Economists are not particularly good at predicting recessions. In June 2022, Fortune magazine reported that more than two-thirds of economists expected a recession in 2023. READ MORE
Don’t Underestimate BRICS+
For more than 20 years, international organizations have been evolving that serve as an alternative to the US-led organizations such as G-7, G-20, and the World Bank. The Shanghai Cooperation Organization was first created in 2001 as a security and defense organization. It includes Russia, China, India and five other countries. In addition, many other countries participate as “dialogue partners,” observers or guests.
The BRICS nations (Brazil, Russia, India, China, South Africa) represent a group of nations with the same core group that seek intergovernmental cooperation. BRICS is headquartered in Shanghai and its five core countries have a combined population of 3.21 billion people with a total GDP on a purchasing power parity (PPP) basis of US$ 56.65 trillion or 32.5% of global GDP-PPP. It is responsible for the creation of the New Development Bank, which is an alternative to the World Bank and funded with $100 billion of initial capital.
Since the war started in Ukraine, a US-backed global task force claims that $300 billion of assets owned by Russia’s central bank and $30 billion of assets owned by sanctioned Russians have been frozen. The actions by the US government and its allies did not go unnoticed by other countries. Since then, more international transactions have been paid for with national currencies and central banks have been diversifying their reserve assets. There are now 41 other countries that are interested in joining BRICS, so the core countries plus the 41 potential new members are often referred to as BRICS+.
BRICS+ will have their annual summit in Johannesburg, South Africa on August 22-24 this year. While there has not been an official announcement yet, there have been recent posts by Russia and Iran regarding a new gold-backed currency for international trade. On July 5, RT News, the English language news agency sponsored by the Russian Government, announced that the BRICS group of countries is set to introduce a new currency backed by gold. Some other headlines posted on RT.com during the last three weeks include:
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- July 16 – Italian businesses want to switch to rubles in Russia trade
- July 15 – Taking the dollar down a peg
- July 12 – Russia seeks to expand de-dollarization drive
- July 10 – China and Russia should lead “global governance reform” – Xi
- July 6 – Russia proposes alternative to EU clearing houses
- June 30 – Central American country (Nicaragua) wants to ditch dollar in Russia trade
- June 30 – BRICS diplomat comments on what is drawing countries to the bloc
Since 2010, central banks around the world have been net purchasers of gold, after being net sellers for the years 1989-2009. The pace of central bank gold acquisitions has accelerated in 2023 in anticipation of a new gold-backed currency.
The remainder of the year promises to be an interesting time for the international monetary system and precious metals. If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA
Mixed Signals
US economic indicators and financial markets appear to be sending mixed signals to investors. READ MORE
An Abdication of Fiscal Responsibility
On Saturday, President Biden signed into law “The Fiscal Responsibility Act of 2023” to suspend the nation’s debt limit until January 1, 2025. As a limiting check on the budget deficit and federal debt, the legislation was a failure. Congress and the Administration appear to live in an alternate universe when it comes to fiscal responsibility. As of December 31, 2022, the ratio of gross federal debt to GDP stood at 129% while federal revenue/GDP was at 20%. Among major countries, only Japan, Italy, and Greece have higher government debt/GDP ratios.
For the first seven months of the federal fiscal year ending September 30, 2023, the US Government has a fiscal budget deficit of $928 billion. According to the latest projections (May 2023) from the Congressional Budget Office (CBO), the projected budget deficit for the full fiscal year 2023 is $1.5 trillion. The projected cumulative deficit for the next ten years, 2024 to 2033, is $20.2 trillion. As a percentage of the economy, deficits are expected to be in the range of 6.0% of GDP in 2024 to 6.9% of GDP in 2033. Assumptions for the projections do not consider the impact of a recession or a stepped-up war effort.
David Stockman, who was OMB Director for the Reagan Administration and an original partner of the Blackstone Group, was critical of the bipartisan compromise.
The deal does absolutely nothing to change the current “trajectory” toward fiscal disaster because it reduces nary a dime of built-in spending for defense, entitlements/mandatories, veterans, and net interest, while those items account for 89% of the $80 trillion of built-in spending over the next decade.
For Stockman’s detailed criticism, see https://www.lewrockwell.com/2023/06/david-stockman/speaker-mccarthys-rotten-deal/
The US Treasury hit its debt limit ceiling of $31.4 trillion in mid-January and its general account (cash reserves) has been declining steadily since then. Deutsche Bank strategist Steven Zeng expects net US Treasury debt issuance of $400 billion in June to replenish the general account, followed by $500 billion during the third calendar quarter, and another $400 billion during the fourth calendar quarter. The increase in federal outstanding debt is expected to pull capital from other sectors of the financial markets and is likely to be accompanied by an increase in interest rates on US Treasury securities. Some analysts also believe that the US Treasury’s debt issuance is likely to have a negative impact on stock prices.
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA
Debt Ceiling Negotiations
Treasury Secretary Jane Yellen notified Congress today that the US Government is projected to reach its debt limit as early as June 1 if there is not a change in the current limit. In her letter to Congress, she wrote READ MORE