What does the addition of six new countries to the BRICS trading bloc mean to the U.S. economy?
BRICS, a five-country global alliance, just doubled. Announced last week, the bloc of world economies invited Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates to join them starting January 1, 2024. The nations were a handful of the 40 that expressed interest to become a part of the trading federation, and part of the 23 formally considered as serious candidates that would consolidate the brokering power outside of NATO and the European Union.
The announcement occurred at the fifteenth BRICS summit, the first in-person meeting since COVID-19 lockdowns. South Africa, one of the member groups that includes Brazil, Russia, India and China, hosted the event in Johannesburg from August 22 to 24. “We have noted that there is global momentum for the use of local currencies, alternative financial arrangements and alternative payment systems,” BRICS chair and South Africa’s President Cyril Ramaphosa said at a media briefing during the summit.
President Ramaphosa expressed optimism about the promise held for the expanded BRICS bloc in “improving the stability, reliability and fairness of the global financial architecture.”
China, the biggest player in the BRICS federation, certainly agrees with Ramaphosa. In remarks by China’s President Xi Jinping, he expressed that the expansion “serves the common interests” of the international community with budding economic visibility. If conjoined and in concert, those nations would be positioned to “write a new chapter of emerging markets and developing countries seeking development through solidarity and cooperation.”
In a more blatant declaration of a newly carved out economic agency, Brazil’s President Luiz Inácio Lula da Silva charged in his opening remarks, “We cannot accept new global colonialism.”
Saudi foreign minister, Prince Faisal bin Farhan concurred. In his speech at the BRICS Plus Dialogue, the expansion opened up efforts in “exploring opportunities to deepen cooperation in all fields and providing conditions of security and stability that support the paths of development and economic progress.”
This past January, Saudi Arabia’s finance minister, Mohammed Al-Jadaan informed a Bloomberg reporter that the country is considering trading its oil in currencies other than the dollar after talks of looming de-dollarization buzzed throughout markets around the world. Currently, Saudi Arabia is the largest trading partner of BRICS.
While BRICS members begin to plan new trading agreements, they are not the only entities voicing the change of tide. United Nations Secretary-General Antonio Guterres attended the summit. “For multilateral institutions to remain truly universal, they must reform to reflect today’s power and economic realities, and not the power and economic realities of the post Second World War,” he stated in a speech.
In one way or the other, the summit and subsequent declarations made show that the U.S. global control is waning, while something else, or multiple economies emerge as the coming new norm. But, what does that mean to the U.S. economy and Americans?
U.S. response to BRICS’ building
Even though the Biden-Harris Administration remains silent about BRICS, their actions have loud implications; especially since they have been doubling down on relationships with Asian countries like India.
This week, national security advisor, Jake Sullivan, announced that both President Joe Biden and Vice-President Kamala Harris will be making rounds in South Asia in early September. While President Biden will be attending the G20 Summit in New Delhi, Vice-President Harris has plans to visit Jakarta to participate in the U.S.-ASEAN Summit and the East Asia Summit. In the past, the VEEP, who is of Jamaican and Indian descent, has made her rounds to Vietnam, Bangkok, Manila and Singapore.
Economy underwater
Earlier this year, talks of de-dollarization circulated through the channels. While that term may have faded in news cycles, the practice became more evident in markets. Not only does the BRICS buildout signal a continued U.S. recession, it shows how countries are dumping the dollar to trade in their own currencies.
The American economy stands on the presumption that its dollars, which are debt notes, can be packaged in investment vehicles called bonds and treasury bills. Because of the petro dollar, there would be an endless supply of investors. However, since 9/11, consumer confidence and world governments’ assurance of a strong U.S. dollar has weakened. This faltering is called a negative yield curve, or the idea that the longer you hold an investment or bond, the deeper the dip in profits becomes.
Now, nations are unwilling to exclusively use the U.S. dollar in the market because it has started to impact their country’s currency value. Moreover, BRICS nations have decided that the biggest commodity that they trade among themselves should be done in their own currencies—which they then can be backed by gold.
Since world players understand the long-term outlook on the dollar’s strength is dismal; as a consequence, this creates a negative or lower percentage return when you hold U.S. investment instruments. Ultimately, the domino effect adds to U.S. inflation.
In layman’s terms, U.S. bills have become hot potatoes that the world no longer wants to hold. So what do they do? Send them back to the U.S., thus creating inflation. With the growing amount of dollar bills in our possession, the purchasing of a limited amount of products drives up the cost of everything.
Bellies full, but they’re still hungry
Since the pandemic, the Federal Reserve has been trying to get a hold of inflation. For the past three years, they’ve been turning off the faucet to money supply by raising interest rates.
Before, we were living off of world governments’ purchases of dollar denominated investments. These bills were printed freely from U.S. banks. Indeed, that was some good eating because it made our banks’ bellies fat. In turn, the banks were able to lend to its corporations and consumers at a low interest rate. But a fattened lamb is only good for the slaughter.
With the geo-political changing of the guard combined with the instability of America’s current domestic affairs, this will leave U.S. citizens holding the bag for another bailout. But hold up with stashing two years worth of toilet paper. This is not an overnight process, it’s a currency war and like all wars, it will be long and drawn out.
Because of America’s strong infrastructure, and the nascent nature of emerging markets, the road to full development will buy us all some time to design our own long game.
