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Last
week, the leaders of Brazil, Russia, India, China, and South Africa met
in New Delhi for their fourth annual "BRICS" summit. The
meeting brought together five countries that together represent 43
percent of the world's population and 18 percent of the world's GDP.
(More importantly, the group is currently attracting 53 percent of global
financial capital.) When the gathering concluded on March 29, the
coalition subtly issued its latest challenge to the increasingly
desperate bankers and politicians of the West. They announced more
definitive plans to establish a BRICS-focused development bank, to be
solely funded by the BRICS countries themselves. Such an institution
could allow this emerging bloc to pursue independent policies on the
world stage, thereby challenging the global financial dominance of the
World Bank and the International Monetary Fund (IMF), which for nearly 70
years have served as powerful monetary levers for Western interests.
If the
BRICS countries continue to develop in the present trajectories, I
believe that in five or ten years they will have the ability to fund
their bank at levels that could challenge Western institutions (for why
we think Indonesia should be included in the BRICS, see our latest global investor newsletter).
If so, the duel between these international banks may be the arena where
the world decides what sort of money it really prefers. The contenders
will be the debased fiat money of the Anglo-American led debtor nations
and a currency backed by the nations whose citizens are awash with
savings and whose economies churn out needed goods.
The
current monetary system can trace its genesis to the Bretton Woods
conference that took place in the waning days of the Second World War. As
a result of the massive wartime expenditure and destruction, Europe,
Russia, and most of the world were near bankruptcy. In contrast, the
United States had flooded the world with high quality consumer goods and
had accumulated vast surpluses. Its currency, the dollar, was convertible
to gold at the fixed rate of $35 an ounce. The U.S. dollar, then, was the
clear choice for the international reserve standard. The pre-war
Keynes-inspired Anglo-American tendencies were later imbedded in new international
supra-governmental bodies such as the International Monetary Fund (IMF),
the World Bank, and in the Security Council of the United Nations.
Sixty-eight
years later, the Anglo-Americans have greatly increased the powers and
size of central governments and central banks. Governments have
accumulated unimaginably irresponsible levels of government debt and
debased their currencies almost beyond recognition. This has discouraged
savings and investment. But if the extraordinary government spending comes
to an end, and the monetary spigots were to switch off, these economies
would face severe recession, leaving vote-seeking politicians with few
good options. On the other hand, those countries with robust industries,
high levels of savings and investment, low levels of government debt, and
more sensible economic policies, have accumulated vast reserves (this
mirrors the rise of America in the late 19th Century).
While the
BRICS have accumulated impressive aggregate reserves of some $4 trillion,
the U.S. Treasury alone has incurred debts of some $15.4 trillion.
Furthermore, American politicians plan on increasing their debt by at
least $1 trillion a year into the foreseeable future. It is clear to many
that the continued monetary dominance of the Anglo-Americans is no longer
deserved.
This
fundamental struggle, with no real prospect of compromise, stands at the
epicenter of the future world clash over money and power. Led by China,
the BRICS appear to favor an alternative to the U.S. dollar, lest they
continue to chafe under the yoke of a monetary system that is based on
increasingly shaky economic fundamentals. In my opinion, they must
clearly be striving for a new international reserve standard linked to
gold to replace the current monetary regime.
Now, the
BRICS are pressing for the rapid realignment of control for international
funding. Struggling countries may wish to align themselves with this new
source of support. Eventually, other resource rich nations, such as Chile
and Indonesia, can be expected to throw in their lot. In addition, if the
United States continues to place all its faith in the printing press,
some savings rich Western nations, such as Germany, Norway or Switzerland
may be tempted to join the BRICS in their drive for a new world order based
on sounder money.
It
appears, then, that the sun is setting on the era of the unrestrained
printing press. When the new day dawns, the path to renewed freedom and
enterprise likely will be paved, not with paper, but with gold and
silver, impacting prices accordingly.
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