China's Central Bank Willing To Share $3 Trillion … China's Central Bank has over $3 trillion in reserves. They might be willing to share it … Brazil, Russia, India and China, the BRIC countries, are back to talking about creating a unified financial system where they can avoid euro and dollar volatility. This time, a pooling of Central Bank dollars from the countries in case liquidity dried up as the world tracks the West's crisis momentum. Regardless of the amount of difficulty involved, the big four emerging markets plus South Africa said earlier this week they were considering setting up a foreign-exchange reserve pool and a currency-swap arrangement in an effort to avoid any credit crisis stemming from the advanced economies. – Forbes
Dominant Social Theme: A currency tent will keep us warm and dry.
Free-Market Analysis: We missed this one but Forbes did us the favor of reporting on it.
The BRICs are apparently considering creating a kind of basket of currencies that would be "aimed at containing crises such as the one roiling the eurozone." This is not exactly a "new" currency but it is certainly a step toward it.
China is willing to contribute part of its US$ 3 trillion in reserves to back the putative strategy, which would involve multi-lateral currency "swaps" and the retention of a good deal of non-BRIC assets (i.e., pooled dollar holdings).
The strategy was first reported in the China Daily and the Forbes article explains that the scheme was discussed by China's president, Hu Jintao, and other leaders in Los Cabos, Mexico where top pols are meeting for the G20 Summit. Here's some more from the Forbes article:
According to the Chinese Foreign Ministry, the leaders discussed the currency swap and foreign-exchange reserve pool ideas with their Russian, Indian and Brazilian peers. Hu asked the finance ministers and central bank chiefs to implement these ideas, according to a story in China Daily on Wednesday morning …
If, for example, oil prices collapsed to 2008 levels of around $40 a barrel from the roughly $85 today, and if oil dependent Russia was in need for a few million dollars after rummaging through its own sizeable cash account at their Central Bank, they could, in theory, borrow from China's $3 trillion international reserves.
That would give the market some confidence that Russia is not forced to wipe out its reserves, sending Russian debt costs higher as investors wonder whether a country's "rainy day" fund is enough to handle its obligations to bond holders.
Of course, like any "good" idea, this one may have some problems not currently anticipated. The chief problem, from our point of view, is that currently the BRICs are riding a wave of prosperity. But we are not sure it will last.
The BRICs have made phenomenal progress in terms of prosperity – as modernity describes it – but we wonder how much of the current advances are ephemeral.
We've pointed out in the past that such rapid growth is fueled by central bank monopoly fiat money, and such hot money can subside with startling rapidity.
This is surely what has happened in the US and Europe. The Celtic Tiger – Ireland – was seen (like Iceland) as the very model of a small, aggressive economy making all the "correct" moves. Of course, it turned out that there were no correct moves – only endless amounts of hot money created and supported by the fiat euro.
It was the collapse of the world's reserve currency, the America dollar, that gave rise to the rolling sovereign crisis that has infected Europe and is gradually undermining the solvency of the rest of the world.
The BRICs, sadly, are no different in this regard. India, China, Russia and Brazil all suffer from a good deal of price inflation, which is a symptom of overheated economies. Almost every week we see a spate of articles about how the governments of these countries are trying to control their hyperactive economies – along with predictions of "soft landings."
In truth, from our point of view, the "health" of the BRICs is a kind of elite dominant social theme. The powers-that-be are trying their best to depose King Dollar (which they set up) in order to bring in a worldwide reserve currency.
If one steps back one can see this strategy in action. There are currency unions around the world now, most notably in Europe, and the BRICs' quasi-currency union would just be one more large agglomeration.
The elite promotion itself apparently has as its goal emphasizing that Europe and the US are dead letters and that economic vitality has passed to the developing world. Is this true?
Or is it a kind of promotion, as surely as global warming or Peak Oil are promotions? The idea is to impress upon people – Western middle classes – a narrative that corresponds to what the elites intend to do. It doesn't have to be an accurate narrative, only actionable.
In this case, the narrative justifies the continued expansion of IMF SDRs and other harbingers of a true world currency.
Yes, in fact, the BRICs may soon implode much as Europe and America already have – but this won't stop the unfolding of what we like to call "directed history."
The elites have it in mind to create a global money and right now the idea that the BRICs are ascendant conforms to the larger narrative they want to pursue.
We'll see how long the story lasts. The BRICs, we'd offer, are a good deal more fragile, economically, than the mainstream press is currently reporting. You read it here.