Creating a New Financial Order: BRICS vs the West

Leaders of the BRICS grouping are gathering in South Africa this week to challenge the dominance of the United States and its Western allies. The goal is to establish an alternative global order that gives more power and influence to emerging economies.

However, there seems to be some confusion about what exactly these leaders hope to achieve in the financial markets. Michael Pettis, a senior fellow at the Carnegie Endowment and a professor of finance at Peking University’s Guanghua School of Management, recently criticized a statement made by Zoltan Pozsar, a former Credit Suisse and U.S. Treasury official renowned for his deep understanding of the global financial system.

Pozsar claimed that the West perceived the BRICS nations as mere lapdogs who would accumulate dollars and invest them in U.S. Treasuries. However, Pozsar argued that the BRICS are actually renegotiating how things are done.

Pettis, on the other hand, argued that this perception was entirely misconstrued. He highlighted that if the U.S. truly wanted China and its allies to purchase Treasuries in order to lower the cost of financing, it would imply that the U.S. wanted them to maintain large trade surpluses. However, U.S. policy has taken the opposite approach by imposing tariffs on China and publicly criticizing countries that manipulate their currencies.

In this context, it becomes clear that the BRICS grouping is aiming for much more than being mere followers of U.S. economic policies. They are determined to reshape the existing financial system and redefine the rules of engagement. By doing so, they seek to establish a more equitable and balanced global economic order.

The Impact of Net Foreign Purchases on U.S. Trade Deficits

In the ongoing pursuit to reduce trade deficits, the United States wishes for foreigners to halt their purchasing of U.S. assets. This desire is underscored by the fact that net foreign purchases of U.S. assets essentially equate to U.S. trade deficits, according to experts.

Contrary to the scarceness of savings in the 19th century, today’s economic landscape boasts an abundance of savings. As a result, net foreign inflows can either decrease U.S. savings or amplify U.S. debt. This is particularly significant as countries like China, India, and the BRICS group are actively striving to enhance their exports, emphasizing their eagerness to generate surpluses and acquire foreign assets.

While this discussion highlights the overall situation, it is important to note that neither China nor Russia are presently purchasing Treasurys. In fact, China’s holdings dropped to a 14-year low in June, although it remains one of the largest foreign holders, second only to Japan. However, because China may possess U.S. Treasury securities in different countries, a precise classification is intricate.

It is worth mentioning that the yield on the 10-year Treasury reached a 16-year peak this week, signifying its growing importance in the global financial market.

Brad Setser, a senior fellow at the Council on Foreign Relations, agrees with Pettis on this matter but adds that these flows have not been renegotiated in the past decade; they have been stagnant.

Overall, these insights shed light on the complex relationship between net foreign purchases, trade deficits, and the motivations of various nations in the international market.

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