BRICS and Yen

BRICS Consortium

If you have not heard of BRICS, you eventually will and will feel its influence in markets.  To be sure it is a fledgling movement with little current effect on markets.  But China is the master of the “long game,” and they are slowly building a coalition to unseat the dollar as the world’s reserve currency.  How long will it take?  No one knows about the speed of change, there are just too many variables in this proposed transition to know.  But directionally we know that China and Russia want to create a reserve currency that is separate from the U. S. Dollar.  A currency that will be used for international trade settlement is attractive to at least four of these five, with India still connected to the west.  India is now a major market for Russian oil in the fallout from the Ukraine war, so we know how they really lean.

And that is where BRICS comes from.  You see BRICS is an acronym for Brazil, Russia, India, China, and South Africa.  These just happen to be some of the countries where China has been building influence over the past decade, and where it has such significant investments that those countries cannot turn their backs on China.  What China wants is to move monetary settlement slowly and methodically between these five countries from the dollar to the Yuan.  This might also take on the shape of a digital currency, a paper currency, or certain debt backed by commodities.  But the most intriguing thing to me is the connection with South Africa, who has a lot of desirable commodities.

According to a September 2017 Forbes article, trade relationships between these five nations have also grown.  China is a major importer of soybeans and iron ore from Brazil.  Another ploy by the Brazilian government has been to sell assets to China in a privatization move after decades of mismanagement of former private businesses by the government.  India is more aligned with the west but is a major importer of Chinese goods with purchases in the tens of billions of dollars.  South Africa needs China as an export partner because it literally makes nothing but raw materials.  But South Africa has gold and diamonds, tons of gold and diamonds.

Another interesting aspect of the connection of these five nations is not the financial interaction but the aggregate population.  A total of 3.3 billion people live in just these five countries, a whopping 41 percent of the world’s population.  China and India obviously dominate these figures, but the significance may be in just the aggregation of population.  Their land mass is 15.3 million square miles, also forty-one percent of the world total.  Take out the Artic and Antarctic and it is even more significant.

Our supply chain issues with Covid are a wakeup call and may have saved us from ultimate ruin.  Now that American companies realize the trade fallacies of the Obama years and are actively working to rebuild capacity here, we have a chance to recover.  The challenge will be getting the Washington crowd to think America first and to get away from foreign lobbyist.

What about Japan, and why do we care?  Japan is obviously small in land area but a significant economic power in Asia and the world.  It has the world’s third largest GDP at $5 trillion, with only the eleventh largest population.  Japan is and should be wary of China.  Japan has an advanced economy with some of the world’s most innovative manufacturing and production.  Its patent generation is legendary and the envy of many nations, China included.  Japan also has Russia and North Korea to contend with in addition to China.

We believe that Japan is the progenitor of the Modern Monetary Theory pointed to by so many in Washington.  The Japanese economy rocked along for decades with low inflation and no visible side effects.  But the American people need to pay attention, close attention.  The Bank of Japan has propped up their economy by purchasing anything that would pump money into the economy and keep it from collapsing.  The result of this has been a transfer of wealth and control from the private sector to the government, a desirable for Washington liberals enamored with Modern Monetary Theory.  This wealth transfer has been so great that the Bank of Japan is now a top ten shareholder in forty percent of Japan’s listed companies.  In late 2020 it was estimated that the Bank of Japan owned roughly $434 billion in stock, and they did this in just ten years.  Add to that the holding of the government pension fund and the Japanese government has an outsized control over its private sector, if there even is one.  This does not include additional holdings of corporate debt.

Why do we care?  We care for two reasons. 

First, we do not want the authorities in Washington to get the idea that what is good for Japan is good for us and to start propping up our economy by having the FED or the Treasury buy equities.  The split between the public and private domains is already tenuous here, and further stock market manipulation by Washington would have dire consequences for our long-term approach to capitalism.

Second, the Bank of Japan is the largest holder of U. S. debt and as Japan goes so might we go.  So long as interest rates were held artificially low, Japan’s strategy of massive borrowing had a negligible effect.  But as interest rates have risen Japan can no longer hold investors at home to buy its debt.  Why buy a Japanese bond at 0.1% or even negative rates, when you can buy a U. S. Treasury at 4%?  As investment money leaves Japan for America, the Bank of Japan will be forced to print even more money.  A weaker Japan in the region is an opening for China, one that they are poised to take advantage of when the opportunity arises.


This is the follow up article promised to Far Away Events Matter and Modern Monetary Theory