Throwing BRICs

Acamar Journal
Jun 19, 2009

The US has run up massive deficits in recent years and concerns that its creditors would stop funding them were dismissed by the argument that China, Japan and the others needed US markets to keep their export-dependent economies growing and to create jobs.

It was mutual economic dependency that kept global savings flowing to the US. And with the US deficits rising to gargantuan levels, the US needs even greater funding from these creditor nations.

But two recent summits show that that game is over.

The Shanghai Cooperation Organisation (SCO) was created in 2001. Its members are Russia, China, and the former Soviet Republics: Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

The idea was to create a military and economic counter-weight to US influence over the oil-rich Central Asia states. The US has military bases in Uzbekistan and Kyrgyzstan, which it uses to support the war effort in Afghanistan. The US also has an interest in the oil in the region and the protection of pipelines shipping oil to Europe.

The SCO invited other regional players to join as Observing Members: India, Pakistan, Iran and Mongolia. Between these countries, "half of humanity" is represented by this organization.

SCO, like NATO, requires member states to intervene if any one member is attacked.

Based on this collective strength, both Uzbekistan and Kyrgyzstan have asked the US this year to close their military bases.

Also meeting for the first time at a formal summit this week in Russia were the four BRIC countries (Brazil, Russia, India and China). And their talking points have been startling:

• Trade between these countries should not be settled in US dollars but in local currencies
  
• They should diversify away from US Treasuries. Russia has proposed selling some of its US Treasury holdings to buy the bonds of the other BRIC countries, if they will reciprocate
  
• That the US dollar be replaced by another global reserve currency. The IMF's Special Drawing Rights (SDRs) are being considered as the alternative, a new supranational currency. The proposal being tabled is that SDRs would be represented by a basket of currencies, including GOLD
  
• That the BRIC countries would exercise greater influence on global organisations such as the World Bank and the IMF and that India and Brazil would have a larger role at the United Nations

This is not just wishful thinking. The BRIC countries have about $2.8 trillion in foreign reserves and are major lenders to the US and Europe.

The bit about gold is momentous. Gold has been a monetary asset since ancient Egypt, and India and China have a clear affinity for the metal, being the two largest consumers of gold in the world.

All these countries have very little by way of gold in their foreign exchange reserves (China has only 1.8% in gold), so BRIC buying gold to diversify away from the US$ and as part of a new reserve currency would have a significant positive impact on the price of gold.

As far as China's dependence on the US consumer is concerned, China has diversified its export base. Two years ago, the US was its largest export market. Last year, it became Europe and now it is Brazil. Trade between China and Brazil is settled in either yuan or the real, not in US dollars.

It has also provided a massive stimulus package to grow its own domestic consumer market to absorb local production.

Apart from the realpolitiks above, the US's debt levels have even made it vulnerable to ridicule, such as when Chinese students at Beijing University laughed at US Treasury Secretary Tim Geithner when he said that China's investment in US bonds was safe.

And in April, China's holdings of US Treasuries actually declined by $ 4.5 billion! Just when China is needed more than ever to step up to the plate to buy ever large new issues of US bonds.

In 1886, when Andrew Carnegie was one of the richest men in the world, he wrote "Triumphant Democracy". He chronicled the enormous debt that Russia, France and other European nations had run up between 1870 and 1882, saying "National debts grow troublesome. Year after year the burden they lay upon the productive energies of nations becomes harder and harder to bear."

He then praised America for reducing its debt: "Our great advantage which the Democracy has secured for itself in America is its comparative freedom from debt. The ratio of indebtedness to wealth is strikingly small."

What a long way the US has come, from being the largest creditor nation in the world in the 1950s to the largest debtor nation in history.

###

Acamar Journal
-Fayyaz Alimohamed

email: info@acamar.ca
website: www.acamaronline.com

Fayyaz Alimohamed has been the Chief Financial Officer of an insurance company in Vancouver and the Director of Investments for a large investment and operating group in Dubai.

Visit: www.acamaronline.com for a unique perspective on global economic events!

Disclaimer: Acamar's Exploration Profiles is intended to provide factual and timely research on general economic trends, opinions about trends in specific industry sectors, information on specific companies, references to other publications and reports that may be of interest to investors, and information on general trading strategies. Acamar Asia Consultants Inc. ("Acamar Asia") is not a registered investment dealer or adviser, and is a subsidiary of Acamar Advisors Inc.

Although the statements of facts in this report have been obtained from and are based upon sources Acamar Asia believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this report constitute Acamar Asia's judgment as of the date of this report and are subject to change without notice. Acamar Asia makes no warranties, express or implied, as to results to be obtained from use of information in this report, and makes no express or implied warranties of merchantability or fitness for a particular purpose or use.

This report is for informational purposes only and is not intended to be advice, or an offer or a solicitation with respect to the purchase or sale of any security. This report does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors are advised that investing in securities entails certain risks, and they should obtain individual financial advice and undertake extensive due diligence based on their own particular circumstances before making any investment decisions.

Acamar Asia may from time to time perform corporate communications or other services for companies mentioned in this report. Acamar Asia and/or its principals may be compensated for such services, in the form of fees and/or options. In addition, Acamar Asia or any individuals preparing this report may at any time have a position in any securities or options of issuers mentioned in this report. Directors, shareholders or employees of Acamar Asia may be a director or officer of a company mentioned in this report.

Copyright © 2004-2009 Acamar Journel. All Rights Reserved.

321gold Ltd