Michael Hudson and Leo Panitch on BRICS Development Bank Salvo v. the Dollar

Yves here. I’ve refrained from saying much about the announcement of the plan to establish a $100 billion development bank by the BRICs nations (Brazil, Russia, India, and China) because the hype is ahead of the reality. Yes, it is true that the US has been abusing its role as steward of the reserve currency. QE has been a huge bone of contention in all emerging markets, since hot money has flooded in, while the Fed has, in an insult to the collective intelligence of the leaders of these countries, tried claiming that it has nothing to do with the influx. And they are bracing themselves for the tidal retreat when the Fed starts tightening. The US’ efforts to use sanctions to punish Russia have also focused the minds of these countries.

However, the formation of a development banks falls vastly short of the infrastructure needed for any country’s currency (or a basket of currencies) to displace the dollar. This measure doesn’t come close to representing a threat. It is at most a statement of intent to get more serious. But setting up any kind of basket takes international cooperation (and not among the BRICs alone) when this group can’t even settle their petty differences and agree on candidates for leadership of international agencies. In addition, a reserve currency replacement candidate needs to run consistent trade deficits to get its currency into international circulation. None of these nations are prepared to hurt workers by sending demand offshore to do that. A deep bond market is another requirement, and none of the BRICs have that either.

The US could lose reserve currency status through a catastrophe that severely damages its economy, like a massive natural disaster or unforeseen consequences of having its aggressions escalate into a hot war. But the actions the BRICs are taking don’t rise to any kind of threat, and unless they take vastly more concerted actions, are unlikely to displace the dollar in the next ten years.

An interesting aspect of this talk is the difference of views between Michael Hudson and Leo Panitch. Hudson is bullish on the BRICs plans, Pantich much less so.

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His two newest books are “The Bubble and Beyond” and “Finance Capitalism and its Discontents,” available on Amazon.

Leo Panitch is the Canada Research Chair in Comparative Political Economy and a distinguished research professor of political science at York University in Toronto. He is the author of many books, the most recent of which include UK Deutscher Memorial Prize winner The Making of Global Capitalism: The Political Economy of American Empire and In and Out of Crisis: The Global Financial Meltdown and Left Alternatives. He is also a co-editor of the Socialist Register, whose 2013 volume is entitled The Question of Strategy.

Is the New BRICS Bank a Challenge to US Global Financial Power?PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

Will a new international bank challenge American global financial hegemony? Well, at recent meetings in Brazil, the five BRICS countries–that’s Brazil, Russia, India, China, and South Africa–have created a new international bank called the NDB or New Development Bank, and it’s been given $50 billion in initial capital. The BRICS bank works on an equal-share voting basis, with each of the five signatories contributing $10 billion. The capital base is used to finance infrastructure and, quote, sustainable development projects in BRICS countries initially, but other low- and middle-income countries will be able to buy in and apply for funding.

BRICS countries have also created a $100 billion contingency reserve arrangement (CRA), meant to provide additional liquidity protection to member countries during balance-of-payments problems and other financial shocks. The CRA, unlike the pool of contributing capital to the BRICS bank, which is equally shared, is being funded 41 percent by China, 18 percent by Brazil, India, and Russia, and 5 percent from South Africa.
The new bank is being described as a challenge to the IMF and the World Bank, that is, a challenge to American global financial power. But is it, as Vijay Prashad wrote, neoliberalism with southern characteristics?
Now joining us to discuss all of this first of all, in Toronto, is Dr. Leo Panitch. He’s the Canada research chair in comparative political economy and a distinguished researcher professor of political science at York University. He’s the author of The Making of Global Capitalism: The Political Economy of American Empire.
And also joining us is Michael Hudson.

Michael, are you in New York?


JAY: You’re in New York.

Michael, joining us from New York, is a distinguished research professor of economics at the University of Missouri-Kansas City. Newest book is two newest books: The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thank you both for joining us.


JAY: So, Michael, kick us off. How significant a development is this?

HUDSON: I think it’s much more significant than any of the press has said. The press treats it almost as if, well, they’re very small, and what do these countries have to do. Think of the BRICS as doing on the government level what Occupy Wall Street has been advocating. When they say a new development bank, they don’t mean they want to be like the World Bank or the IMF. They want a different kind of development.

But also it’s not only a development bank, but it’s the $100 billion currency scheme. They are trying to–they’ve been driven into a mutual economic defense alliance by the U.S. sanctions against Russia, by the threats against China, not letting it invest in the U.S. on national security grounds. They’ve forced other countries really into let us do whatever we want with you, there is no alternative, and we’re going to do to you what we did to Ireland and Greece, and that’s it.

Well, basically what the BRICS are saying in their new bank and their clearing house is, yes, there is an alternative. We don’t have to be like neoliberalism. Their critique of the World Bank and the IMF isn’t that they’re not given big enough quotas; it’s they disagree with the whole philosophy of the World Bank and the IMF that is subsidizing economic dependency, food dependency, and basically anti-labor parties that result in budget deficits, that then governments are told, well, in order to finance your foreign debt and your budget deficit, you have to sell off your water, your natural resources, your privatization. The BRICS banks, they’re not going to go to the member countries and saying, you have to sell off your water supply and raise prices in order to pay us.

JAY: Right. Let me bring Leo in here.

So, Leo, what do you make of Michael’s take? How significant is all this?

PANITCH: Well, I think it’s very significant, and it is designed to give these large developing capitalist countries more room for maneuver vis-à-vis the American state and the European Central Bank and the IMF and the World Bank. But I think the significance he’s attaching to it is remarkably overblown. There’s no evidence that their purposes are indeed not to apply conditionality to loans. There’s loads of evidence with the nonoperationability of the Bank of the South, which was the bank created in Latin America that the Brazilians–which have made it nonoperational by insisting it be a very conventional development bank which in fact goes to the markets and therefore is constrained by the markets in terms of interest rates to be charged, etc., conditionalities, as opposed to Bolivia and Venezuela that wanted it to operate on very different, not market principles. The Brazilians don’t want that and don’t want it for the new bank. And I don’t think it’s just a matter of the Brazilians. The Chinese don’t want it either. There’s a much deeper factor why it’s not so significant, although it does give them some room for maneuver in their operations. But the main reason is that it’s embedded in countries, even with China, that don’t have the very, very, very–as Michael knows very well–deep financial markets that is needed for this kind of bank to play that kind of role.

JAY: Okay. Leo, hang on one second. That’s sort of a second point. Let Michael respond to your first point. Your first point is that this is not something against a neoliberal strategy; this is some independent maneuver of countries that do work within a neoliberal strategy. So what do you make of that?

PANITCH: Well, let me just to emphasize that look at who was just elected as the government of India. Look at the extent to which even the Workers Party has been keen to integrate further into global capitalism. Let’s look at the way in which China has just begun to remove some of its financial restriction. And let’s look at what the ANC now represents. So, sure, they want more room for maneuver, but within the framework of buying into capitalist globalization and being extremely dependent on it.

JAY: Okay, Michael, you can respond.

HUDSON: Neoliberalism is not simply an economic philosophy. It’s interwoven with American foreign policy. Take the case of Ireland when it bailed out the banks a few years ago. Europe was coming to an agreement, and the IMF, with Ireland to write down the debts until Tim Geithner called from the Treasury and said, wait a minute, you can’t write down the debts, because American banks have written credit default insurance, and American banks will take a bath because we’ve be that Ireland will pay; so don’t bail it out. So Europe and Ireland both surrendered and said, okay, we’re going to follow you. Same thing in Greece. The IMF even got into an argument with the E.U., saying, you can’t be that bad against Greece, you can’t really force it into so deep a recession. The U.S. got on the phone and said, wait a minute, the American banks have written default insurance. You can’t write it down. If you do, we’re all going to have to pay through the nose, and we’re not going to take the loss. So at issue isn’t bank profits or capitalism; it’s specifically the United States. And it’s the United States that has the veto on the IMF, the United States that has the veto on the World Bank.

And basically I think what’s motivated the BRICS, these countries together, is they have one thing in common: they’re all under attack by the United States economically, and in Russia’s case militarily, with sanctions. And so what Russia is trying to do is say, look, right now the United States can make a threat against us. They can say, if you don’t do what we want militarily or politically or economically, we can block your currency payments, we can block the banks, and we can strangle you.

So what Putin in his press conference for the BRICS said was the state was the distinguishing feature is we’re not putting in dollars into these banks, we’re putting in our own currencies, and the loans will be made in our own currencies. And the fact is that governments can create as much of their own currency as they want. They don’t have to go to the market in principle.

Now, what Leo says is absolutely true. If Brazil, which is still run pretty much by the banks, insist in having the banks go to the market, then it will be tied in a knot. But if Russia, China, and the other countries use modern monetary theory and say, okay, our treasuries are going to print the money to develop and we don’t need Wall Street, then you’ll have a [crosstalk]

JAY: Okay, let Leo jump in.

Leo, go ahead.

PANITCH: Well, Michael, if you were advising them they might, although there would there would be very, very heavy, as you would admit, sacrifices that they then would have to bear. But these are states that reflect their class structures, these are states that like the United States reflect powerful forces within it. And what you’re proposing is not something that any of the dominant capitalists in any of these countries, whether, you know, foreign mining companies in South Africa or ambitious Chinese multinationals, want to happen.

Moreover, the notion that they’re not interested in convertibility into American dollars–I mean those particular domestic capitalists in those countries–is absurd. Sure, Putin can spout off all he wants about the ludicrous notion of the ruble as a international reserve currency with none of the infrastructural capacity to make it such, but this is not a practical alternative. That’s not to say it isn’t designed to do is you say, to give them some both rhetorical and maybe institutional room for maneuver. But let’s not overblow this, for heaven’s sake.

HUDSON: Okay, it’s not–there was no attempt by Russia to make the ruble a convertible currency. What Russia wants to do is to nominate its trade in rubles, just as China’s denominating its trade in yuan, so that the United States cannot use its banks to do what they’ve done in the case of Argentina and say, we can block any payment going through the banking system just like after the Shah was overthrown in Iran, Iran tried to pay its foreign debts, the new regime, and Chase Manhattan acted on behalf of the U.S. government and blocked Iran’s payment, forcing it into default, causing a crisis. Now, Iran is an observer member of the Shanghai Cooperation Organization that’s part of the BRICS, and the whole attempt is to make an alternative, is to avoid the dollar. It’s not to make the ruble an international currency; it’s to get free of the dollar and hence free of the kind of sanctions that the United States has just escalated against Russia today, free of the monetary sanctions, and free of the ability of the U.S. to use the dollarized system as a political solution.

PANITCH: I know that’s their objective. I don’t disagree with you that that’s their objective. I think we if we’re assessing the significance of this, I think we have to assess the likelihood of this. We have to assess what the most powerful forces inside their own countries wanted this respect, how many eggs they’re going to put in this basket, what is the capacity of these countries to operate outside of international financial markets in which the dollar–by which we really mean very powerful financial institutions headquartered in the West with the states that represent them–of continuing to exist.

HUDSON: You’re right. This is a dialectic at work, and it’s the dialectic between national interests and the vested interests within the country. You’re seeing that in the United States right now over the Argentine crisis, where the banks and the Treasury Department and the White House all wanted the Supreme Court to overrule Greece’s ruling about the debt defaults. And these class interests are themselves in conflict, and very often, just as American foreign policy has been captured by the neoliberals and neocons, this can hurt many of the most vested interests here, same thing in Russia and China. So it’s a whole dialectic [crosstalk]

JAY: Michael, I want to just refocus this, ’cause the first part of the argument was whether the strategic objective of this bank is actually anti-neoliberal, ’cause it seems to me there’s two different issues here. If they want to have more room for their own sovereign interests within this whole neoliberal financial system, that’s one thing. It’s another thing to say that they want that, plus they want that to avoid things like structural readjustments and all the various privatizations and attack on Social Security net and lowering wages. I mean, it seemed to me at the beginning you were suggesting they want to go against those kinds of policies, and Leo asked or said there’s no evidence of that. So what’s the evidence of that?

HUDSON: If you read Putin’s press conferences that he has given explaining his aims–and they’re available on Johnson’s Russia List that has both his and Lavrov’s, the foreign minister’s comments, you see that they’ve spelled this out exactly, that the neoliberalism is not only privatization, but it’s the idea: what’s really at issue is are economies going to be planned by Wall Street and financial interests, or are they going to be planned by governments,–

PANITCH: Come on.

HUDSON: –with a view towards raising living standards–.

PANITCH: Michael, no country has privatized more, no ruling class has privatized more than the oligarchy around Putin. They’ve taken that country’s wealth and put it in their back pockets. And even if it is officially still owned by the states, it’s in their back pockets. Let’s not turn Putin and his cronies into the vanguard of a new socialist society, for heaven’s sake.

HUDSON: I cannot argue with that, Leo. You’re absolutely right.

PANITCH: It’s very important we not do this.

HUDSON: The question is: what’s the evidence that there is a break from the neoliberalism? I mean, another break that they’ve all said is, well, neoliberalism really means the dollar standard and it means lending money in dollars for imports. For instance, one of the things that the BRICS conference said was, we will be lending money in domestic currency. Now, that’s very important, because the World Bank doesn’t lend money in domestic currency. That means it doesn’t lend money for land reform, for agriculture, for all of the expenses that are met domestically for labor to develop agriculture, to develop industry. It only lends dollars, basically to buy U.S. exports of infrastructure, U.S. engineering exports–and European. So making loans in domestic currencies for domestic development–for instance, China would love to see Latin America, instead of producing hard cash plantation crops, it would love to see it produce wheat and food. This would have a byproduct: it could feed itself, as Argentina’s now doing, and it could export. So a shift [crosstalk] financing to wheat away from other things would be a big change.

PANITCH: Again, I don’t know what evidence you have that China has not played an enormously massive role in producing export-oriented monocultures in South America. In fact, the Landless People’s Movement, whose main theme is that, you know, we have such a massive population, we need a diversified agriculture to feed it, it doesn’t target any longer the United States as imposing that upon Brazil, for heaven’s sake! Brazil, sure, is looking for room for maneuver in terms of diversifying its exports by concentrating on monocultures, as is Argentina with soy, to be sent to China. I mean, I don’t think that one should look at these ruling classes in the Global South with rose-colored glasses, even though we want to be able to recognize the extent to which the American state is indeed the imperial state governing, superintending this global capitalism, and we need to, of course, be critical of it. But that doesn’t mean we need to be naive about what these other states are.

HUDSON: No, what I said is that the exports that China is trying to develop–and you’re absolutely right; of course it’s promoting exports to itself–are different from the kind of development exports the United States wants. Their economies are so asymmetrical, the United States doesn’t want food exports, because it wants the world to become dependent on American grain and American agriculture. That’s been the basis of American foreign policy since World War II. So just shifting to grain and to foodgrains, as opposed to other cash crops, is something that at least in emergency the countries will be able to feed themselves, which they’re not able to do under under the current system.

JAY: Okay. Leo, let’s dig in a little further just how significant, this. Now, the size of the economies we’re talking about are massive. My understanding is South-to-South trade is now larger than North-to-South trade by $2 trillion, and that’s about a quarter of global trade. So is the potential here of these countries seeking to build some kind of a more independent financial structure significant? I mean, you said earlier there’s a deeper issue here, and I kind of cut you off. What’s the deeper significance here?

PANITCH: Well, obviously, these are very important developing capitalist countries. Unfortunately, they’re developing capitalist countries rather than developing socialist countries. That’s what’s happened even with the Workers Party in Brazil and the ANC and the South African Communist Party. All the more so it now happened with the right-wing-led India. And it’s happening with a vengeance with a Communist Party that is very venally turning its elite into a capitalist class. So it’s a developing capitalist country. That’s significant historically. It certainly undermines the old notion that capitalism was underdeveloping the Global South. The people used to blame the United States for that. We now see that there’s a rapid development, which the United States has encouraged through free-trade and neoliberalism, very much so. That said, it’ll be much more difficult to integrate those countries within the American empire than it was to integrate the former imperial countries of Europe and Japan, for reasons that have to do with the lack of military occupation, that have to do with differences in religion, culture, history, language, etc. That’s certainly true and it’s significant.

But the important thing that’s going on now that’s much, much more significant is the participation of these countries in guaranteeing, in the wake of this crisis through the G20 and through their very active cooperation in this, that the crisis would not lead to the re-imposition of tariff protection, it would not lead to the imposition of and extension of capital controls, all of the things that occurred during the depression in the 1930s when there was a breakdown of capitalist globalization. These countries are opposed to this.

Now, insofar as we might see a break from Russia under pressure from the United States, that would take much more the form of a right-wing nationalism led by this Russian oligarchy than it would be something progressive, unfortunately, given the balance of forces in Russia.

But the main thing is that these countries are not getting off the capitalist globalization bandwagon. They’re looking for more room for maneuver within it.

JAY: Okay. So, Michael, if I understand, your main argument is–in some ways it’s not that different, in some respects, from what Leo was saying. You’re not saying they’re getting off the whole capitalist bandwagon. What you’re saying they’re doing is buying themselves a little more room in terms of their foreign policy.

HUDSON: There is a very broad range over what they can do. And if you look at what is the most likely of common denominator, it’s exactly what Leo said. The common denominator is it’s their capitalists against the U.S. capitalists, it’s their saying, what can we do to be free of the U.S. banks and Wall Street and the City of London and the financial extractive loans. At least the neoliberal plans today have gone beyond trying to finance infrastructure development. The financial system in the West is almost entirely extractive now, not productive. The capitalist class in the countries that Leo’s mentioned want at least some bank to do some productive loans that they can benefit from, rather than having the U.S. come in and grab everything for itself like a privatization on behalf of the U.S. You see this kind of fight going on in Greece right now, where the eurozone said, Greece as to privatize its natural resources to pay the debt. Half the privatization last year was to be the sale of its gas rights.

PANITCH: And you know who’s buying [crosstalk]

HUDSON: Well, it turned out that Gazprom [incompr.] And Europe said, never mind; don’t sell them. We don’t want Russia. Only us, not Russia.

PANITCH: But do you know who’s buying the Port of Piraeus,–

HUDSON: The Chinese.

PANITCH: –one of the largest and more–. China.

HUDSON: China.

PANITCH: Chinese capitalists.

HUDSON: Right.

PANITCH: So, I’m sorry, I don’t see the world in terms of competition amongst the capitalist classes of the world in the sense you’re speaking of. I think there is a very deep integration on the part of the leading capitalists in these countries, including the domestic ones, into globalization. I think that’s true of Vale in Brazil.

JAY: That’s the world’s largest iron ore company.

PANITCH: That’s the world’s largest iron ore company, which, sure, is competing with other iron ore companies. But it doesn’t see itself as aligned against the American bourgeoisie or the American capitalist class. This is not right.

And moreover, I think that these capitalist classes very much want access to the deep financial markets of London and New York. They don’t want to leave them; they want to be part of them. They want access to them. Indeed, they’ve been floating bond us in those markets–dangerously, in terms of volatility. So I think–and it has to be said the reason they do so is that their financial markets, their bond markets, even the European bond market relative to the London/New York access, remain extremely weak, extremely vulnerable. So it’s also a matter of where the deep institutional strength of capitalism is.

I would make one other point. I don’t think that finance, even Wall Street and London–the City of London finance is merely parasitic. I think it facilitates, it underwrites, it’s very important in terms of hedging for all of the integrated production that goes on between China and the United States, between South Africa and Europe. This plays a functional role for all these value chains. Of course there’s loads of speculation in this, but it means that industry is linked up with this speculation. These aren’t separated compartments. And you can’t unscramble them.

HUDSON: I see that I’m emphasizing the geopolitical much more than you of nobody’s talking about Brazil and other countries not interacting with the London and New York money markets. What they don’t want to do is to have the U.S. government and U.S. banks act as a threat, a threat against their countries. And of course they’re trying to keep their–have other options apart from being tied into the U.S. as a system of control. They want to break free of U.S. control, basically, and European control is a satellite of the United States.

PANITCH: Yeah. But since politics and economics aren’t so easily separated, their continuing interest and increased interest in being linked economically and financially means that the American state, given its superintending role of Wall Street and the City of London, will continue to have power vis-à-vis them. They would like to, as we’ve agreed, they’d like to have more room for maneuver in the face of that enormous power of the American Empire, but they are not interested in breaking from it.

JAY: Okay, guys, this is a wonderful beginning to a very complicated subject, and we are going to pick this up again. So I’d like to just say to you our viewers, if you have questions you’d like me to ask, ’cause we’ll ask both these gentlemen to come back and carry on this discussion, below the video make your comment, or you can just write to contact (at) therealnews (dot) com, or you can go @therealnews on Twitter, send in your questions and comments, and we will pose them to our guests.

Leo, Michael, thank you very much for joining us.

PANITCH: Glad to be here, Paul.

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    1. psychohistorian

      What does trust have to do with the death of empire?

      It forms bonds between conflicting forces when the alternative is being ground up in empire.

      I think the propertarians of the BRICS can’t help but lose out to the sovereign push for MMT like power over ones destiny. The global understanding of and support for the MMT concept will come into question as part of this direction but it will be a good experience for the world.

      I have no doubt that many other countries will follow and align themselves with the BRICS….they don’t hate us for our freedoms……

      I think this effort by the BRICS nations marks the turning point in unbridled private control of the world of finance. It is not just about the US and Reserve Currency status.

      1. skippy

        Its quite hilarious that on sites that have neoliberal free market sorts are foaming at the mouth, wrt the evil empires Russia – China and satellites poking a toe into the pool reserved for them.

        skippy… pointing out market competition [efficiency – equalization silliness] only seems to increase more rabid foaming, funny that.

  1. financial matters

    The IMF and World Bank definitely need some competition. I don’t think it’s useful to concentrate too much on currencies. Resources and labor are more important. I think ultimately it will be more important to control these rather than to be a major writer of credit default swaps. As Michael points out the US needs to refocus away from its dependence on an extractive financial industry. If the US continues a feckless foreign policy it will encourage the BRICS to find other ways to distribute their resources.

    1. susan the other

      Just because China has embraced capitalism, along with lots of emerging market countries, doesn’t mean capitalism is set in stone. The way we in the US have practiced it has be the model of “economic hitman.” Paul Craig Roberts had a chapter in his 2010 book about the evolution of trade theory. It seems to have reached it’s point of pointlessness a few years ago because American Capitalism has aggressively promoted “competition” and not natural advantage. Competition is now absurd because all countries can develop the technology to be one tick more competitive than the next and it makes trade basically good for no one. Hudson is always rational in his outlook about domestic progress. He is here as well. Although he doesn’t put trade competition into this argument, I think this is where he is circling.

  2. lakewoebegoner

    also should note that a China initiative for an Asian-lead Asian development bank has been gaining support—-with Korea (IMF veteran with pleasant memories I’m sure) being the latest supporter.

  3. Moneta

    I don’t know how this will pan out but humans are great at implementing lose-lose strategies just to get some form of revenge.

    Have to laugh at economics’ hypothesis of maximum utility… I always wondered how well revenge fits into this equation.

  4. John

    Competition is welcome but these folks are not the ones to lead it. We can count on the BRICS countries leading this to blow the effort.

  5. Deaf Smith County

    Panitch makes a better case but neither he nor Hudson touched on what would break the grip of US hegemony whose source of power is the dollar and the depth of the financial markets. That is what is generating the interest in this BRICS story. Yves in her introduction cited natural disaster or war; great! empire or rubble.

  6. toldjaso

    Dr. Hudson’s point is being missed. “Displacement of the dollar” is not the issue. The issue is the collective demonstration (in solidarity against the Anglo-Saxon Monopolar Pretenders to the Global Throne) that there SHALL BE an alternative to total entrapment of nation-state Government by the “TINA” RothRhodes Monopoly Dictatorship enforced financially through the BISNATOWBIMF Totalitarian “Governance” System. As they say, “Rome wasn’t built in a day” — and history shows that the reversal of an immoral system (Chinese foot binding, Pike’s dream of “universal slavery” to profit his MasterRace backers betting on the “Confederacy” side) is hard won. Hudson’s mastery of the MEANING of “economic” history is unparalleled, Q.E.D., so his insight is deeper than is acknowledged by the illustrious Dr. Panitch of YORK University.

    The ACTION of the BRICS is an affirmation of the potential for human autonomy in the leaden face of the criminal Anglo-American-Zionist Establishment Dictatorship of Brutes in a “Conspiracy” to “Rule the World” by engaging in “War Crimes” and “Crimes Against Humanity” (Nuremberg Tribunal: meet the new boss, same as the old boss). The establishment of the BRICS alternative to the IMF is Step One indicating the “giant leap for mankind” awakened to the ACTUALITY of Alternative Thinking and Doing. The potential for a global Parallel Universe for the 99% has been presented to us in actuality. The People now can imagine release.

    Arendt’s “The Origins of Totalitarianism” were written for our benefit right now. Assert your autonomy.

    1. Yves Smith Post author

      That is not the apparent intent of the development bank. It is much more aimed at bucking dollar hegemony. China has similarly been pushing to have more trade denominated in its currency, the renminbi. Even with this effort, it’s only 1.5% of the total.

      1. toldjaso

        True, and the devil is in the details, which is why this is such an interesting play. What we don’t know is how labile the motives of the players are, as they re-position themselves in the shifting sand box. Can we hear opportunity knocking? Who knows what preparations have been made, in anticipation of just such a moment as this? The question is, was the IMF caught by surprise by this? Was TheCityDC?

        Even the most jaded onlooker might recognize the Greek “reversal of fortune” potential of this move on a grand scale, for who knows what lurks in the hearts of public *vires* on the make? No Saints are at play here, bien entendu, but isn’t “David v. Goliath” an irresistible myth of potential even in the West? Will “Right” outsmart “Might” based on old imperial calculations?

        Wouldn’t it be a “surprise” on this battlefield if all motives were not only pecuniary? Isn’t it true that the old king must die for real in order for the waters of wealth to flow, since time immemorial? Imagine the possibilities afoot, in light of the Works of Shakespeare, and of the report quoted below:

        “As limits are reached, it becomes increasingly expensive to make progress. At the same time, the possibility of new approaches often emerges–new possibilities that frequently depend on skills not well developed in leader companies. As these attacks are launched, they are often unnoticed by the leader, hidden from view by conventional economic analysis. When the youthful attacker is strong he is quite prepared for battle by virtue of success and training in market niches. The defender, lulled by the security of strong economic performance for a long time and by conventional management, wisdom that encourages him to stay his course, and buoyed by faith in evolutionary change, finds it’s too late to respond. The final battle is swift and the lead loses.”
        — p. 37, “INNOVATION: The Attacker’s Advantage” by Richard N. Foster (Summit Books, New York, Copyright 1986 by McKinsey & Company)

        Indeed, “What is a man?” is it time we found out? Is someone daring to show us the answer?

      1. toldjaso

        Could it be the tip of a feint? It’s a “War of the Worlds” not just of “banks”. Re-positioning is stealthwork,, or think of it a “quantum tunneling” when your back’s against the wall. Is Fidel Castro still breathing, despite the best efforts of the Ochsner-Dr.Mary-Ferrie-Baker *Designer Cancer* blended expressly for him from the most potent viral cancer tumors extant, before Jack Rubenstein put the “silencing” bullet into Oswald, before dying of cancer himself while incarcerated? The face of the ArchFrenemy of the People is golden, but its feet steeped in the gore of death are of clay. This even the peasant knows.

  7. Jim Haygood

    ‘But if Russia, China, and the other countries use modern monetary theory and say, okay, our treasuries are going to print the money to develop and we don’t need Wall Street, then you’ll have a [crosstalk]’ — Michael Hudson

    From context, one can infer that the missing word was ‘clusterf*ck.’

    1. susan the other

      That was the most encouraging thing for me. It’s not like they are going to print up trillions. They are going to be able to fund their own domestic development this way. And hey, when they get ready to deal in dollars they can just use bitcoin.

      1. Jim Haygood

        Unlike in the U.S., where MMTers soothingly claim that ‘we’ll stop printing if inflation becomes a problem,’ BRICS nations have inflation problems now.

        Brazil, India, Russia and South Africa all have inflation rates between 6% and 8%. Printing more confetti currency would push them into double-digit inflation in a hurry.

        Brazil in particular, with its nasty history of hyperinflation in the 1970s and 1980s, should not be tolerating even its current 6.5% inflation, which is already provoking social unrest.

        1. Alejandro

          “Brazil in particular, with its nasty history of hyperinflation in the 1970s and 1980s, should not be tolerating even its current 6.5% inflation, which is already provoking social unrest.”

          Lest you correlate the effects of military dictatorships and the always alluring promise of “Democracy”. Finance plays both sides and is unconcerned with the “flipping of the coin” as debt and compound interest has given them the upper hand either way.


  8. Spoofs

    It is not clear to me why a reserve currency is necessary, at least for economic reasons. There only needs to be a (central) banking infrastructure to facilitate currency trades with those countries which you are trading real goods an services. No? For example, the russia/china gas deal. Are we saying that this development bank is not the first step in developing that infrastructure? To facilitate trade?

    Thus, fact that the BRICS can not compete with the dollar as a reserve currency is not the issue. The issue is that it is not clear why we have a reserve currency at all.

    In terms of economic development strategy for emerging markets, the dollar reserve currency is a legacy institution that no longer serves the function it’s original function; i.e. ramp up exports by pegging your currency to the dollar and by u.s. debt to manage the process. As the financial crisis and QE has clearly demonstrated, the cost of the this strategy is greater than the benefits.

    Thus, the first steps to create an infrastructure to facilitate trade. Not to create a reserve currency.

    Thanks for Naked Capitalism….See you in S.F.:-)

  9. Lune

    I’m with Panitch and will go further: this will be a fiasco. Like Moneta above said, this is a lose-lose strategy. It will at best end in ineffectiveness and at worst end in acrimony among the BRIC members.

    Once again economists are giving short shrift to politics. Part of the reason why the IMF / World Bank have been so successful (at least in implementing their own goals) is because for all talk about being international agencies, they’re run by the Washington Consensus. They speak with one voice. Regardless of whether that voice speaks in English, French, German, etc. the words, beliefs, and actions are the same.

    The BRICs are no such thing. The fact that lazy western economists picked a few developing economies whose country names would make a good acronym and began viewing them as in any way alike doesn’t make it so. India and China have gone to war with each other, and still have long-simmering border disputes. Indeed, India’s massive arms buildup over the last few years hasn’t been to defend against Pakistan (they’ve long eclipsed Pakistan’s ability), but to defend against China’s excursions.

    China and Russia have suspicions and enmities dating to their communist days. And none of the RICs really has much vested interest one way or another with Brazil who lives a half a world away. Just about the only two with a genuine alliance is India and Russia.

    Now this doesn’t mean they can’t cooperate at all. But cooperation between these countries has taken the form of narrow, bilateral efforts in which there’s a clear benefit to both parties (e.g. oil exploration between Russia / China, Arms development between Russia / India, global patent initiatives between China / India, etc.). An open-ended, multilateral bank with no clear goals has no chance for success with principals as diverse as the BRICS.

    1. Abe, NYC

      I mostly agree. Let’s count multilateral lending agencies: World Bank; Inter-American Development Bank; African Development Bank; Asian Development Bank; European Bank for Reconstruction and Development; European Investment Bank. Plus the Bank of the South, of which I hadn’t heard of until reading the article, and I’m sure I’ve missed at least one or two more. I don’t think the BRICS Bank is necessarily going to be a fiasco, but it will be just another such institution, unlikely to make a lot of difference.

      As for the reasons of WB/IMF success, a key reason is also their universality. Almost all countries are members of these two institutions. The question is, if the BRICS are so opposed to Bretton-Woods, why don’t they pull out? There would be a price to pay but not so huge: USSR for example was not a member. And you are right about the frictions between Russia/China and India/China.

      1. toldjaso

        Can the pyramidion be kept aloft if the stones below it disappear by stepping aside? The “untouchable” private/secret principals of the BIS dwell in the pyramidion, the “Trust” (not). The People dwell in the 99% of “the rest”. Will the BRICS take advantage of this design flaw and grow “through attraction” of those who have “had enough’? Is the “other” world entire tired of a Monopoly Diet of “BigSwigingDicks” (term for TopDog Macher “winners” at Solomon Brothers, made famous by Michael Lewis’s book, “LIAR’S POKER”).

        “If I Could Tell You” — by W.H. Auden, 1940:

        Time will say nothing but I told you so,
        Time only knows the price we have to pay;
        If I could tell you I would let you know.

        If we should weep when clowns put on their show,
        If we should stumble when musicians play,
        Time will say nothing but I told you so.

        There are no fortunes to be told, although,
        Because I love you more than I can say,
        If I could tell you I would let you know.

        The winds must come from somewhere when they blow,
        There must be reasons why the leaves decay;
        Time will say nothing but I told you so.

        Perhaps the roses really want to grow,
        The vision seriously intends to stay,
        If I could tell you I would let you know.

        Suppose the lions all get up and go,
        And all the brooks and soldiers run away;
        Will Time say nothing but I told you so?
        If I could tell you I would let you know.

        –from “W.H. AUDEN: Collected Poems – Edited by Edward Mendelson (1976, Random House, New York)

        What if the lions all get up and go, and all the brooks and soldiers run away?
        “Ut pictura poesis” (Horace)

    2. Moneta

      Cooperation means Americans will need to downgrade their material lives and give the ROW some material breathing room.

      IMO, it’s not going to happen by choice.

    3. Abe, NYC

      Also, I highly doubt that Washington Consensus exists anymore. In fact Hudson pretty much says it doesn’t: it was the Treasury which vetoed Ireland’s and Greece’s bailout already agreed by EU and IMF. Also in Europe, it appears that IMF has consistently been the most dovish member of the Troika, opposing extreme austerity measures – after all their own Chief Economist bluntly stated that austerity doesn’t work. So there are signs that while Treasuries and Central Banks in EU/US are largely captured by banking interests, Bretton-Woods institutions are moving away from orthodoxy that plagued them in 1990s. But it may be too early to tell.

    4. Lambert Strether

      Those economists aren’t so dumb, then. Getting the ruling classes of whole countries to self-identify with an invented construct that doesn’t serve their interests is GENIUS. I wonder if they’ve run that play anywhere else?

  10. tiger

    Yves, I think the important takeaway here is “if there’s a will there’s a way”. The BRICs have momentum in the direction of not relying on the dollar and they want to continue. The Americans don’t like the direction this is going in and don’t address it properly (wars and stupid monetary policy vs. smart initiatives). Also, there doesn’t have to be “A basket of currencies that displace the dollar”. There can be a new currency out of nowhere, backed by either units of precious metals or units of labour or a crypto-currency that everyone trusts. Furthermore regarding deep bond market: the U.S. and Japan’s bond market is huge but I’m not sure how deep it is. There is a liquidity problem with fail-to-delivers, the Fed buys up many bonds (now less because of the taper) and in Japan, according to any reliable source, the BOJ *is* the market.

    Plus, if the USD or the Yen are hit by high inflation, they will no longer be special vs. other currencies. Also, in times of stress, humans have found even smart ways of doing barter. It’s not that realistic of a global scale but just highlighting the fact that the US to dominating is really something that has been eroding ALREADY, out of our view, and when the tide goes out, the USD will be exposed as naked, in my opinion much earlier than many people think.

  11. Paul Tioxon

    You do not replace hegemony with a committee. The real politik is that America provides more order by getting all of the significant powers to along with our geo-political lead, which includes finance and economics. A tower of Babel of domestic currencies may deal with the dependency issues. It may even work concurrently with American loans in USD providing a means to purchase large scale infrastructure projects for electricity generation, roads from factory areas to seaports and airports, all from American engineering and construction companies. At the same time, political stability and some amelioration of being a low level periphery nation can be provided by the BRICs development bank. Reducing some of the dependency by reducing impoverished conditions provides a market for the BRICs just as Americans produce a market for high valued infrastructure projects. China, for example, gets to export as much cheap Walmart consumer goods to people where they lend, in exchange for their monoculture development loans. Soybeans for cell phones. Maneuvering around the obstacles to move up the food chain in the global capitalist system may be high minded bluster, but again, for Russia to break out of its role of fossil fuel exporter or for China to break out of its role as cheap manufacturer of cheap finished goods will take a lot more time and effort with the US and Europe and Japan in the way constantly making counter moves.

    And not just political counter moves, but then continuing introductions of new high technology industrial goods, which make their way into the new high technology consumer goods, which leave the semi-periphery producers scrambling to play catch up with America. The dialectic of politics and business, pouring forth innovations that become the new commodities, keeps the US/Europe/Japanese coalition at the lead of new high value products with high profits that require a while for others to play catchup. It is a never ending cycle of product development and innovation coupled with planned obsolescence that leaves imitators in the role of cheap commodity producers but never the leading edge of innovation and product introduction of the high profit, exclusive source status of the US/Europe/Japanese commercial development machine. The BRIC Bank is not offering structural reforms to the current international system, its offering depth of capital and breadth of lenders, within the overall system under its pre-existing rules of operation. Not an alternative system, and not a new hegemony.

  12. Abe, NYC

    Wow, what an interesting discussion. Panitch is brilliant.

    I’m with Panitch: the capitalist class’s main geopolitical interest is access to markets, they don’t give a damn about nation state. That’s why German corporations were most vocal in their opposition to sanctions against Russia. I suspect Russian business, whatever there is beyond state-integrated oligarchs, was opposed to the escalation of the situation in Ukraine but it hardly has a voice in Russian politics and stating one’s opposition to Putin is extremely dangerous these days.

    It’s up to the governments to defend the national interest. And so it’s the BRICS governments, not businesses, trying to wean themselves off the Wall Street and the City; and it’s European governments, not businesses, trying to get themselves off Gazprom’s hook.

    1. Moneta

      Considering Europe’s dire energy situation, it will be interesting to see how the allegiances will evolve over time. If Americans do not prop up Europe ASAP, who will they end up bonding with? The Middle East? Russia?

      1. Abe, NYC

        Americans want to have their cake and eat it too. Knowing that cooling with Russia will bring much pain to Europe, they have so far only thought in terms of the exports of their fracking natural gas to Europe. Nice. If the US don’t want France to send the frigates to Russia, they’ve got to buy them instead. If they want Europe to be on board with the sanctions, they must offer something that will relieve the pain, instead of trying to profit from the crisis.

  13. Stephen Barrett

    The idea of “deep institutional strength,” a reference to Wall Street/ City financial institutions, is important. Yes, a nation can float a bond there and find buyers, discover prices. Not so much in other non-global markets. What the BRICS are doing is starting to build an alternative institution, deeply needed for global resilience. It is, at the very least, a rhetorical power play. Even the idea of an alternative to the global financial, and thus economic, hegemony of one country is refreshing. With a shrinking energy base and a disruptive climate globally, building alternative institutional strength anywhere is important.

  14. Ken Ward

    Yves, As Hudson and Panitch and many, but not all of, the earlier commenters clearly know, ‘BRICs’ is now out of date. ‘BRICS’ has been the appropriate acronym since South Africa’s adhesion to the group several years ago.

  15. Rahul Deodhar

    I think the BRICS bank means to build confidence for non-dollar trade settlement through existing credit cross-holdings. Barring that other advantages are merely add-ons.

  16. penny bloater

    ‘In addition, a reserve currency replacement candidate needs to run consistent trade deficits to get its currency into international circulation’

    Wouldn’t a neutral reserve currency serve this purpose, provided it was widely acceptable of course?

    Not that the BRICS are likely to be so radical, but wasn’t that the point of Keynes’ ‘Bancour’

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