Wednesday, June 17, 2009
I wrote an essay in November called "Throwing a BRIC Through America's Windshield?" in which I predicted:
Will the BRIC countries and Japan demand a shift away from the dollar at the G-20 summit later this month?
My prediction is that at the G-20 this month, Japan, Brazil and India will drag their feet, and that China and Russia won't turn their bark into a bite.
However, I predict that America's economic meltdown will occur so quickly that the BRIC countries and Japan will force a change in the world reserve currency within the next year.
Well, yesterday, the BRIC countries said they might be each others' bonds (and not just U.S. Treasury bonds). As Bloomberg writes:
The BRIC countries accounted for about 22 percent of the world economy in 2008, up from 16 percent a decade earlier, based on purchasing power parity.
Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar as their leaders meet for a summit in Russia’s Ural Mountains.
The leaders of the so-called BRIC countries will discuss measures to promote regional currencies, including “possibly placing part of reserves in the financial instruments of partner countries” ...
The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.
And today, Russia and China announced that they will greatly increase their use of yuan and rubles in trade between the two countries. Given that Russia is currently the world's largest producer of crude oil and that China holds more monetary reserves than anyone else (more than a quarter of the world’s reserves), this could be substantial.
Indeed, as AFP writes:
The dollar fell against the euro and yen on Wednesday after major emerging economies cast doubt on its long-term future as the world's main reserve currency, dealers said.My prediction might not have been so crazy after all.
For background, see this, this, this and this.