The week ended on October 26, 2024. Interesting news items to look at this week are:
1. The Breakout of BRICS: After two months of absence in updating my Bloc, this week I finally find time to sit down and ponder on events that had shaped the world in the past period. I thank you for friends who reached out to inquired whether I had fallen to sickness or other unfortunate causes. I am glad to report that my time away from writing was simply due to happier circumstances of a completion of construction of my retirement home, moving and seeing my youngest daughter married with a celebration party right in our retirement home backyard. The next big personal project is to sell my old house and hopefully no more distractions thereafter. However in the harsh realities of Geo-politics and Geo-economics, much had transpired in the past 84 days. There were dangerous escalations in the wars in Ukraine and Middle East, continued cooling in the global economy, a change in leadership in Japan, NATO and in the next 10 days, Presidential Election in the United States. At this juncture, my focus of study would be on the just concluded BRICS Summit that took place in Kazan, Russia.
(i) Context and Perspective: The inertia of a new alternate Global Monetary Architecture necessarily differs between a perspective of whether you are a beneficiary of the dollar-centric system or a victim thereof. Unlike the former Bretton Woods, the BRICS proposed alternative has not been settled by a baptism by fire of a World War and therefore the BRICS alternative will continue for a period to be subjected to sabotage, ridicule and cognitive warfare. For this very reason, the prepared announcement that came out from the BRICS Summit is very much restraint, steering clear from criticisms against US, EU and the Western alliances. The presentation of the BRICS payment and clearing system is one of refinement and complementary to the existing monetary order. Nonetheless, let none of our readers misjudge the BRICS’ linguistic finesse as meaning the outcome of the Summit was a nothing burger. A meeting of over 40 Heads of States representing a significant portion of global population, GDP, energy, manufacturing and trade that exceeds all other geopolitical or geo-economic groupings is not something to be taken lightly of. (Fig. 1).
One has only to look at the geographical spread of former colonies of Western powers (Fig. 2) to appreciate a global acceptance of a new monetary order is as natural as water finding its own level once nations are freed from oppressive restraints and shackles.
May I caution readers that shrewd politicians as Putin and Xi would never prematurely sound a drum roll or flash multi-color spotlights on their plans to alert adversaries to derail their carefully planned quiet revolution.
(ii) The Heart of the Dollar Reserve System - At the heart of the dollar reserve system is fractional reserve banking and credit. Implicitly for credit to be functional, the holder of a promissory note must believe the issuer would on demand redeem the credit note with something of value. This trust in the dollar system has consistently been eroded through default of the gold window in 1971, unstoppable dilution of value through debt issuance, whimsical quantitative easing and confiscation and political sanctions in the dollar settlement mechanism against competitors. There is no nation that tried to dethrone the dollar because the spiral downwards of the dollar system has been totally self-inflicted. In the fullness of time, the BRICS payment and clearing system emerge as nations seek self-preservation from the chaos currently engulfing the entire globe. (Fig. 3).
(iii) Unsustainable Fiscal Dominance - Forecast GDP growth for US for 2024 was 2.7%. This compares well within the G7 with EU of 0.8% and Japan of 2.7%. Whilst the headline number shows the US economy is chugging along nicely, upon scrutiny, the US economic growth was solely driven by a Federal Budget deficit of a whooping 6.3% of GDP. In other words, within the period in question, the US private sector contracted 3.6%. One telltale sign of the US economy loosing its technological prowess at the alter of extreme financialization is the decline of Intel and Boeing. These corporations were at one time stood head and shoulder at the cutting edge of US scientific supremacy have both fallen from grace. The stock of Intel fell YTD by 52.55% (Fig. 4)
and Boeing fell by 38.4%. (Fig. 5).
This is despite both Intel and Boeing were given billions of Federal grants and subsidies to shore up their competitiveness against Chinese tech companies. The US “small yard and high fence” extreme restrictive policy against the high tech segment of China naturally would backfire into Chinese buyers staying away from all American products. With falling demand from the world’s largest semiconductor market in China, Intel is halting most of her expansion plans despite government funding through the Chips Act.
(iv) The Federal Reserve Tool Box is empty - As students and investors, our brief is to validate the reassuring babble of officials. The Federal Reserve has 3 principal tools in its tool box: (a) Price of short term money through the Discount Window, (b) Supply or withdrawal of liquidity through bank reserve expansion or contraction using its Balance Sheet and (c) Influence market participant’s reaction through hints and guidance. In the infamous quote of former Fed Chairman Ben Bernanke, “Monetary Policy is 98% talk and 2% action”. (Fig. 6).
Much as the Fed wants inflation to come down, the private sector has already responded through consumption contraction but spending demand from Government would simply not heed and has progressively worsen. When the most wasteful and unproductive element within a society refuse to budge and foreign buyers of US Treasuries stayed away, the Federal Reserve is left with one option and that is to maintain a high interest rate policy to attract funding into Government papers or see the US Treasury default.
(Fig. 7) shows Who is Buying US Treasuries which is hardly anyone except the US Public. (Fig. 8) shows a continuous growth of Money Market Funds as US Citizenry switched their lower yielding bank deposits into Money Market Funds (principally short term Treaury Bills).
(Fig. 9) shows a weekly growth of Money Market Funds even after the Federal Reserve cut interest rate by 50 basis points on September 18. One study shows over 300 US regional Banks are in trouble having been squeezed by fleeing customer deposits and non-performing commercial real estate loans and underwater Govt Bond portfolio.
(Fig. 10). For this reason, the Bank Bailout Facility implemented after First Republic and Silicon Valley Bank failures in March 2023 and supposedly to end on March 11, 2024 is still continuing.
(Fig. 11). The Fed is clueless as to what it can do and those in the know expects nothing will be done until something breaks.
2. Financial Market Performance for 2nd Half 2024 - Since July 1 2024, performance of various asset class as follows (Fig. 12):
Gold (+17.8%), Silver (+14.45%), Dow (+7.52%), S&P 500 (+6.08%), JPY (+6.01%), Bitcoin (+5.91%), Uranium (+2.99%), Nasdaq (+2.72%), GBP (+2.39%), CNY (+2.08%), EUR (+0.50%), AUD (-0.88%), Copper (-1.11%), USD Index (-1.43%), Russian Rubble (-10.84%), and Oil (-12.63%).
In anticipation of a new settlement and reserve unit from the BRICS Summit, Central Banks have diversified their Reserve Assets away from USD into Gold. The new BRICS settlement mechanism termed “The Unit” will be 40% Gold and 60% based upon a basket of BRICS Currencies. Initially the basket of BRICS Currencies will be modeled after the Special Drawing Rights of IMF but based upon the Special Drawing Rights of BRICS Development Bank called R5. R5 are the currencies of the 5 founding members of the BRICS Development Bank and comprise Real of Brazil - 15%, Ruble of Russia - 15%, Ruppee of India - 25%, Rmb of China - 40% and Rand of South Africa - 5%. Trade between countries will be settled initially with their own currencies and periodically any large imbalances will be settled using “The Unit”. From the perspective of the 150 countries comprising the Global South, “The Unit”, MBridge and BRICS Play is an equitable settlement mechanism and much cheaper and efficient than SWIFT, that naturally will upset the “Rule Based International Order”. What do you think? With existing technologies and trading platforms, 24 hours live trading offer and bid prices of the Unit is as easy as A,B,C. (Fig. 13) is a mock BRICS Bank Note.
1Timothy 6:6 Now godliness with contentment is great gain. 7 For we brought nothing into this world, and it is certain we can carry nothing out. 8 And having food and clothing, with these we shall be content. 9 But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and perdition. 10 For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows.
