BRICS Thrown at the U.S. House of Cards May Cause Things to Come Tumbling Down

Brazil, Russia, India, China, and South Africa, each representing large and populous developing countries with growing economies, have formed a consortium known by the acronym BRICS.  They met four days ago to call for an end of the U.S. dollar as the world’s reserve currency. 

These emerging economies are seen as the engine for global growth (China is expected to grow by 9.5 percent a year for the next five years and India is expected to grow at more than 8 percent a year. Russia and Brazil anticipate growth of more than 4 percent) and their leaders are demanding a greater voice on the world stage.  Their final statement said, “The governing structure of the international financial institutions should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries.”  The group also called for “a broad-based international reserve currency system providing stability and certainty.” This was directly aimed at the U.S. dollar and Washington’s monetary policy, which they think has allowed the dollar to depreciate.

Last November, we wrote that China and Russia had made a pact to denounce the dollar and to transact their bilateral trade in their own currencies.  Similarly, the five countries agreed to have their development banks provide credit to one another, denominated in their local currencies and not in U.S. dollars.

The movement away from the dollar as the world’s reserve currency gained some clout as, today, Standard & Poor’s downgraded the outlook for the United States to negative, “because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.”  The move to a negative outlook means S&P believes there is a 30% chance that Treasury bonds could be downgraded from their AAA rating, the ratings agency said.

Should the U.S. lose is reserve currency status the following would be likely:

• Commodities will skyrocket – they are already well on their way
• Fuel prices will increase drastically
• Lifestyles will be negatively impacted
• Interest rates will rise sharply
• Housing prices would drop even further than they already have
• The stock market would fall
• Unemployment will see double digit increases
• Inflation will rise substantially

The U.S. is being given a warning, by S&P, to initiate austerity measures to address its deficit immediately.  A delay may well cause the current house of cards (built on monetized debt) to come tumbling down.