BRIC Nations: Be Careful What You Wish For

“To prevent the deficiencies in the main reserve currency,” reads a report released today by the People’s Bank of China, “there’s a need to create a new currency that is delinked from the economies of the issuers.”

That’s right, another call from China to ditch the dollar as the world’s reserve currency. “Special drawing rights of the IMF should be given full play,” said the state-run bank, “and the international body should manage part of its members’ reserves.”

We took note a few weeks ago when Brazil, Russia and China cleverly announced an $80 billion swap of IMF bonds for U.S. Treasuries. Factor in today’s report from China and previous similar calls from Russia… perhaps the IMF will be the nexus of this monetary overhaul.

“As BRIC nations have sent up a hue and cry for a supranational currency,” ponders our currency adviser Bill Jenkins, “I have to wonder if they have really learned any lessons at all. First, their complaints have centered around a single manipulated currency at whose mercy they find themselves. They seem to intuitively know that a fiat currency system is flawed. It is flawed because men are easily corrupted.

“But what is their solution? More of the same. Another fiat currency. Actually, a currency made up of a basket of currencies. This should really strike us as hilariously funny, if it weren’t so sad. And by sad, I mean stupid. It’s like draining bad oil out of a motor and replacing it with equally bad oil. Or like removing a tire that has a nail in it, only to replace it with one that is dry-rotted.

“What’s more, both India and Russia still receive foreign aid from the United States. They’re rather like a rebellious teenager who takes potshots at their parents while holding out their hand for cash and car keys.

“Beyond that, consider that the BRIC nations hold over 30% of the U.S. Treasury market. That’s a lot of eggs in one basket. So when they start grumbling about policy, they can really strike a fire. On the other hand, upsetting the basket breaks a lot of their own eggs.

“BRIC nations are still reliant on the American economy, as well as highly connected to dollar-based difficulties. So as they chop away at the tree, they had better be careful, lest it fall on them.”

The Daily Reckoning