Friday, May 16, 2008

BRIC is for real!

The world has changed. The change was coming anyway…the United States just helped it along.
Globalization was going to happen. The United States pushed it along for its own benefit…and now the United States is, itself, seeing what globalization is going to mean...for everyone.

Brazil is now riding high…like other emerging countries, commodities are driving the engine. But, Brazil is just one among several.
· BRIC…Brazil, Russia, India, and China...a group of dynamically emerging countries.
· Sovereign wealth funds; Brazil is joining China and Middle Eastern oil states.
· Canada and a few other countries are being recognized as the ‘next wave’ of countries that are emerging economically.

This is the world of the future. It is a world in which the United States is still the super power, but it is a world that cannot be dominated by the one and only super power. And, these people are talking with one another. For example, the countries that make up BRIC are meeting this weekend in Russia. They are “taking awareness of (their) own influence in world affairs.” And, it is expected that this talking will continue and spread.

But, this is a world in which the United States cannot just do as it wants as it pretty much has tried to do over the past seven and one-half years, economically as well as in foreign affairs. The United States is going to have to consider itself as a member of the world community and learn to work with others as well as encourage and help others if it is going to be respected and listened to.

The United Nations is outdated and unrepresentative; the leadership of the World Bank and the International Monetary Fund is too ‘Western’; and the G-7 or whatever does not contain some important players. The world is in transition and the United States is going to have to be an integral partner in the transition. In the past seven and one-half years, in too many areas, the United States has taken the position that if it didn’t like what was going on, it just removed itself from the picture. As a consequence of such action, the United States lost any ability it might have had to influence outcomes. Also, in the process, other countries learned how to ‘go it alone’ and work out the best solution they could. The United States lost respect while other nations gained in wealth and confidence and the knowledge that they did not need the ‘big guy’ around. They would like the ‘big guy’ there, but their work continued without that input.

Economically and financially, the United States is going to have to become a full member of the world community once again. This administration will not do it…they have neither the time nor the will to do it…but the next administration should. Most of all, the United States must start talking with these nations, not as their superior but as their partner. The United States must not be selfish in this partnership, it must help the emerging powers to become strong, but it must do so while strongly advocating its own position.

Where does this process start? The United States must begin the process by bringing under control its monetary and fiscal policy. It must play by the same rules that the rest of the world plays by.

Why is Brazil considered a part of BRIC? It paid the price of bringing its inflation and its economy under control. Brazilian president da Silva ‘bit the bullet’ and made the central bank independent and let it bring inflation under control. Its economy improved, productivity increased, and, financially, Brazilian debt has been rewarded with an “investment grade” rating. It was not easy, but it was done. Now Brazil is riding the crest of the commodities boom and is trying to make good use of the funds coming into the country: hence the formation of a Sovereign Wealth Fund. And, in the last two years or so, the Real, the Brazilian currency, has even outperformed the Euro relative to the dollar. But, Brazil needs the United States to be strong financially…it needs the United States to be a partner.

Brazil is not the only country that has gone through this cycle. Most major nations, as well as many of the emerging nations have made their central banks’ independent and allowed them to contain inflation. And, this does not help the value of the dollar, given the current stance of the United States with respect to its monetary and fiscal policy.

Hear the stern words of Mervyn King, the governor of the Bank of England, at a news conference on Wednesday: England is “traveling along a bumpy road as the economy rebalances. Monetary policy shouldn’t try to prevent that adjustment.” He further stated that inflation is expected to accelerate and the central bank must continue to combat this inflation and this means that the Bank of England will not make further cuts in interest rates. This, of course, does not help the position of the United States and the value of the dollar. But, the Bank of England does not stand alone in taking this stance.

The world has gotten to where it is faster than it otherwise would have. The United States has contributed to this accelerated pace by creating large fiscal deficits underwritten by extremely low interest rates. The mountains of debt, both public debt as well as private debt, that have resulted have been spread throughout the world. The fact that the United States has no energy policy has also played its part in the changing world and has helped along the explosion in commodity prices. Before these events, the world was globalizing…these events just sped the effort along.

Where does this leave the United States economically and financially? It leaves us in a position in which we must stop pointing at others and placing the blame on them. As Steven Covey wrote…”if you think the problem is out there…that is the problem!”

When there is dislocation and dysfunction, behavior must be adjusted to re-establish some form of unity and wholeness. Most often, dislocation and dysfunction come about due to the strict adherence of ‘ideology’. The United States, once one of the more realistically pragmatic countries in the world, has been compromised by a rigid pursuit of an ideology that has had little connection with the real world. It cannot afford to continue behaving in this way.

BRIC is real. The wealth and power of a dozen other countries is real. And, this change is going to continue. If the United States doesn’t accept this fact, and what it means for its own behavior, disruption and volatility will continue in world markets and may even increase. How one constructs an investment strategy for the future depends upon how one sees this situation working itself out.

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