Meanwhile, in Growing Markets
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- Published on Thursday, 11 October 2012 15:03
- Written by Sara Nunnally, Editor, Inside Investing Daily
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While the U.S. and most of the developed world are swimming in debt, there's something interesting happening in growth markets.
I'm talking specifically about the BRICS. Check this out from Chuck Butler, president of EverBank:
[Brazilian Finance Minister] Mantega also made an announcement yesterday at the annual meeting of the IMF. Mantega announced that the BRICS (Brazil, Russia, India, China, South Africa) have agreed to create a pool of reserves to provide a rearguard of financial support. He said that this pool of reserves would modeled after the Chiang Mai Initiative for Japan, China, South Korea and 10 Southeast Asian countries that have pooled $240 billion of emergency liquidity to fill any gaps and help smooth out global financial shocks.
These are just pledges, folks. They don't really put the funds in the pool upfront. They sign an agreement that promises they will provide "X," should the time come. It is believed that the BRICS will iron out the details of this pool of reserves at their next meeting in Mexico next month.
We all know that growth in these countries is slowing... That's what makes this move so important. This is very different from how the U.S. has played the game. The main difference is that these countries already have pools of cash of their own.
China has about $1.2 trillion in its sovereign wealth funds, Brazil's foreign reserves equal $376.2 billion, Russia has a $149.7 billion National Welfare Fund, India is sitting on foreign reserves of $294.8 billion, and South Africa (though the low rung on the ladder) saw its foreign reserves climb 2% in September, to $51 billion.
They wouldn't have to borrow to bail out their buddies... or themselves!
That's what kept these countries afloat during the Great Recession, and that's what'll help them through the double dip.
Indeed, the world's sovereign wealth funds hold more cash now than they did before the financial crisis hit. Just look at this progression (in billions) from the Sovereign Wealth Fund Institute.
Yesterday, you heard Bill Bonner talk about how neither spending nor austerity will help us out of the hole.
America is broke. Trillion-dollar gaps in the budget are holes that neither spending nor austerity could fill. Spending works only when you don't have to go into debt to push money into the system. Otherwise, you're shooting yourself in the foot.
And we're so far in the hole that we'd have to gut our entire budget to even start making a dent in our debt. So austerity carries with it the threat of severe civil unrest...
But the BRICS? They're on the right track.
I don't care if mainstream analysts think China's in for a hard landing, that Brazil is having trouble reining in inflation, that India's government is struggling with graft or that South Africa needs to address its two-tier economy. All of that is valid.
Yet here are these five countries -- which experienced massive growth over the past 10-15 years -- still flush with cash, promising to back each other up if the financial crisis hits home.
They've been saving while times were good, so it makes sense to join forces with a global slowdown in the mix.
The BRICS have been talking about this for a while. Back in June, Mantega said, "By creating financial solidarity among us, we will be even safer and stronger than we already are."
In discussion were currency swaps and the possibility of a joint development bank. These ideas are pushing the BRICS far onto the global stage. And developed economies should take note.
And maybe take a few lessons, too.
Happy Investing,
Sara
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