One small step for establishing a bank, one giant leap for de-dollarization . . .
That is what happened on Tuesday July 15, 2014, with the signing of the BRICS Contingent Reserve Arrangement (CRA). The basic explanation: a banking institution to counter-balance and more effectively represent the needs of the 3 billion people currently being underserved by the IMF (US) or the World Bank (Europe). The political view: another win for Putin vs. the USA during a period of global political evolution. The world is moving away from the unilateral model of the United States serving as the “Global Wet Nurse & Policeman,” to a model of global governance based on a greater emphasis on regional leadership to resolve conflict and the promotion of economic policies. While this process has been underway for a while (every empire eventually loses its position on top), the recent speed of the transition is alarming.
Looking back on 2008 and the final days of W’s presidency, a majority of US voters said, “There is no way Obama could be any worse than Bush.” In hindsight, this goes down as the most flawed logic since the invention of “New Coke” in the 1980’s. At the end of Bush’s administration, the US was hated broadly across the Middle-East, distrusted by parts of Europe, and had a lukewarm relationship with the BRICS. Yet that is a far better description of the world than what we see today under Obama. Today, with the signing of the BRIC CRA, Russia and China have taken a decisive step in ending the role of the US dollar as the global reserve currency and, with that, the way of life Americans have come to expect. Life is more expensive in a world with greater representation of emerging economies at the bargaining table, but it pales in comparison to the cost that comes with the BRICS getting their own table.
The impact of the BRICS CRA is that it will ultimately allow countries who oppose the policies of the West to circumvent the historically negative economic impacts of such disagreements. Large parts of the globe have objected to the perceived military and economic overreach of the USA and Europe in the past, but their objections amounted to little more than words on paper. These countries were not in a position of strength with their negotiations due to their reliance on the dollar, but that will no longer be the case. If you thought the UN Security Council was ineffective, get ready to see the G20. Bye-bye $3.50 gas. So long “3 t-shirts for $9.99.” Looking for a bargain on counterfeit Viagra? Think again. The dollar simply will not buy what it did in the good old days.
“How does this happen? Isn’t there a czar in charge of making sure we maintain our standard of living at the expense of others? I am an American and I am entitled to a modest retirement, healthcare, discounted smart phones, and access to the finest things the world has to offer! Which czar in which department do I need to ream to get some answers?” I guess there isn’t one. As it turns out, the dysfunction that has persisted for years in Washington has effects far beyond our borders. The long-tired blame game of “the Republicans said this and the Democrats said that” approach to politics and deciding who leads this country has brought about a hastening of the demise of this once great republic. Think back 20 or 30 years. Can you imagine Ronald Reagan, George H.W. Bush, or Bill Clinton being openly humiliated on the global stage like Obama? While “W” may have become the butt of late night talk show hosts and sketch comedy impressionists, he never got glove-slapped repeatedly by Vladimir Putin. Since the conclusion of the US Presidential Election of 2012, Putin has been playing chess while Obama has been playing pin the tail on the donkey, and the global landscape has become unrecognizable as a result.
How long before the plug is officially pulled on the US dollar as the global reserve? There is a lot of money to be made in guessing that date correctly, but these things take time, and anything can happen between now and then. What seems increasingly clear is that the term “currency wars,” which entered the mainstream a few years ago, is moving toward a “Currency D-Day” within most of our lifetimes. At that point, playing the blame game, “kicking the can,” and “politics as usual” will all become things of the past. Expressing political opinions in bread lines with a bunch of Americans who feel as though they just got duped will not be an advisable course of action. During that time, hard assets, farm land, and sustainability investments will hold the greatest value. This massive transition in currency will have a significant impact on trade and market-based investments. A period such as this would likely be marked by debt liquidation and restructuring, illiquid capital markets, high inflation, and painful economic contraction. When politicians talk about our need for greater sources of energy and the need for energy independence, they are 100% correct. When they talk about the need to invest in manufacturing here in the United States, they are again telling the truth. The reasons why those investments are so critical probably aren’t clear to most Americans beyond the rhetoric, but those will be the jobs Americans hold in the future. Moving back from services and toward manufacturing is a mixed blessing with a tough road to hoe in the process.
That brings us back to today. Large parts of the world are now more committed to the path of de-dollarization, despite the objections of the US. In the process, our view of globalization must continue to evolve to match new realities. Proceeding with our eyes open, accepting change, and being willing to take risks when necessary are the essentials to uncovering the opportunities found through transition.
Brass Tacks 