Brazil and the other BRICS

Stating the obvious, the world is changing, both in terms of politics and economics. The crises we face today impact how the world will look in the future. There is a movement away from the modern concepts of countries to post-modern views where power is relegated to non-governmental organizations. The centers of power are also very fluid, while the US is the dominant military power and probably will remain so for so time, simply because of its current stockpile of weapons and technology; it's military is dependent on the well-being of the countries economy. Economics dictates policy or at least it should. So how is economics changing the global perspective? This brings us to the BRICS.

BRICS is defined as a set of countries that, through their growing economies, are changing the centers of economic dominance. These are Brazil, Russia, India, China and added sometime later South Africa, B-R-I-C-S. I find that although grouping these countries together is an interesting concept, they are certainly in different leagues and probably make no sense being grouped together. India and China are in a league of their own. Each with over 1 billion people and large land mass, they in no way resemble the other countries. Russia is problematic. Extremely large land mass, a declining population and an economy highly dependent on commodities such as oil and gas, Russia has a multitude of social and economic infrastructure problems it needs to deal with. And South Africa is still evolving, more on that in a later blog. That brings us to Brazil.

I, for whatever reason, am highly optimistic about the rise of Brazil as an economic power. Clearly Brazil is blessed with natural resources. A large land mass and a large diverse population make Brazil a potential for sustained economic growth. But there is another factor that I think adds to Brazil's potential. Economics drives politics and politics drives economics. Both are linked and both play a role in defining success. Along with that is the nature of relationships a country can develop out sided it's own boundaries. For Brazil it is a common language that it shares with several other counties, specifically Portugal, Angola and Mozambique.

Angola and Mozambique are also blessed with natural resources and while Portugal does not have the scale of the other countries, it does provide a gateway into the EU. Just think of a greeter common bond then language, add to that religion. In the English-speaking world, the links between the UK, US, Canada and Australia are very strong. These links invite a strong sense of cooperation. There are other examples of language commonality that I will not dwell on but are obvious.

Brazil being the largest of these economies can become a major power by cultivating relationships with these countries. Not only a common economic zone, but maybe something akin to OPEC where power is shared among them. Plus from an interesting geopolitical perspective, a grouping such as this would be the first in the southern hemisphere.

We are moving quickly into a post-modern world where notions of country and nation and state are changing drastically. Countries rich with potential such as Brazil can take advantage of this changing world and become major players in the world arena.

Can the military keep its edge?

As nations scramble for raw materials, the US military is thrown into the fray. As China and India as well as the rest of the world demands more raw materials, the US military must deal
with limited quantities of resources scattered around the world.

More to be said on this topic later. But the following article illustrates the current predicament for the Defense Dept.

http://online.wsj.com/article/SB10001424052748704608104575220112898707130.html?mod=WSJ_hps_MIDDLEForthNews

Financial Warfare - Part 1

This blog begins a new thread that I want to discuss and maybe get feedback. I have discussed much in the nature of the current financial status (and there is more to come). Most of it giving information about the "numerology" of the economic world. Also I have discussed some aspects of cyber-conflicts.

The topic that I want to consider is "financial warfare", by this I mean the ability of a nation or an organization (NGO) to "attack" the economic wellbeing of a sovereign state. The attack can come in many forms, open or covert. It can come through currency manipulation, aggravated marketing, cyberattacks on the bank system, etc. The purpose being to manipulate the country into certain behaviour or just plain terrorism. The dependence of a nation on the Internet makes covert or cyberattacks more probable, just consider the recent attacks on Estonia allegedly by Russia. [http://en.wikipedia.org/wiki/2007_cyberattacks_on_Estonia]

I would consider "vanilla" financial warfare as being an open (non-cyber) attack on the financial condition of a nation. One form of financial warfare is the sanctions placed on countries that don't comply to specific demands. Consider banking restrictions on Iran, implementing severe restrictions on Iran to do business due to imposed restrictions on how much business it can do can be considered a form of financial warfare. But "financial attacks" can be more immediate.

One of the most flagrant financial attacks was by the US against a supposed ally, Great Britain, during the 1956 Suez Canan crisis. In an article in "Wired" magazine,

"During the 1956 Suez Canal crisis, for instance, President DwightEisenhower used market pressures to keep the UK and France from attacking Egypt by ordering theTreasury Department to flood the market with the Sterling. "This depressed the value of the British pound, causing a shortage of reserves needed to pay for imports," writes Yale management professor Paul Bracken. "The message quickly got through to London, which, along with Paris, soon pulled out of the Canal."
[http://www.wired.com/dangerroom/2009/03/finance-threat/#ixzz0gVKwGQq2 ]

What does this mean for the US? Consider how much the US financial system is leveraged, the ability of China to pursue actions not unlike what the US did to Great Britain is not out of the question. Can (or will) China be able or willing to "punish" the US for actions it (China) considers objectionable is certainly not out of the question. Recently Chinese PLA (Army) officers urged the sale of US bonds as a punishment for US sales of weapons to China. While this did not happen, the future is less certain. [http://www.reuters.com/article/idUSTRE6183KG20100209 ]

Another aspect to consider is the role on NGOs. Given the amount of money that is held by private organizations, it is not out of the question that these entities could do serious harm to the wellbeing of nations. While probably not a hostile attack, consider the role of Goldman Sachs in creating the financial crisis in Greece.

All the money in the world

OK, the amount of money in the world is not infinite. Given that the US is about to spend $750 billion on defense, I was curious how much money there is in the world. How much money the US has, how many dollars China has. So here are some statistics for the curious. I don't try to make any conclusions here, that is for another blog, but I wanted at least to get a sense of perspective of the available cash in the world.

A calculation in January 2009 was done by Mike Hewitt of the economics blog DollarDaze.com. Hewitt calculated that in October 2008, there was about (in notes and coins of countries that comprised about 97% of the world's GDP) the equivalent of $3.94 trillion in U.S. dollars in circulation [source: Hewitt].

M0 is the amount of outstanding notes and coins in circulation. According to the Federal Reserve, there was $908.6 billion in the M0 supply stream as of July 2009 in the US [source: Federal Reserve].

Thus, about 25% of money (cash) circulating in the world is American dollars.

The global market capitalization for all stock markets that are members of the World Federation of Exchanges was $32.5 trillion by the end of 2008.[http://www.world-exchanges.org/about-wfe] [2008 WFE Annual Report, p. 84]. By comparison, the New York Stock Exchange capitalization is $28.5 trillion as of May 2008. [http://en.wikipedia.org/wiki/New_York_Stock_Exchange].

Just for thought, cash in the US = $908 billion, market cap of NYSE = $28 trillion.

Getting back to the US and the rest of the money, after all there is more money than $900 billion. The rest of the money is held in bank accounts of various types, and the Federal Reserve tracks these funds in three different values known as the M1, M2 and M3 money supplies:

M1 represents all of the currency in the M0 money supply, plus all of the money held in checking accounts and other checkable accounts, as well as all of the money in travelers' checks. In July 2009, the M1 money supply for U.S. dollars equaled about $1,655.6 billion [source: Federal Reserve].

M2 is the M1 supply, plus all of the money held in money market funds, savings accounts and small CDs. In July 2009, the M2 money supply was about $8,326.8 billion [source: Federal Reserve].

M3 is M2 plus all of the large CDs. As of March 2006, the Fed no longer tracks the M3 money stock as an economic indicator. That month, M3 totaled around $10.3 trillion [source: St. Louis Fed].

[http://money.howstuffworks.com/how-much-money-is-in-the-world.htm]

And lest we forget, the current US debt is $12,346,427,470,024.01, about $12.3 trillion. That is 4 times the total amount of cash in the world, to put it in perspective. Furthermore it is more than M3, total money in the US. [http://www.treasurydirect.gov/NP/BPDLogin?application=np]. Where there is debt there are interest payments. The annual interest payments by the US is about $400 billion annually. [http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm]

So how do we get out of this mess?

US and China

When it comes to trade, according to the US Census Bureau, the US deficit with China in 2009 was about $208 billion (excluding December).http://www.census.gov/foreign-trade/balance/c5700.html.

At the same time China held about $2.4 trillion in foreign reserves, of which it seems that $2.1 trillion is in US dollars. That is more than 2 times the amount of total cash in circulation in the US. [http://en.wikipedia.org/wiki/Foreign_exchange_reserves]. [http://news.xinhuanet.com/english/2009-07/15/content_11710420.htm]

Furthermore, the US debt to China, in form of US Treasuries, is around $800 billion as of Nov. 2009. [http://en.wikipedia.org/wiki/United_States_public_debt], [http://www.ustreas.gov/tic/mfh.txt].

Enough information for now, more to come so that we can make some conclusion about what it means to have a Federal budget of over $1 trillion and where will the money come from.