via Mike Shedlock:
BRICS+ is set to expand. Let’s discuss the hype regarding an alleged reshuffling the world order.
Push to Reshuffle World Order
Reuters reports BRICS Welcomes New Members in Push to Reshuffle World Order
The BRICS bloc of developing nations agreed on Thursday to admit Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates in a move aimed at accelerating its push to reshuffle a world order it sees as outdated.
The group’s leaders left the door open to future enlargement, potentially paving the way for the admission of dozens more countries motivated by a desire to level a global playing field they consider rigged against them.
The entry of oil powers Saudi Arabia and UAE highlights their drift away from the United States’ orbit and ambition to become global heavyweights in their own right.
Petrodollar Silliness
The entry of Saudi Arabia and UAE is not a result of those countries drifting away from the US on their own accord. Rather, the US became largely energy independent and has needed the Mideast less and less.
The vanishing dependence of the US on the Mideast is largely a US success story.
In contrast, China is increasingly dependent on Saudi Arabia and Russia for energy. Yet, the petrodollar theory advocates portray US energy independence as a US weakness. That’s the first hoot from today’s BRIC reporting.
BRICS+ Is Forecast to Dominate the World’s GDP
The lead chart is from the Bloomberg article BRICS Bloc Grows Heft With Saudi Arabia and Other Mideast Powers
The chart appears to be an extension of IMF silliness comparing the US and China on a fatally flawed Purchasing Power Parity PPP basis.
The article makes a few points worth discussing but is also riddled with serious flaws.
The push for expansion was largely driven by China but had the backing of Russia and South Africa. India was concerned a bigger BRICS would transform the group into a mouthpiece for China, while Brazil was worried about alienating the West.
“In a sense the Saudis, the Emiratis in particular, and the Egyptians to some extent have ambitions for global governance and see membership as a way of exercising leadership and achieving their global ambition,” said Hasan Alhasan, Research Fellow for Middle East Policy at the Bahrain-based International Institute for Strategic Studies. That doesn’t mean they are abandoning their strategic security partnership with the US, but they are “building coalitions on an issue-by-issue basis depending on where their national interests are,” he said.
Both of those ideas are accurate assessments. It makes sense to build coalitions based on natural interests. But how easy is that?
EU Comparison
The EU is a perfect example of why bigger isn’t better and goals are easier said than done. The EU is so unwieldly there is infighting over everything and it takes unanimous consent to do anything.
Since inception, the EU has bickered over agricultural policy, with France having veto power over making any trade agreements.
Global trade forums fail every year over agricultural policy alone. Unfortunately, that will never change.
Currently, there is tremendous energy bickering between EU nations. France and Germany are oceans apart in how they view Ukraine, NATO, military spending, and trade with Russia. Poland and the Eastern bloc nations have an even wider gap with Germany.
Returning to the BRICS, India is concerned a bigger BRICS would transform the group into a mouthpiece for China and Brazil is worried about alienating the West.
BRICS+++++
Factor in “building coalitions on an issue-by-issue basis” while being part of a large group that has nothing in common with each other than to avoid using dollars, please explain how it works.
Show me a functional currency that ties all of those ideas together.
Hells bells, the Eurozone nations have far more in common than this ragtag BRIC collection. Nonetheless, they keep adding nations to brag about how big the BRIC block is.
This is hoot of the day #2.
Economic Writers Don’t Understand Trade
Let’s return to the Bloomberg article for some serious reporting flaws, widely believed.
“The enlargement of the BRICS is driven by the desire to build an alternative to an international system centered on US hegemony,” said Hasnain Malik, a strategist at Tellimer in Dubai. [True]
“A distinction should be drawn between the use of the US dollar as a trading currency, which may erode as many seek an alternative, and as a reserve currency, which almost no other country or group of countries have the size, institutional credibility, and freely convertible characteristics, to rival.” [Say what?!]
Fatal Economic Flaws
The first paragraph is true. But it’s also easier said than done as noted by my comments on the EU and BRICS+++++.
The second paragraph is fatally flawed.
Hasnain Malik proposes a distinction between reserve currencies and trading currencies. How does that work?
Trade is Not Between Nations
It’s important to understand that trade is between individuals, 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.
For example, you or I go to a store and buy a tool at Home Depot. More likely than not, it’s made in China. A Toyota may be assembled in the US or Mexico with parts from Japan, China, or Mexico.
Taking a step back, the intermediate buyer, say Home Depot, makes big orders with various Chinese manufacturers.
The same applies to a Brazilian Store Owner (BSO) dealing with China.
Let’s call the proposed trading currency a BRICK. To place its order with China, in light of the fact of the alleged distinction between a Reserve Currency and a Trading Currency, the BSO would need to convert Brazilian currency to BRICKs place an order with a Chinese Manufacture willing to accept BRICKs, then the Bank of China would swap Yuan for the BRICKs and then do what with the BRICKs?
What precisely does the Bank of China do with all the BRICKs it is accumulating given that BRICKs are a trading currency, not a reserve currency?
Are there any BRICK bonds? No, because the BRICK is only a trading currency.
Aramco Example
Consider Saudi Arabia’s oil producer Aramco. It sells oil to China. What the hell does Aramco do with the BRICKs it allegedly will take?
Will it even take BRICKs? If so why?
Remember, the BRICK is a trading currency, not a reserve currency.
The hype of a trading currency that cannot possibly work as designed is hoot of the day #3.
Questions on the Value of a BRICK
- What’s the value of a BRICK?
- Who sets it?
- How?
- Is a BRICK backed by anything?
- Is there a BRICK bond market?
OK, there is falling trust in the dollar, but how does that translate into rising trust in BRICKs.
Once again, careful analysis shows BRICS+++++ and the corresponding BRICK trading currency is still nothing more than meaningless hype.
BRICS+++++ GDP Forecast
Returning to the lead chart, the notion the notion that the GDP of the G7 will fall to 20 percent by 2040 is Purchasing Power Parity nonsense.
Demographics in China have turned hugely negative. Coupled with a massive debt bubble that resulted from China trying to achieve ridiculous GDP targets, China is following closely in the deflationary footsteps of Japan.
China has not passed the US in GDP and will not do so any time soon
For a thorough trouncing of the PPP idea, please see Purchasing Power Parity Silliness and the Myth China Passed the US in GDP