Nonsense of the Day: BRICS to Create a New Credit Rating Agency

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via Mike Shedlock:

Let’s discuss the latest BRICS silliness starting with the definition of BRICS.

BRICS++ Economic Trading Block

The term BRIC stand for Brazil, Russia, India, and China, a group of countries that have little in common other than seeing an alternative to the US dollar for international trade.

The group added an “S” for South Africa and now the block is portrayed as BRICS++ as additional countries join the block.

In the past decade, we have seen numerous BRICS announcements on a trading currency that never happened, and also a gold-backed currency which never happened, and never will.

I will recap prior silliness below, but let’s take a peek at the latest nonsense first.

BRICS To Build ‘Credit Rating Agency’ to Counter US Dominance

Please consider BRICS To Build ‘Credit Rating Agency’ to Counter US Dominance

The US has an array of credit rating agencies that rate firms and countries on their financial health and repayment abilities. The top three US credit rating agencies include Moody’s, Standard and Poor’s (S&P), and the Fitch Group. The US credit rating agencies dominate the global market and can make or break a company’s prospects with their reports. However, BRICS now aims to put an end to the US credit rating agencies by creating their own ranking ability firm.

BRICS countries have been affected by the US credit rating agencies who have previously pointed out negatives ignoring their positives. The BRICS bloc plans to launch its own credit rating agencies to counter the US-dominated financial world order. The move will put the BRICS alliance in charge and decide the creditworthiness of a firm and not depend on the US.

The top US rating agencies are trash, but the notion a BRICS alliance can set the creditworthiness of a firm is ridiculous.

Who is going to pay attention to a BRICS rating assuming the block ever does rate debt?

No Demand for US Bonds?

For an even sillier post, please consider BRICS: No Demand For US Dollar Bonds.

The US dollar bonds are no longer attractive to BRICS countries and broader Asian markets as sales nosedived in January 2024. Countries around the world are shying away from the US dollar as its debt has climbed above $34 trillion. Holding the US dollar in reserves for BRICS and other Asian nations poses an equal threat, as a market downfall creates turmoil in their native economies. Asian countries are carrying the risk of US dollar debt default making the USD bond sales see the worst start this year since 2016.

The less demand for US dollar bonds indicates that developing countries are fearing the mounting $34 trillion debt. The US debt is spiraling out of control and rising at an alarming rate and countries who keep the USD in reserves are at the receiving end. Read here to know how many sectors in the US will be affected if BRICS ditches the dollar for trade.

Anyone who suggests the US will default on debt understands nothing about default. Countries that owe money in their own currency don’t default.

Second, the author knows little or nothing about demand or the implications of trade math.

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The US runs trade deficits. As a result, foreign nations accumulate US debt. Their is automatic demand for US debt as a result of trade math.

BRICS Challenges U.S. With New Credit Rating Agency

Coinmarketcap chimes in with more silliness in its take BRICS Challenges U.S. With New Credit Rating Agency

Within the corridors of power in the BRICS nations, there’s a palpable sense of urgency to recalibrate the world order of financial assessments. Spearheaded by Russia’s Central Bank Governor, Elvira Nabiullina, the initiative is more than just a clapback at perceived injustices. It’s a strategic play to establish a “supranational” rating agency that promises to be faster, more pragmatic, and devoid of the alleged bias that currently clouds the judgment of the established agencies. Nabiullina’s vision is for a system that truly reflects the economic realities and potentials of all countries, not just those within the BRICS bloc but globally.

The groundwork for this ambitious venture is expected to be a key topic at the upcoming 16th BRICS summit, hosted by Russia. The agenda is brimming with transformative ideas, including the creation of an internet service that bypasses U.S. data channels, symbolizing a broader push for autonomy and resistance against Western hegemony in digital and financial spheres. This summit, beyond its conventional expectations, could mark a pivotal moment in the quest for a more balanced and inclusive global governance structure.

No Details Hype Headlines

The above reports all have several things in common. They are all proposals, they are mostly to totally sensational hype, and not a one of them have any meaningful details.

There are literally hundreds of similar reports all speculating on the quick demise of the dollar.

Supposedly, It’s Official!

Groundwork of the Last Stupidity

There was not a gold-backed BRICS currency announced at the last meeting. Heck there is no BRICS currency of any kind.

The last conference was a total failure as will be this conference.

Yet, people buy into this BS, as if it means something.

Bigger Isn’t Better

According to CNN, thirty-four countries have submitted an expression of interest in joining the bloc of major emerging economies, South African Foreign Minister Naledi Pandor told reporters, without naming the nations.

So what?

That we have no names is an indication of the meaninglessness of the additions.

The hypesters total it all up as a percentage of global trade when China alone is nearly all of it.

What Would it Take for a BRIC-Based Currency to Succeed?

Let’s call the currency the “Brick”.

None of these articles ever address the key question I asked and answered on August 25, 2023: What Would it Take for a BRIC-Based Currency to Succeed?

  • The Brick would need to float freely. The yuan doesn’t.
  • The Brick have to be a genuine reserve currency to achieve widespread use.
  • A functioning Brick-based bond market. This requirement is also for widespread use.
  • A significant desire by individuals to trade in Bricks and accept Bricks rather than local currencies or the dollar.
  • Willingness of China to stop export mercantilism.
  • Trust over and above trust in other international currencies.
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Export Mercantilism

The yuan failed to succeed as a global reserve currency because the yuan does not float, because China has no functioning international bond market, and because of simple trade math.

China runs trade surpluses with most of the world. China oil imports are a major exception. As a result, China mathematically accumulates US dollar reserves.

Unless and until China is willing to stop export mercantilism and the US trade deficit shrinks, someone must accumulate US dollar reserves or assets. Mathematically, dollar accumulation is unavoidable.

“Every night I ask myself why all countries have to base their trade on the dollar. Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

Q: Who was it?
A: Individuals

That is the key point all the articles and Lulu miss.

Trade is Between Individuals, Not Nations

Fundamentally, trade is not between nations.

Aggregate reporting of trade deficits such as the persistent US deficit with China, makes it appear otherwise. But the deficit is really a result of a sum of individual transactions.

Why would a Brazilian wheat exporter want a BRICS currency when the exporter needs the Brazilian Real to pay workers or the US dollar to buy farm equipment.

Consider Saudi Arabia’s oil producer Aramco. What would Aramco do with any BRICS backed reserves it receives for oil?

Sanction Avoidance

A Brick (or something similar) has one use: sanction avoidance.

On July 20, 2023, my lesson of the day was If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation

A Brick currency is not a requirement for sanction avoidance. Any central bank digital currency would suffice. But a Brick makes things much easier, especially in cases where a nation does not want to openly antagonize the US but would instead prefer to just look away.

If and when a Brick makes it easier to avoid sanctions, a small set individuals and companies sanctioned would use it, even if it the Brick is relatively illiquid.

Other than sanction avoidance, a BRICS currency serves no real purpose. Even it there was a purpose, requirements for widespread use are not in place.

The latest announcement on a new credit rating agency is just more silly BRICS hype, most likely to conjure up fresh talk having made zero progress on a currency.