The U.S. stock market is testing a four-year high. Jobs are slowly coming back and Wall Streeters who had shrunken bonuses this year are hoping memories of the bad old days will be gone by fall. Four years after America’s banks toppled the global economy, the U.S. is into a slow rebuilding.
To be sure, the majority of Americans whose savings are in their depressed homes don’t feel it yet. And for U.S. commuters, gas at $4 a gallon is like a painful tax that cuts into the weekly food and rent budget. It’s investors who see a brighter spring.
But leaders of the developing countries aren’t celebrating the U.S. recovery as they might have a decade ago. That was then. This time there’s a long memory about U.S and European monetary failures creating financial catastrophes with once-esteemed regulators losing control and credibility. And so developing world leaders are rallying around ways to counter the next American crash, which they think is highly likely given the trillion dollar mega banks and weak regulation. They’re also furious that the Federal Reserve’s bailout for the banks through quantitative easing or printing money, and with Europe following suit, has created an ocean of stateless money chasing the highest returns in their fast-growing economies. This exacerbates inflation and drives up their currency, weakening industry and agriculture, says Brazil’s President Dilma Rousseff. “There’s been an avalanche of money, dollars and euros…thrown into developing countries…we are suffering from that,” she said.
So when the leaders of Brazil, Russia, India, China and South Africa ended their fourth annual BRICS meeting in New Delhi on March 29, the message was clear. We need an alternative to your Federal Reserve and the dollar. It was the same sentiment behind a meeting about India and China sponsored by the International Monetary Fund (IMF) in Delhi a week earlier, and it’s been the subject of countless papers, books and seminars in the last two years. The agenda: How to fend off another financial shock that clobbers the high-growth Southern nations? How to build an alternative financial network that dilutes the impact of volatile Wall Street money management?
To be sure, there was plenty of posturing and image-making as the five leaders inked a commitment to move toward their own BRICS bank. They are on a high, delivering strong growth for about half the world’s population while America and Europe faltered. Soon they will start to offer letters of credit and lines of credit in their own currencies – tiny steps toward a bank that would one day make real loans. Then there’s the problem of the money. If not dominated by China’s renminbi, what would nations with bills called the renminbi or yuan, the real, the rupee, the ruble, and the rand call it – the R5, the Ryi, the Realruprub, or the 7, after the ‘R’ digit on your mobile keyboard? And how many faces can you put on one bill?
There’ll be time to work on a name. Except for the euro, which was 40 years in the making from idea to launch, no one has made a dollar rival work. The Gulf States tried it against a sagging dollar in the 1970’s but failed. “You have to show them the money by creating an alternative reserve currency before they will change their ways,” says European economist Nicolas Krul, a Gateway House advisor. “The BRICS have the economic potential to do that, do they have the will?”
It’s important to remember that the euro was born out of deep frustration with the U.S., not unlike the BRICS frustration of today. The U.S. had printed dollars to pay for the Vietnam War, then rocked the world by ending the gold standard on August 15, 1971, allowing a floating dollar to weaken so badly it took an iron-fisted Paul Volcker three years from 1979 to 1982 to wring out inflation and lay the foundation for two decades of sustained U.S growth. The U.S. borrowing from China over the last decade is similar, regarded by BRICS members as money that will never be re-paid.
It’s also important to consider that Asia stands as a case study of monetary reform. Hot money and reckless lending broke Thailand, Indonesia, Malaysia, South Korea and Singapore in 1997. Facing depression, they got a bailout from the IMF with harsh terms. But by 1999, they’d started on a successful long-term growth path with a vow never to become heavily indebted in dollars again. Many are now using China’s Yuan as an emerging transaction currency to settle payments, but the odds of China agreeing to an open market for the Yuan are slim. Zong Liang, deputy manager of the Bank of China, said at the IMF meeting: “Hot money comes like a flood into your market but leaves in a flash creating all kinds of financial risks. The international monetary system will be dominated by the dollar for some time. But we must find a way to constrain the U.S. from printing dollars indiscriminately.”
That still leaves the door open for Asians and BRICS to consider their own hybrid currency. It may take years, and may disappoint like the euro now. But the backlash against U.S. monetary and too-big-to-fail bank “arrogance” is familiar. You never know.
Bob Dowling is Editorial Advisor to Gateway House: Indian Council on Global Relations.