I have often spoken to you about the health of the U.S. dollar and how it is failing. The state of the U.S. fiscal deficit is the prime cause of the ill-health, as the deficits are out of control.
Americans are nearly $60 trillion in debt. When you total up all forms of debt including government debt, business debt, mortgage debt and consumer debt, Americans are in the negative by $59.4 trillion.
I have also spoken to you at length of how China has been assaulting the dollar for several years now. It has been signing dozens of bilateral currency agreements with countries to engage in trade with them in non-U.S. dollar denominations, making the U.S. dollar irrelevant.
We now have a new player on the scene. Well, actually make that four more players. I am referring to the BRICS (Brazil, Russia, India, China and South Africa), which have been eyeing a real platform to assert their influence on the world scene. We have heard about their meetings and their desire to engage the alliance in meaningful and substantive ways to challenge the status quo that is the U.S. dollar being the reserve currency of the world.
China has been gunning for the title for nearly a decade now. Russia has begun a particularly difficult period with the United States due to the Ukraine-Crimea and related tensions. So Russia is no U.S. friend either.
India has a new prime minister who had been denied a visa to the United States for the past 12 years and made to eat humble pie in public often. Now that he is in power, the United States is trying to backpedal fast and curry favor with him, but may not find it too easy to do that.
Brazil might have been neutral, but the National Security Agency revelations of U.S. spying on the Brazilian president cannot have helped the relationship.
South Africa is the only nation that does not have a bone to pick with the United States these days.
We have a strong group of powerful nations that are forming the "anti-dollar" alliance. The BRICS have a meeting coming up in a week or so where they will sign the draft agreements on a new Development Bank and a pool of BRICS currency reserves.
The Development Bank aims to "finance infrastructure projects and sustainable development undertakings in the BRICS member states and developing countries," ITAR-TASS news agency reports, while the BRICS currency reserve pool agreement envisages "the establishment of the mechanism of eliminating current and short-term problems in the balances of payments of the BRICS member states."
I am sensing a shift in the currency wars that the countries have been engaging in behind the scenes these days. The early challenger to the U.S. dollar was the euro. While the challenge has not gone away, it has weakened due to the significant economic challenges faced by Europe. I suspect that the European Central Bank will have to start quantitative easing in the next few months to "rescue" the European countries that are facing real slow growth. That will weaken the euro.
The new challenger on the block will be the BRICS alliance and a combination of currencies to take over from the euro and lead the challenge.
Any prudent investor should take note of the change and alter their diversification strategy to start including the BRICS in their portfolio.
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