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BRICs Begin to Crumble?

Brazil central bank cuts 2011 growth forecast to 3.5% ... Brazil's central bank has lowered its forecast for economic growth to less than half of last year's, partly blaming the slowing global economy. The central bank lowered its prediction for growth in 2011 to 3.5%, from 4% that it expected in June. Brazil has boomed as other countries have stalled, growing 7.5% last year. The bank pointed to "the deterioration in the international outlook" for the downgrade, and also to spending cuts enacted by President Dilma Rousseff. – BBC News

Dominant Social Theme: The world has troubles, but things will be fine. The BRICs are solid enough for the rest of us to build on.

Free-Market Analysis: In India, the government believes it's OK for up to 70 percent of the country to live on fifty cents (US) a day; in Brazil, growth is slowing markedly (see article excerpt above); and China continues to struggle with unrest and growing doubts about its ongoing industrial boom.

The world is focused mostly on Europe's problems and to a lesser extent America's, but it's the BRICs' struggles that may ultimately prove the most damaging to what's left of the world's economy. With half of Europe unraveling and America sliding further into recession, the BRICs have seemingly proven to be a bedrock of stability, but it may be an illusory one.

We've often pointed out that the whole narrative regarding the BRICs is somewhat phony – a dominant social theme purveyed by the Anglosphere power elite that wants the world to believe faux "capitalism" is effective in reducing poverty and providing people hope. Of course, this doesn't explain why billions live on a dollar a day, even in places where the capitalist "miracle" is supposed to have taken effect.

In fact, these industrial "miracles" have more to do with monetary stimulation than real, long term growth. But we're not supposed to notice that. The mainstream media does its job as best it can, trumpeting the progress of India, Brazil and especially China while avoiding any mention of the fundamental, pernicious and ultimately ruinous monetary stimulation.

Can it be otherwise? If one looks at these economies unsentimentally, the reality becomes clear. The BRICS are entirely dependent on Western style central banking economies and stimulation for their "progress." Both Brazil and China (India, too) have poured money into their economies with the same sort of crazed abandon – and results – as the West. Eventually, the bill will come due, as it already has in the West.

Once the economic infrastructure has been put into place, it's easy to over-stimulate economies by printing money and keeping interest rates low. Or in the case of Brazil, targeting industry and the larger economy with various kinds of pump-priming campaigns that then demand higher interest rates to keep price inflation under control.

Of course, when interest rates go up, capital is attracted and the hot money pours into the economy, often aggravating price inflation. Brazil's central planners have struggled with this as well. Brazil's interest rate has been held artificially high as a result – around 12.5 percent.

It's no wonder with those kinds of rates that "growth" has slowed and that central bankers are contemplating a "cut" to 12 percent. The government also intends to remove "stimulus" introduced since the 2008 financial crises. The same pattern can be seen in India and China, too, where interest rates have also been used aggressively to manipulate economic growth.

For China, the result of so much monetary manipulation has meant empty cities, unfinished infrastructure and vacant skyscrapers across the country. It has also meant, as infrastructure is completed, that the haste with which it has been built becomes increasingly evident.

Failing or shoddy roads, bridges and tunnels don't always call attention to themselves immediately, but large railroad accidents are impossible to cover up. According to the UK Telegraph, a pair of violent rail incidents, one in Shanghai just this week (on Tuesday) and another in Wenzhou that received a lot of publicity in July, have proven impossible to downplay.

The two accidents have given rise to the term "blood-stained GDP" and the Chinese Communist Party has reacted by vowing to fix problems and avoid further risks. "The tragedies in Wenzhou and Shanghai keep reminding people that China cannot afford failure," stated a recent editorial in a major Communist-run newspaper.

These are not small incidents, and railroad accidents rarely are. Perhaps 270 people were injured on Tuesday in a train collision and 40 were killed in a high-speed collision in Wenzhou. Making matters worse, the Wenzhou rescue effort was badly managed and further aggravated by a clumsy cover-up.

Now the anger is palpable and the normally cautious Chinese are venting, even on the Internet. "A blogger named Qi Jie on Sina Weibo, a popular Twitter-like service, suggested tying officials to the first car of every subway train to ensure that safety standards improved."

Unable to duck the problem, the Chicoms are reducing train speed, firing bureaucrats and generally retreating from the vision of nationwide high-speed rail. Here's some more from the Telegraph article:

Between 2010 and 2015, China will have invested $180 billion in subway lines, tripling the network's reach to 1,864 miles. It's an investment the country needs to get right, as China is now the world's biggest purchaser of automobiles and congestion has started to take an economic toll.

An IBM survey released last year determined that Beijing and Mexico City have the worst commutes in the world. The World Resources Institute has emphasized the need for sound transportation policy given the effect rising car ownership has on pollution and China's oil security.

But expanding the country's transportation network will now continue under a cloud of public skepticism. "Careful planning is a must before a city begins to construct its subway system. Otherwise, it'll be a regret that can last over 100 years," Shi Zhongheng of the Urban Rail Transit Research Center at Beijing Jiaotong University told the China Youth Daily.

The reaction of Chinese officials sounds good but misses the point. The various infrastructure plans come out of the same flawed central planning that has given China empty cities and cavernous, unpopulated malls. These are downplayed as part of the larger wisdom of Chinese central planning. The same sort of commentary was aimed at the USSR's "industrial miracle' circa 1950.

When the Chinese economy crashes – and we think it will happen sooner rather than later – the insanity of the 20-year easy money bubble will be more fully revealed. Much of the "growth" that China has experienced will be seen to be a race to fulfill industrial quotas set by the party. Nothing about the Chinese miracle is organic, at least not at the top. Same goes for the rest of the BRICs.

Scratch the surface of the BRIC miracles and you find central planning aided and abetted by monetary stimulation. In fact, one could argue that the real difference between the ponderous and inefficient socialist practices of the 20th Century and the hyper-charged "progress" of the 21st is merely the result of Western-style central banking.

Conclusion

Modern central banking economics is not sustainable. Sooner or later, the BRICs will find themselves facing the uncontrollable unraveling that Europe and America face. It's inevitable, and only the timing is unknown. China's railroad crashes are like the tolling of a bell marking the end of the BRICs manipulated "miracles."

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