The World Financial Markets are Changing..Are You Ready?

By creating their own multilateral financial institutions, the BRICS emerging-market powers are shaking up global economic governance but remain far from dismantling the post-war system dominated by the West.

Why these moves should concern each one of us is related to the fact the FED has put us, the US Government in a position of insolvency. If the current world capital systems collapse (The EU is in as bad a situation as the US) the ramifications are very stark and all inclusive. First let’s look at what has happened in the last few months with the BRICS movements and then we will examine the impacts they could force related to the solvency of the US and EU governments.

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For the past 70 years, the International Monetary Fund and the World Bank have been the pillars of the world’s economic system, coming to the rescue of countries in trouble and supporting development projects, respectively. But the Bretton Woods institutions are regularly criticized for their inability to reflect the growing and important contributions of the major emerging economies to the global economy.

China, the world’s second-largest economy, continues to have just slightly more voting power in the IMF than Italy, about five times smaller. And, since their creation in 1944, the IMF and the World Bank have only been led by Americans and Europeans.

“Broader global governance reforms have become stalled, despite the many commitments made by advanced economies to emerging markets to give them a more prominent role in international financial institutions and other international forums,” said Eswar Prasad, a trade policy professor at Cornell University and a former IMF expert.

In this context, the launch Tuesday of a development bank and an emergency reserve fund by the BRICS — Brazil, Russia, India, China and South Africa — appears to be a concrete attempt to address those inequities. “If the existing institutions were doing their jobs perfectly, there would be no need to go to the trouble of creating a new bank, a new fund,” said Paulo Nogueira Batista, who represents Brazil and 10 other countries at the IMF, in an interview.

BRICS Summitt 2014

The mere creation of the two BRICS institutions sends a strong signal to Western powers, where some doubt the ability of the five powerhouses to surmount their individual needs and ambitions. The launches “are significant actions that represent a game changer as they turn statements and rhetoric about cooperation among these countries into reality,” Prasad said. Still, many areas of uncertainty cloud the new BRICS structures, giving the IMF and the World Bank a long lead on their fledgling rivals.

– Battles for influence –

For now, only the BRICS countries will be able to draw from the $50 billion in the New Development Bank and $100 billion in the Contingent Reserve Arrangement. However, proof of the new institutions’ effectiveness will come when other countries knock at their door for money. “Will the BRICS take the financial risk to lend to other countries? And what conditions will they impose?” said an IMF official, who spoke on condition of anonymity.

Accustomed to bailing out a country, and being reimbursed, in exchange for austerity conditions, the IMF has the kind of expertise that “doesn’t happen overnight,” the official said. Some also have concerns that the BRICS institutions — dominated by China — will be less careful about safeguarding the environment or fighting corruption when they make their financing deals.

Aware of their current limitations, the BRICS made a point to say they were working closely with the IMF. Some of their financing would be available only to countries already receiving Fund assistance. Dilma Rousseff, the president of Brazil, said the creation of the BRICS institutions did not mean her country was moving away from the IMF. “We have not the least interest in distancing ourselves from the IMF,” she said. “On the contrary, we wish to democratize it and make it as representative as possible.”

Unsurprisingly, the Bretton Woods institutions responded with offers of cooperation. The IMF managing director, Christine Lagarde, said in a statement Wednesday that her staff would be “delighted” to work with the BRICS team on the reserve fund. The World Bank, facing other new development rivals and undergoing a major internal restructuring, welcomed the arrival of an “invaluable partner” in the battle against poverty, a bank spokesman told AFP.

This display of friendliness, however, could in time give way to rivalries and battles for influence in the corridors of the 188-nation institutions, based in Washington. “The new institutions aren’t created against anyone,” said Nogueira Batista, the IMF representative. “But they are a first step toward a multilateral world.”

1. The meeting started the second cycle of BRICS summits. This time it focused on sustainable solutions for inclusive growth. It confirmed common interests in broadening multidimensional cooperation, including mutual trade and investment. With combined GDP around 21% of global volume, 20% of global trade and 11% of accumulated investments, the five countries represent one of the largest markets in the world.

2. The summit highlighted once again that the BRICS countries play an increasingly significant role in international affairs, an example of which was the prevention of an outright military invasion of Syria, as well as the elimination of chemical weapons in that country.

3. The countries are united in their willingness to coordinate their positions and actions on issues of global development and the reform of the global financial and economic architecture, including the IMF. The G20 format offers the five countries a good framework for such cooperation.

4. Decision to create the New Development Bank (NDB) based in Shanghai will contribute to the efforts to eliminate infrastructure gaps and meet sustainable development needs of the BRICS countries and other emerging markets. With initial authorized capital of $100 billion, including $50 billion of equally shared initial subscribed capital, it will become one of the largest multilateral financial development institutions. Importantly, it will be open for other countries to join.

5. Creation of the Contingent Reserve Arrangement, or currency reserve pool, initially sized at $100 billion, will help protect the BRICS countries against short-term liquidity pressures and international financial shocks. Together with the NDB these new instruments will contribute to further co-operation on macroeconomic policies.

6. Other documents, including the Memorandum of Understanding on Cooperation among BRICS Export Credit and Guarantees Agencies, as well as the Cooperation Agreement on Innovation within the BRICS Interbank Cooperation Mechanism, will offer new channels of support for trade and financial ties between the five countries.

7. The BRICS framework now includes more than 20 equally important cooperation formats, including the BRICS Business Council, the BRICS Banking Forum, the BRICS Exchanges Alliance and others, embracing such areas as information security, healthcare, agriculture, science and technology, and others.

8. Russia is actively engaged in the strengthening of the BRICS framework. Among its proposals are the draft Strategy for Multilateral Economic Cooperation and the Roadmap for Investment Cooperation. We are also proposing to establish the BRICS Energy Association, the Fuel Reserve Bank, the BRICS Energy Policy Institute and a training center for experts in metals industries, as well as to widen cooperation in areas of culture and education.

9. Another important topic is the BRICS “outreach” format. Meetings with leaders of different regions add to the Summits’ agenda and make the work more relevant globally.

10. As Russia is taking over the position of the BRICS Chair, the next summit will be held in the city of Ufa in the Republic of Bashkortostan, in July 2015. We are looking forward to working ever more closely with our international partners.

This all sounds really cozy, except for the fact that the BRICS structure represents MORE assets than currently exists within the World Bank and IMF infrastructure. Secondly, the BRICS is going to be much more inclusive in relationship to their country partners and much less demanding in relation to austerity measures required by participating countries and much less intrusive in relationship to how deals for expanding economies is concerned. This will mean the BRICS will expand their membership and participation rapidly and as that happens countries will abandon the World Bank and IMF and will STOP buying the bonds and treasury bills that fund those organizations.

This is where the Western “house of cards” could collapse very quickly. The impacts could be rapid and very profound. In the US, for example, the FED relies on the sale of treasury bonds to keep afloat. Already they are buying the own TBills at a 40% rate because of a lack of interest by countries like China in acquiring debt instruments that are less and less attractive long term. This combined with the fact that the US dollar is becoming less and less important as the Petrodollar could cause an absolute collapse of the dollar on a global basis.

As early as this fall, the US government might go the very same way as Detroit and end up filing for chapter-11 help. In other words, it will end up asking itself to bail itself out. Now, isn’t that a neat little trick, a piece of magic we would all like to be able to do? Bailing myself out? Heck, I’d do it even if I weren’t in debt. Wouldn’t you? So, is it possible for the US to go bankrupt?

Countries go bankrupt every day around the world, legally declared financially insolvent, totally depleted and destitute. Ruined! A ruined state! I wonder who will step in and break the counters of the Federal Reserve (‘bankrupt’ comes from the Italian ‘banca rotta’ (derived from the practice of breaking up the counters of bankrupt bankers so that they would no longer be able to do business because they had no money left)).

Bankrupt USA?

Countries that go bankrupt are not just the poor ones, the developing ones, the ones that are in the southern hemisphere, the ones we like to point the finger at. The UK was bankrupt right after World War II. The US lent the British $4.34 billion in 1945 to help them get back on their feet (which works out today to $140 billion). That loan back then was just about twice as much as the entire British economy at the end of the war. It took the country until 2006, when the last installment of $84 million was made to pay that money back!

Can the USA go bankrupt?

The US Congress is not scaremongering just yet, but there looks as if this fall there is going to be a shootout between Obama and the Republicans over two fiscal deadlines that are looming fast and in quick succession. October 1st will see the need for the Obama administration getting a measure to tide the country over and to keep it from going bankrupt. Then, in November the Obama administration will need to get agreement to raise the limit that is legally authorized on the borrowing authority. If it doesn’t, then it will face bankruptcy once again since it will default on payments. That will harm the US economy and also bring the markets into disarray. The Republicans, who now control the House of Representatives, will have the possibility of stopping that going through on both dates and thus demand severe cutbacks from Obama if he wants to get these two deadlines out of the way. Republicans will have enough leverage to be able to demand what they want from Obama. That means that there are two choices. Either the country defaults and there is no more money and the country goes bankrupt, or Obama gets what he needs and the country gets austerity as a result. Either way, the future looks far from rosy.


The last time there was a shootout in 2012 over the budget of the Obama administration, the country got an increase in taxes on the wealthy and that has been a bitter pill to swallow for the Republicans. The 2011 fight over the debt limit of the US resulted in the country getting downgraded by credit rating agencies. Secondly, October will see the start of Obamacare at the same time that Obama will be asking for more money to tide the country over. It looks as if that will be hard to get if Obamacare goes through and begins in October.

Any preliminary fancy footwork between Obama and the Republicans looks as if it won’t happen just yet since Congress will be taking recess on August 2nd. That means that Obama will be left out in the cold for a five-week period. Obama has spoken openly about the Republicans’ ‘manufacturing another crises’ this week also, adding fuel to the fire. On the Republican side people are talking of using this possibility of default on payment as a means to seize an opportunity and gain political ground. This is a dangerous and very ill-advised move and such talk simply doesn’t reflect an understanding of the global impacts and the resultant backlash on the US economy.

For years now many have warned that the debt crisis in Greece, Spain and Portugal in the EU are just a small glimpse of the tip of the iceberg that is ready to crash into other countries. If you believe that the US won’t and can’t go bankrupt, because it is too big to fail, then you should just think again a little. This fall, the US needs to get ready for unrest. Obama’s administration has its work cut out to get the budget approved and it won’t be easy. If it doesn’t, win the showdown between Republicans and Obama’s government then shutdowns will be the order of the day and defaults on payments. Just like in Detroit, there will be basic services that close down or restrict even more. Police forces will stop policing, people will withdraw their savings and hide the stash of cash under the mattress as it becomes worthless, postal workers will stop working as they go on strike demanding pay rises.

Folks, you should at least do some small things to prepare for the worse. How, you ask? There are no specific recommendations, but think about waking up one morning and the money you thought you had is worth only half of what you thought it was worth. You wake up one morning and gas is $12/Gal. and a loaf of bread costs $10. Further the services like mail, food delivery, healthcare, and social security has been suspended, how would you cope? These realities are not out of the realm of possibility as early as this fall. Wake up and get ready.


Author: redhawk500

International business consultant, author, blogger, and student of life. After 35 years in business, trying to wake the world to a new reality. One of prosperity, abundance, and most importantly equal opportunity. it's time to redistribute wealth and power.

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