a factor of 6X during the following decade.
Needless to say, an ever accommodating printing press at Brazil’s central bank stood in the background.
In all, there was no BRIC miracle of capitalist ignition—just a giant global credit bubble that is now rapidly fracturing. The Wall Street heathens self-evidently got rich scalping the windfalls.
But now, surely, comes their downfall.