BRICS+ For Short

Starting next year, “BRICS” will be harder to pronounce.

Cyril Ramaphosa on Thursday announced the first expansion of the group since 2010, when the addition of his country pluralized Jim O’Neill’s decades-old acronym.

New entrants include Iran (which means the BRICS will include both the first- and second-most sanctioned nations on Earth), serial-defaulter Argentina (where the leading presidential candidate wants to dollarize the economy), crisis-plagued Egypt (and its dictator) and Ethiopia (which is negotiating a new IMF program). Also set to join: Saudi Arabia (party to, and co-founder of, the petrodollar system) and the UAE, whose currencies are both hard-pegged to the dollar and who both depend on US security guarantees, formal or otherwise.

The tragic jokes are many. Out of respect for the citizens of those nations, all of whom are in some fashion beleaguered, oppressed and downtrodden, I won’t make them. Suffice to say economic stability, democracy and a commitment to respecting citizens’ civil rights aren’t prerequisites for BRICS membership.

Invariably, de-dollarization proponents will suggest that Saudi membership is a big deal, and that when considered with the inclusion of Iran and the UAE, the bloc will be in a position to conduct more energy trade in currencies other than dollars. Of course, Iran barely has a currency, the ruble is just a promissory note backed by contraband, the riyal and dirham are just dollars and (for the umpteenth time) nobody is excited about getting into CNY in size because you can’t get out of it if you need to — you can take that figuratively and literally.

I’d say it’s not immediately obvious that the expansion actually does “enhance [the BRICS’] ability to push more trade to alternative currencies” (as Bloomberg wrote Thursday, without elaborating), but that’d suggest there’s something to discuss when there really isn’t. As noted here earlier this week, “BRICS” isn’t really a thing. It’s just an alliance in theory with no real, concrete agenda.

Currently, the BRICS harbors nebulous pretensions to “changing the world order” and “build[ing] an alternative to an international system centered on US hegemony” (as one Dubai-based strategist put it), but these sorts of vacuous, unofficial mission statements always sound like New Year’s resolutions: They’re couched in terms that reflect the socioeconomic flavor of the day and everyone knows nothing’s going to come of them.

Maybe some commodities trading will be invoiced in yuan, and maybe we’ll see some barter-based pilot projects for small transactions, but that’ll be about it. At least for the foreseeable future. Obviously, dollar hegemony won’t last forever, but the interim period between now and a new world order could quite easily be several human lifetimes. Accelerating it would likely require a war that the US loses.

Finally, do note that even if BRICS does eventually become something, that something will be an instrument of Chinese foreign policy just like today’s dominate multilateral institutions are instruments of US foreign policy.

On Thursday, Rabobank’s Michael Every had a few things to say about all of this. Find excerpts from his latest below. I imagine readers will enjoy his remarks every bit as much as I did.

A lot of states now want to join BRICS: Algeria, Bangladesh, Bahrain, Belarus, Bolivia, Cuba, Egypt, Ethiopia, Honduras, Indonesia, Iran, Kazakhstan, Kuwait, Morocco, Nigeria, Palestine, Saudi Arabia, Senegal, Thailand, UAE, Venezuela, and Vietnam. That runs like the Welsh village with the longest place name in the world. This unpronounceable group has a GDP larger than the G7. However, as I warned 18 months ago, just looking at the world map and adding up populations and GDPs does not make a functioning ‘New World Order’.

As a parallel, if you ‘add’ a gorilla to a great white shark, you don’t get the king of the sea AND the jungle without a lot of evolution – you just get digestion.

In BRICS+, China is larger than all other members combined, and it exports ever-more value-added goods to them while only importing raw commodities from them. Yet the BRICS+ want to industrialize, not just sell raw materials to rich countries, as to the G7. Something doesn’t add up.

Also note there was no BRICS+ launch of a promised common currency backed by gold or crypto, just the sensible goal of more development lending in their own currencies. Which, by the way, the G7 should also be embracing at Jackson Hole if they have a brain, even if it’s bad for inflation near term.

Yet if it’s hard to create a new global system, it’s easier to destroy one. If BRICS+ trade invoicing shifts from the dollar to local FX bilateral barter, and then goods flows shift too, it will mean a gradual global 1930’s-style fragmentation of supply chains and capital flows, exacerbated by tech and clearing systems schisms.

One key way the West can push back against this trend is via higher rates offering a decent rate of return on the US dollar, or Euro, etc. Capital can be hoovered out of rival political blocks with higher rates. Commodity prices can be pushed lower, or at least capped. We don’t talk about this, focusing instead on data now apparently screaming for rate cuts despite stagflation, but it’s true, and it’s clearly working.

Of course, Wall Street hates it. Then again, it also hates dedollarization and being shut out of the BRICS+. Zoltan Pozsar thinks the US fears dedollarization because, as quoted in the Financial Times, “The West dreamed of the BRICS as a lapdog, that they would accumulate dollars and recycle them into Treasurys, but instead of that they are renegotiating how things are done.” What he means is Wall Street, not the West. After all, post a serious economic bump, the US economy would do fine in a more fragmented world because it has all it needs – Wall Street wouldn’t.

Zoltan’s new ‘Ex Uno Plures’ –Latin for ‘Exit Through the Gift Shop’– offers 50% Fed liquidity and 50% on new ‘dollar-rival’ views. Yet the only Fed plumbing we need to know about is which acronym will be used to fund the Pentagon while rates stay high – again let’s see what Jackson Hole might say; and on the ‘gorilla-shark’ side, Hand-of-Godley Michael Pettis just pointed out that Zoltan misunderstands how the global balance of payments works, saving me doing it again. Frankly, Zoltan could just have listened to both Donald Trump and the Republican Party presidential debate, where there was universal agreement that the US doesn’t want to keep receiving recycled dollars via larger trade deficits, and wants mercantilism and/or industrial policy instead. (Alongside rather too much talk about washing machines and shower head pressure.)