Brazil, India, and China meet in Russia as the four contries begin talks to break away from dollar hegemony — an ambition strongly pursued by Russia lately.

“The one reserve currency has become a danger to the world economy: that is now obvious to everybody,” said Russia Prime Minister Vladmir Putin at the World Economic Summit in Davos late last January. The U.K. Daily Telegraph went on:

Mr Putin said the leading powers should ensure an “irreversible” move towards a system of multiple reserve currencies, questioning the “reliability” of the U.S. dollar as a safe store of value. “The pride of Wall Street investment banks don’t exist any more,” he said….

Mr. Putin’s full speech from Davos can be found on The Wall Street Journal (WSJ) site where he added:

Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake….

The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.

“In the 20th century, the Soviet Union made the state’s role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.

“Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.

“…Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings….

“…Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model….

“…Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states….

“Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive.”

We’re seeing continuity of this rationale through Russian President Dmitry Medvedev. In a recent interview with CNBC, Maria Bartiromo asked the president of Russia’s Stabilization Fund set up before the recession and part of his response took diversification of reserves a step further:

“As for the Stabilization Fund, we indeed have spent much time and effort to accumulate certain reserves which now amount to billions of U.S. dollars. At one point, we had more than $600 billion in the Reserve Fund. Now we have spent some of this money, but nevertheless, the remaining reserves are still vast. It is still a lot of money and of course, it helps us solve many problems at the moment. But you cannot develop by using reserves alone. Therefore, despite the fact that we continue to accumulate gold and currency reserves and strengthen the currency component as such, we will have to think about the diversification of our economy in general, about launching new production facilities and creating a high-tech, innovative economy. This is probably the main task at the moment.”

When asked specifically about the U.S. dollar (USD), Mr. Medvedev responded:

“This is another subject we are very much concerned about, because the whole world depends on the situation with the U.S. dollar. Although there are other reserve currencies such as the euro, the pound, the yen, still a lot depends on the situation with the US dollar.

“You know, we have our own point of view on this matter, which, incidentally, I presented a year ago at the Saint Petersburg International Economic Forum. Our viewpoint is that the world today needs more reserve currencies, and this is not because the U.S. dollar is bad or the euro is not good enough. The current situation itself suggests that there should be more currencies, which banks, individuals and countries could invest in. This will give us more options should any problem emerge in the economy. The problems, as we understand, initially occurred in the U.S. economy; it is evident now. Had the U.S. government responded differently to these problems, the crisis could have been less serious. But that’s not my point right now; my point is that the crisis in the U.S. economy naturally changed the general attitude to the U.S. dollar.

Here’s the full interview (35:43):

When Mr. Medvedev says that the “current situation” calls for diversification, he’s not making an ideological jab at the U.S. Mr. Medvedev is saying that the Market guided by a spontaneous, rational invisible hand is calling for diversification and that acting irrationally will only make the crisis more serious than it already is. The “general attitude” toward the USD has “naturally changed” because U.S. inflationary monetary policy made the current economic crisis more serious than it had to be. It’s not that the printed money of the Greenspan era was misappropriated toward war and Wall St. over healthcare and infrastructure, but that the money was printed at all when the Market was trying to correct itself after the Nasdaq bubble burst prior to 9/11.

Brazil, Russia, India, and China (BRIC) met today for a summit in Russia. Russia Today describes it as little more than a common interests club,” but this is the time for “BRIC to become one of the building blocks of the global economy as it emerges from the downturn”. Russian international relations scholar, Ekaterina Koldunova, calls the summit a display of “dissatisfaction with U.S. policy” (3:06):

These quadrilateral talks represent four of the most populous, productive nation-states in the world. Mr. Medvedev has rejected the practicality of a global currency as an alternative to the USD as the primary international currency saying, ““There can be no successful global currency system if the financial instruments that are used are denominated in only one currency… Today this is the case and the currency is the dollar.”

Dallas Federal Reserve President Richard Fisher was recently quoted: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature…. “I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States.”

China is the largest foreign owner of U.S. debt and when the U.S. Treasury Secy. Timothy Geithner recently said in a speech at Peking University, “Chinese assets are very safe [in the USD],” the audience responded with laughter. During this visit a survey of 23 top Chinese economists found that 17 believed that China’s USD holdings put them in a “very dangerous position”.

“Don’t trust Uncle Sam,” one of whom added. “Why do they enjoy the pleasures and we pay the bill?”

Chinese economist Andy Xie recently wrote in the Financial Times:

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households.... [T]he U.S. situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency.

… The Fed is printing money, which will eventually inflate away the value of dollar holdings…. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the U.S. national interest in the short term, will destroy the dollar’s global status [in the long term].

China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the U.S. will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

Though, this is the first official summit, talks between these four countries date back to 2001 and now are motivated to ‘dump the USD‘.

The WSJ reports:

Their proposal for a less dollar-centric reserve system comes from “growing concern over the creditworthiness of the U.S. and the stability of the dollar amidst aggressive U.S. monetary and fiscal stimulus,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

The Brazilian unit of exchange (real) opened stronger than the USD today. Brazil Strategic Affairs Minister Roberto Mangabeira Unger was quoted by Brazzil Mag a couple of weeks ago against “dollar hegemony”:

There’s a strong consensus among BRIC members that the U.S. dollar can’t go on for ever as the reference currency, but we also don’t want the U.S. dollar replaced by a system which originates bureaucracy. Nobody wants a European Central Bank from a “Global Brussels” with huge powers,” said the Brazilian minister.

Between the U.S. dollar hegemony and a technocratic bureaucracy made up of official bankers there’s a great gap, ample space,” he said. “An option under discussion in BRIC is having a basket of currencies, or quasi-money such as the IMF Special Drawing Rights. But nobody has a definitive position on the issue,” remarked Mangabeira Unger.

China is committing to buy $50bn — with Russia and Brazil are committing to buy $10bn in IMF bonds — over U.S. Treasuries. In a year where global economic contraction is inevitable, India expects over 7% growth in FY2009 after a FY2008 which yielded a growth of 6.7% as the global system acknowledged its collapse. China has increased its gold reserves by about 65% to over 1,000 tons and Russia has over 500 tons.

Andrew Kramer of the New York Times (NYT) brushed this summit off saying the quadrilateral talks “concluded with only a cautious statement suggesting a move away from the dollar’s role in global commerce and a call for greater representation of developing countries in global financial institutions” (my emphasis) in his introductory paragraph, but followed:

By some predictions, the four nations… will surpass the current leading economies by the middle of this century, a tectonic shift that by this reckoning will eventually nudge the United States and Western Europe away from the center of world productivity and power.

Russia’s president, Dmitri A. Medvedev, said the main point of the meeting was to show that “the BRIC should create conditions for a more just world order.

The four countries produce about 15 percent of the world’s gross domestic product and hold about 40 percent of the gold and hard currency reserves, but they are far from a unified bloc and do not do enough business among themselves to justify a trade alliance.

With the USD falling, four countries holding about 40% of the world’s hard and soft reserves makes for a natural progression toward very strong trade alliances as they become the “center of world productivity and power” and the NYT article makes no mention of another summit scheduled for 2010 in Brazil.

The next G-20 Summit will be held in Pittsburgh, PA on the 24th and 25th of September this year.

  1. […] Russian President Calls for the End of Dollar Hegemony « Little …Chinese economist Andy Xie recently wrote in the Financial Times: Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of … […]

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