The Sidekick #005

The BRICS Bash

Kris Lance

Kris Lance

VP & General Manager, Una

May 30, 2024

Feature Image #005

Intro

Welcome to Issue #005 of The Sidekick! In this edition, I take a look at the BRICS countries’ plans to establish a currency to rival – and maybe one day replace – the US dollar’s dominant position in world trade. Representing nearly 30% of the world’s economy, the bloc includes economic powerhouses China and India, and also some countries where relationships are extremely tense like Russia and Iran. How would a rival BRICS currency impact the US? Find out below. 

Here in the US, the higher-for-longer rates policy is starting to bite. The Federal Reserve is walking an increasingly wobbly tightrope with galloping inflation on one side and a “recession” on the other; I put recession in quotes because based on what I was taught in school, we’ve already been in a recession for some time now. One major regional bank has failed so far this year, with more predicted to follow. Read more about this below.

That’s not all. Scroll down to check out some curated highlights from social media, words of wisdom, tech news, people to follow, and more. 

Let’s dive in. 

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The American Supply Scene: How a New Currency Could Shake Up the Dollar's Dominance

There’s been a lot of talk lately about the BRICS countries cooking up their own currency to rival the US dollar. This would be a real game-changer for the global financial system.

Right now, the dollar is the undisputed king of the currency world. Around 60% of the world’s currency reserves are in dollars, and according to SWIFT, it accounts for over 80% of trade finance because much of commodity trade continues to be invoiced and settled in dollars. But the BRICS nations are getting tired of playing second fiddle to Uncle Sam.

Who are the BRICS? Well, the founding countries are Brazil, Russia, India, and China (that’s the BRIC part), and they have been joined more recently by South Africa, Iran, Egypt, Ethiopia, and the UAE, with Saudi Arabia on the cusp of joining. Several other countries have been invited (mainly in the global south), while Argentina recently pulled out. 

BRICS expands footprint in global south

In terms of relationships to the US, it’s a mixed bag of allies, major trading partners, geopolitical rivals, and of course the Middle-Eastern bogeyman that is Iran. Members are among the world’s top ten countries by population (China and India in particular), area, GDP, and purchasing power. The five initial states have a combined nominal GDP of US$28 trillion, which is nearly 30% of the world’s gross product. 

Don’t let Iran’s presence lead you to dismiss BRICS as a non-serious player. The bloc is now considered the foremost geopolitical rival to the G7. And they’re growing faster than the US, with an average annual GDP growth rate of 5.7% from 2010-2022, compared to 2.3% for the US. So these guys have some serious economic firepower.

BRICS countries and GDPs

Which leads us to the proposed BRICS currency, which could be called the “BRICScoin” or something equally catchy. This would give emerging markets more autonomy and control over their financial systems. They’d be able to bypass the dollar for trade and investment, reducing their exposure to US monetary policy and sanctions.

One of the most sensible voices among the BRICS bloc is Brazilian President Luiz Inacio Lula da Silva. “Lula” isn’t particularly fond of the USA, but what he says makes sense:

“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries? Who decided that the dollar was the (trade) currency after the end of gold parity?”

I know what you’re thinking – “But the dollar is the gold standard! How could some upstart currency ever challenge its dominance?” Well, let me tell you, the greenback isn’t as invincible as you might think and that decline started back in August of 1971. The US national debt has skyrocketed to over $34 trillion, and the Federal Reserve has been forced to keep interest rates high to combat inflation. This is putting strain on the economy and the dollar’s status as a safe-haven currency. Meanwhile, the strong US dollar is wreaking havoc all over the world, and actually encouraging the push towards de-dollarization.

Right now, BRICS nations are busily setting up the infrastructure to support their new currency. They’re talking about a BRICS payment system, a BRICS development bank, and even a BRICS stock exchange. And let’s not forget, China has been steadily chipping away at the dollar’s dominance by promoting its own currency, offloading Treasuries, purchasing massive quantities of gold and limiting critical transactions in US Dollars – like oil.

So while the dollar is still top dog for now, the BRICS are mounting a serious challenge. If their new currency gains traction, it could mean big changes for the US – everything from higher borrowing costs to a loss of influence on the world stage. The main thing to keep in mind is that the dollar’s status as the world’s reserve currency gives the US a lot of important economic advantages.

When the dollar is the go-to currency for international trade and investment, it allows the US to borrow money more cheaply, maintain a trade deficit, and wield financial power through sanctions – by controlling access to the dollar-based financial system, the US can effectively cut off countries or entities from global commerce. But if the BRICS countries succeed in creating an alternative to the dollar, all of these benefits will erode.

The bottom line is, the BRICS are playing for keeps. They see the dollar’s reign as a vulnerability, and they’re working hard to create alternatives that reduce their reliance on the US currency.

The dollar isn’t going to disappear overnight as it’s deeply entrenched in the global financial system. But even a gradual erosion of its dominance could have significant consequences for the American economy and Washington’s global influence. You may remember Christine Lagarde predicting that the IMF could move from Washington to Beijing by 2027 if China’s growth rate continues.

We’ll have to wait and see how it all plays out. But one thing’s for sure – the global financial order is in for a shake-up, and the BRICS are coming out swinging.

The Sideick #005 4

Spotlight: Fed Walks the Inflation Tightrope

Have you ever seen Man On Wire? It’s a documentary about the Frenchman Philippe Petit’s absolutely insane high-wire routine performed between what was once the World Trade Center’s Twin Towers.

I sometimes think about Man On Wire when I read about the Federal Reserve’s tightrope-walking efforts to manage inflation in 2024. On one side of the tightrope is the risk of runaway inflation – prices spiraling out of control, eroding consumers’ purchasing power and destabilizing the economy. This is the side the Fed must avoid at all costs, requiring them to take blunt action by raising interest rates.

But on the other side of the tightrope lies the peril of more bank failures or worse – hike rates too aggressively, and the Fed risks sending the economy tumbling into a painful downturn, with job losses, reduced business investment, and muted consumer spending. This is the equally treacherous outcome the Fed must carefully sidestep.

What we’re experiencing now has been dubbed the “higher for longer” rates policy. It normally takes eight months from the last Fed hike until the central bank starts cutting, but we passed that benchmark back in March:

Federal interest rates

The impacts of higher-for-longer aren’t hypothetical. Billionaire Barry Sternlicht, CEO of Starwood Capital Group, predicted recently that US regional banks will fail at a rate of “one or two a week” due to the higher-for-longer rate policy and the troubled commercial real estate sector impacting the “fragile animal” that is $1.9 trillion in real estate loans.

Commercial real estate debt is viewed as one of the most dangerous financial assets out there today. In January, regulators seized the troubled Philadelphia bank Republic First Bancorp after rising rates led to a substantial decline in the value of the company’s mortgage loan portfolio.

As Shiff Gold writes: “The Fed is stuck between preventing a banking crisis and preventing inflation from getting even more out of control. It needs higher rates to reduce inflation, but crucial sectors of the economy that are heavily dependent on lending can’t survive in a higher-rate environment, even if they don’t appear insolvent at first glance.”

Adding to the complexity, the underlying drivers of the current high inflation, such as supply chain disruptions and geopolitical factors, are not easily solved by monetary policy alone. Ultimately, the Fed’s dilemma is about striking the right balance – applying enough monetary tightening to lower inflation, but not so much that it creates a severe economic downturn.

It’s a high-stakes challenge requiring thoughtful policymaking – something, unfortunately, that is usually lacking in an election year. Stay tuned for some short-term solutioneering from Biden, like lowering our strategic reserves even lower and promises of “easy” fixes from Trump – nothing about fixing this will be easy!

The Sideick #005 Section 6

Technology News

What’s going on in the world of technology? Plenty. Here’s some news that caught my attention:

Crypto not as disruptive as feared: Cryptocurrencies were once heralded as a way to disrupt the world’s financial systems, but a new study by the University of Missouri argues that cryptocurrencies like Bitcoin are less of a threat to the international political and economic status quo than previously thought. Personally, I see Bitcoin and other crypto as akin to the Dutch tulip-mania, with rampant appreciation driven by perception rather than intrinsic value. 

ScarJo is lawyering up over OpenAI’s “Her”-like ChatGPT voice: To quote the journalist Cam Wilson, “It’s hard to think of a more on-the-nose metaphor than OpenAI’s relationship with creatives than the company literally stealing the voice of the 21st century’s defining pop culture representation of artificial intelligence.”

Tech layoffs still going strong: If you thought the post-COVID wave of tech layoffs was over, you’d be wrong. We’re not even halfway through 2024 and we’ve already seen 60,000 cuts across 254 companies, including Tesla, Amazon, Google, TikTok, Snap and Microsoft, according to TechCrunch. 

Dr. Pam Popper

People to Follow

Dr. Pam Popper is the President of Wellness Forum Health. Wellness Forum Health provides educational programs for consumers and healthcare providers that facilitate evidence-based, collaborative, informed decision making for health-related matters.

Pam is on a personal mission to change healthcare in America, and throughout the world, by teaching people about the connection between diet and common degenerative conditions; and by educating people to become more informed consumers of health and medical services.

No matter where you are on your personal Healthcare journey, I encourage you to give her a follow.

The Sidekick 005 quote section

Quote of the Month

“He who fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you”  

Friedrich Nietzsche

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See you next time!

– Kris

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