BRIC: What Happens When Kids Grow Up?

Remember the days when the US was the big kid, “the bully” who no one would stand up to? The one who dominate the playgrounds and take away your PB&J sandwich? Well, it looks like some kids have had enough and don’t feel like giving their lunch money away anymore. Introducing, the new kids from the BRIC-block – Brazil, Russia, India and China!

Nicknamed “The BRIC” – as cool-cat Goldman Sachs coined them – these 4 nations represent a growing force in the economic playground. At the moment, the BRIC account for as much as 15 percent of the global economy (or just $9 TRILLION). The thesis is that, in the future, Brazil and Russia will become the dominant force in supplying raw materials for the world while China and India would be the prime source of manufactured goods and services. If the BRIC band together, they have the potential to create an extremely potent and influential economic union. In the next 50 years, the BRIC is predicted to amass enough size to overtake the G7 nations combined.

The BRIC threw their coming out party on June 16, 2009, holding their first ever BRIC meeting. The group aimed to find ways to put their stamp on the world’s financial system. As the world’s emerging economic powers, they feel that they too must find ways to make their voices heard. These nations combined hold a whopping $2.8 trillion worth of currency reserves in US dollars!

During the meeting, the participants called for a greater participation in the global financial system. They talked about the need for a “stable, predictable and more diversified international monetary system” to lessen the reliance on the world’s reserve currency – the “mighty” US dollar. They tackled the possibility of selling bonds and exchanging currencies among themselves, and pledging money to the International Monetary Fund (IMF). China though, stayed somewhat quiet regarding this issue since it doesn’t want -its $2 trillion in US holdings to evaporate there and then.

In the weeks leading up the meeting, we saw some statements from central bank officials regarding the state of the US dollar. One moment, we saw Russian and Chinese officials say they had confidence in the dollar. The next moment however, we see Brazil, Russia, and China announce their intention to invest in IMF bonds to diversify their USD-heavy portfolio. (IMF bonds are denominated in Special Drawing Rights (SDRs) which is an artificial currency used by the IMF). Brazil and Russia each offered to purchase $10 billion in IMF bonds. China also announced its interest to invest $50 billion to the IMF.

With about $2.8 trillion in USD-denominated reserves among them, any measure to liquidate at least part of their holdings would increase the supply of US treasuries and USD in circulation. The USD would surely devaluate further against the other majors if this event happens. Just the idea of it would already cause some panic (regarding the USD) in the market. Maybe that’s why media tried to keep this on the down low….

So what’s next on the agenda for the BRIC kids on the block? The last shindig must have left you thirsting for more. Will we see more shout outs for a more diversified global monetary system? More aggressive comments on reducing the dominance of the Greenback? With global economic recovery likely to be underway next year, is it time for “emerging economies” to step up on the dance floor and invest reserves in each other’s currencies, set bilateral trade in domestic currencies, and strike currency swap agreements?

How will the big dog US react? Will Tim Geithner “reassure” that their treasuries are safe? Will the US flex its muscle and threaten nations that want to get rid of their dollar reserves?

For now, we can only wait and watch from the sidelines till the next party sometime in Brazil, 2010! RSVP!

  • Nara

    Analysis is spot on assessment & well presented. Congratulations.

  • Nara

    Analysis is spot on assessment & well presented. Congratulations.