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China and Russia are reaching!A few days back we reported how the face of the world is changing and how it is becoming at least bi-polar (see It Truly Is TEOTWAWKI). The new Sino-Russian block is consolidating its economic and military power. But now there has been a new development.

It is no secret that neither the Russians nor the Chinese are fond of the USD or EUR, but until now they were pretty much powerless to do anything about it. Until now.

A new multi-prong economic strategy is being developed. It is no mystery that China and Russia want to extend their influence as far as they can go. Unfortunately for them, they are mostly land-based powers and as such it is difficult to project power or influence through long distances, particularly to other continents. Until now.

A new game is afoot. BRICS countries (Brazil, Russia, India, China and South Africa) are setting up their own equivalent of the International Monetary Fund (IMF) and the World Bank (WB). The new B-IMF and B-WB (let's call them this way until their formal names are announced), will serve to provide "liquidity" and "development funds" respectively in the same manner as the IMF and WB do today; with one crucial difference. There will be neither US nor EU influenced. These new organizations are slated to begin operations in 2015.

In the beginning, the available funds will be relatively small (the equivalent of only about $100 Giga USD for each organization), with China contributing with more than 40% of the total, followed by Russia, Brazil and India with 18% and South Africa with 5%. However, these funds will be more than sufficient if compared with IMF's and WB's funds ($370 Giga USD).

The interesting part of this information is that the B-IMF will operate as the traditional IMF but controlled by the new political block, while the B-WB will not. Traditionally, the WB provides development loans to its member countries; the new B-WB will offer assistance to non-BRICS countries. This is a critical piece of the general strategy, as the reach of the EEC and CSTO (Eurasian Economic Community and the Collective Security Treaty Organization) will be able to expand their "influence" beyond what's possible through geopolitics alone. Money is infinitely more fluid than goods and services or the military. Not to mention that loans from the B-WB will come with conditions; typically that the money be spent primarily on contractors from BRICS countries.

Another interesting piece of this information is that these new organizations have the intention of departing from the USD and the EUR. At the onset, they will be using USD and EUR for obvious reasons; what's the point of having "savings" in a currency that depreciate at a ludicrous rate.

Russia China Inflation

Why is this information important?

Because this new block is consolidating its position and influencing the rest of the world. This will have an impact in your life. But there is something even more important, more basic to consider; the race to the bottom. When people are given this type of information, they usually dismiss it as curiosity. Don't. What the creation of blocks develops is an "us versus them" mentality. This means that the unavoidable struggle for dominance will be underpinned by economic muscle. In practice this means economic development at all costs and in financial terms this translates as inflation, debt and ultimately world-wide economic instability.

Consider this. We know that China reserves (mostly in USD are vast), but we also know that China's debt is also vast. Russia, on the other hand, is in far worse conditions. Brazil is already running into troubles, India does not seem to manage to get significant growth going and South Africa is a bit of an economic basket case. What this all adds up is to a group of bullies with a little bit of cash, a gigantic ego and a counterfeiting press. It will be critical for the BRICS to look viable, regardless of reality; this is particularly true for the Chinese where saving face is something buried deep in their psyche. Weak-looking countries cannot exercise political influence, and political strength comes from the military and financial strengths (the former also dependent upon the latter). It all boils down to this: they will do whatever it takes to keep their economies looking good, and this invariably means printing. The problem with printing is that they cannot print USD or EUR; they can only print their local currencies … which are far from being internationally accepted as anything more than painted pieces of paper. They cannot print themselves into economic success, as the US has done and the EU is doing because other countries accept their currencies as "reserves" and therefore the inflationary effects are not felt at home. It's simple, if the newly minted cash leaves the shores, it has no effect locally. It's called inflation exporting and the US has been doing it since the end of WWII.

Printing will invariable lead to local instabilities in the form of booms and busts, which will translate into more printing to "stabilize" the situation. As these booms will create the appearance of success, the "other" politico-economic blocks will try to follow suit… by doing the same.

It all adds-up to a race to the bottom. Everybody will try to print itself into wealth as fast as possible. What this will inevitably trigger is an acceleration of the printing process that is already underway. This will increase the number, frequencies and intensities of economic debacles at the world-wide level. But there is more. As markets are becoming truly global, economic necessities of these blocks will dictate that they too become globally intertwined at a very large scale. This creates an insoluble dichotomy.

On one hand the markets will be global but on the other hand, countries (politicians) will attempt to manage them using deeply flawed local monetary economic policies. There will be two sets of diametrically opposed rules trying to "manage" the same economic process. What do you think will happen? Noting good you said? You are absolutely right!

There will be global booms and busts far beyond what everyone can possibly imagine. Entire continents will go broke overnight. This is what we are facing. This is what the further stabilization of these power blocks implies. This will most definitively impact your lives, wherever you may live. Our advice is simple; if you have the means to become financially independent, grab it and don't let go. When the massive economic tsunamis finally come, it will be too late.

But is it this truly so doomy and gloomy? Well, no. There is a ray of hope. It may be possible for the global economy to somehow grow faster than anticipated and nullify the effects of governments on economic activity. However, all indications so far point towards a negative outcome. It would seem that ZIRP (Zero Interest Rate Policies) are a dead end. Japan has been stuck since the 80s. Now is US's and EU's turn. Their respective economies are going nowhere. The only true exit from ZIRP is default and politicians will fight this with all their considerable financial might. So, no. As it stands today, the future indeed seems doomy and gloomy.

CONCLUSION

The development of these new BRICS financial organizations will bring some stability to these countries but will also provide to fuel to intensify the fires of financial (i.e. Central Bank) competition. This can only spell booms and busts of unimaginable reach and depth at a world-wide level. From this point of view, gold seems indeed your only friend, but caveat emptor. Not even gold is free from government intervention and manipulation. Proceed with caution. Or not. Be a believer in government action down to the very last minute. Your choice.

Note: please see the Glossary if you are unfamiliar with certain words.

 

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