Building the BRIC wall

The Delhi Declaration translated

Unless coming from North Korea or another dysfunctional dictatorship, diplomatic language is normally notoriously vague and, when on occasion specific, is so watered-down that it can be served up to minors. Not so, however, with last week’s BRIC+SA Delhi Declaration. When it comes to diplo-speak, this is rather blunt stuff indeed. Here are a few relevant excerpts, with my proposed translations from diplo-speak into plain English:

The build-up of sovereign debt and concerns over medium to long-term fiscal adjustment in advanced countries are creating an uncertain environment for global growth. Further, excessive liquidity from the aggressive policy actions taken by central banks to stabilize their domestic economies have been spilling over into emerging market economies, fostering excessive volatility in capital flows and commodity prices.


“We know that the unsustainable debt burdens of ‘advanced’ countries are going to be inflated away or defaulted on. Indeed, the associated inflation is already showing up, wreaking havoc with commodity prices, our domestic capital markets and economies.”

We recognize the importance of the global financial architecture in maintaining the stability and integrity of the global monetary and financial system. We therefore call for a more representative international financial architecture, with an increase in the voice and representation of developing countries and the establishment and improvement of a just international monetary system that can serve the interests of all countries and support the development of emerging and developing economies. Moreover, these economies having experienced broad-based growth are now significant contributors to global recovery.


“You folks in ‘advanced’ economies have mucked things up badly for all of us with your flawed debt-based monetary system. We demand more say going forward so that you don’t just try to foist your burdens of adjustment on us. After all, we have gone out of our way in recent decades to implement market-based reforms, contributing far more to real, sustainable global economic growth than your credit-fueled bubbles. Ignore our interests at your peril.”

We have considered the possibility of setting up a new Development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement the existing efforts of multilateral and regional financial institutions for global growth and development. We direct our Finance Ministers to examine the feasibility and viability of such an initiative, set up a joint working group for further study, and report back to us by the next Summit.


“Because we don’t trust you to act in good faith on the above, we are now planning to set up our own IMF/World Bank. After all, we run huge current account surpluses so it is only natural that the money we are constantly lending to you can also be lent out, if we so choose, to each other or to emerging markets instead. We expect to have plans for such in place within one year. The clock is ticking.”

We welcome the conclusion of the Master Agreement on Extending Credit Facility in Local Currency under BRICS Interbank Cooperation Mechanism and the Multilateral Letter of Credit Confirmation Facility Agreement between our EXIM/Development Banks. We believe that these Agreements will serve as useful enabling instruments for enhancing intra-BRICS trade in coming years.


“We are sick and tired of being dependent on your inflating currencies. In case you haven’t noticed, we have largely completed work on arrangements that will allow us to rely significantly more on our own currencies for bilateral trade in future.”

Global interests would best be served by dealing with the [Syria] crisis through peaceful means that encourage broad national dialogues that reflect the legitimate aspirations of all sections of Syrian society and respect Syrian independence, territorial integrity and sovereignty.


“Stop mucking around in Syria and arming the rebels. Syria is a sovereign nation that has some issues to sort out, but those are internal matters.”

We are concerned about the situation that is emerging around Iran’s nuclear issue. We recognize Iran’s right to peaceful uses of nuclear energy consistent with its international obligations, and support resolution of the issues involved through political and diplomatic means and dialogue between the parties concerned, including between the IAEA and Iran and in accordance with the provisions of the relevant UN Security Council Resolutions.


“Even more important, lay off Iran. They have every right to peaceful nuclear power, just like the rest of us. We prefer a negotiated solution and can no doubt bring much pressure to bear in this regard. Don’t expect us to support the recent hysterical sanctions cutting Iran off from the global financial system. Notwithstanding such sanctions, we’re more than happy to keep trading with Iran through barter arrangements or even for gold. We’re looking to reduce our dependence on the dollar anyway.”

Translated into plain language, the BRICs are sending a clear message that the US economic and monetary policy mainstream, so far at least, appears not to hear. Yes, well-intentioned folks like John Taylor recognise that US economic policy is off the rails and are proposing ways in which it might get back on track. But the BRICs have already lost patience and, I would argue, are increasingly acting as if the US and most other ‘advanced’ economies are simply beyond the point where they can reform themselves, absent clear and present international pressure to do so.

Implicit in the Declaration is that the BRICs are laying the appropriate groundwork for their own monetary system: Bilateral currency arrangements and their own IMF/World Bank. The latter could, in principle, form the basis for a common currency and monetary policy. At a minimum it will allow them to buy much global influence, by extending some portion of their massive cumulative savings to other aspiring developing economies or, intriguingly, to ‘advanced’ economies in need of a helping hand and willing to return the favour in some way.

In my new book, The Golden Revolution (John Wiley and Sons, 2012), I posit the possibility that the BRICs, amid growing global monetary instability, might choose to back their currencies with gold. While that might seem far-fetched to some, consider that, were the BRICs to reduce their dependence on the dollar without sufficient domestic currency credibility, they would merely replace one source of instability with another. Gold provides a tried, tested, off-the-shelf solution for any country or group of countries seeking greater monetary credibility and the implied stability it provides.

Now consider the foreign policy angle: The Delhi Declaration makes clear that the BRICs are not at all pleased with the new wave of interventionism in Syria and Iran. While the BRICs may be unable to pose an effective military opposition to combined US and NATO military power in either of those two countries, they could nevertheless make it much more difficult for the US and NATO to finance themselves going forward. To challenge the dollar is to challenge the Fed to raise interest rates in response. If the Fed refuses to raise rates, the dollar will plummet. If the Fed does raise interest rates, it will choke off growth and tax revenue. In either case, the US will find it suddenly much more expensive, perhaps prohibitively so, to carry out further military adventures in the Middle East or elsewhere.

Would the BRICs shoot their own, export-oriented economies in the foot this way? It all boils down to national priorities. Iran is an important BRIC trading partner, Syria less so. No country willingly chooses an economically damaging confrontation unless it feels the alternative would be even worse. Yet to stand by and let the US and NATO interfere with one important BRIC trading partner after another could be costly indeed in the long run. At some point, they may decide, collectively, to challenge the dollar.

In The Golden Revolution, I apply a Nash equilibrium game-theory analysis to the current set of global monetary arrangements to demonstrate how even minor policy shifts by one or a handful of small countries can lead to major policy shifts by larger ones, eventually replacing an unstable global equilibrium centered around an unbacked fiat reserve currency with a more stable one backed by gold. The Delhi Declaration indicates that the transition from one to another is closer than previously thought.

This article was previously published in the April 3rd edition of The Amphora Report.

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