top of page

Multipolarity: Episode 3

Special Episode: Brazil and Argentina Form A Currency Union



[00:00:00] Andrew Collingwood: Up this week as Brazil and Argentina announced plans for a currency union. We're hosting a special episode running through the implications of this dramatic twist. 

[00:00:09] Philip Pilkington: Is this the beginning of the end of the dollar? Or would such a union be doomed from the start? Can currency unions even work? Is America still interested in controlling its backyard?

[00:00:20] Andrew Collingwood: This is Multipolarity charting the rise of the new multipolar world order. This week, Philip, there has been some very big news and news that's particularly related to the sort of things that you and I talk about on Multipolarity every week. So I think it's worthwhile concentrating this week's episode on this matter entirely.

[00:00:42] Brazil and Argentina are starting proprietary work to create a currency union, a a, a single currency. For Brazil and Argentina and that they would look to invite other South American nations into that. Since then, there's been some confusion. Will it be a currency union? Will it simply be a unit of exchange?

[00:01:02] Will the BRICS be involved in this if it is a unit of exchange? However, the bottom line is that Brazil, certainly President Lula certainly has made clear that this is looking to move away from reliance on the dollar as a unit of. Yeah, 

[00:01:20] Philip Pilkington: so I think as you say, this fits in very well with what we've been dealing with on the podcast.

[00:01:26] I think first of all, this should give people pause for thought who have been quite critical of some of the things that you and I have been saying on Twitter and saying that they were all fancy for, they'd go nowhere. There was no capacity for these sorts of countries to collaborate with one another.

[00:01:40] Obviously, that's not disproved by the, the announcement recently. But at the very least, I hope it would, it would give people pause for thought, and maybe p maybe allowed them to think that just because some of these things were floated in the past and they never came to fruition, doesn't mean that they won't in the future.

[00:01:56] In terms of the, um, announcement itself, I think again, it, it really fits in well with what we've been talking about whenever we've talked about changes to the financial system or the currency. I think we've both always come away. Saying that there probably won't be some big original grand plan that'll get put into place immediately as, for example, America did after World War II with Bretton Woods.

[00:02:18] That's probably not how this is going to shape out. It's probably going to be local experiments in various regions that eventually converge on one another. And that is precisely I think, what we're seeing in Latin America. And it's exactly as you said, even, even the original press release raised questions and, and, and then they had to come back and clarify.

[00:02:38] And it's still actually not a hundred percent clear what this thing is going to look like. But I think we have to judge these things by looking first at intentionality. And the seriousness with which countries perceive these things. And I think, I think those headlines really have caught some, a caught some win this week because they, they have kind of, uh, planted a flag there.

[00:02:57] I saw that this was the, the most read story [00:03:00] on the Financial Times, either yesterday or the day before. So, so I think people are taking it seriously. And as you say, I think there's, there's value added to explore in depth over the next few. 

[00:03:10] Andrew Collingwood: Well, absolutely. I think one of the most interesting aspects of this is that it matches so closely what's happening elsewhere in the world.

[00:03:19] So Russia, for example, is looking to trade increasingly in national currencies rather than with the dollar when it trades with non-American nations. It's already spoken with Iran about doing that. It has broached the issue with African countries. The Indians and Russians are looking to also trade in national currencies, and obviously the Russians and the Chinese already do.

[00:03:45] The interesting thing about that is one of the ways that the Russians have looked to facilitate that, certainly with Iran, was through the use of a stable coin, which is basically a kind of a cryptocurrency, if you like, but. Fixed to a certain value, either to a, a, a regular fiat currency like the dollar or the euro, or to a basket of commodities or, or, or, or some other fixed Pega value.

[00:04:08] And it was interesting that I heard the Argentinians and the Brazilians or, or, or certainly within the discussion of this item of news talking about something similar. And I think that whether it is as a unit of exchange simply for trade, Or whether it is, you know, looking to eventually become a currency union in the same way that the Eurozone is a currency union that uses the Euro as its currency.

[00:04:36] I think what's clear to me anyway is that this is a direct consequence of the United States, confiscating Russian reserves, Russian Central Bank reserves. I'm not sure whether it's because these countries are now afraid as they, they probably ought to be that if ever they have a foreign policy that the United States dislikes enough, they could have their reserves confiscated as well, or whether it's because there's been a thirst to move away from the dollar, and this is just seen as an opportunity.

[00:05:08] But either way, I think it's fairly clear that this is precipitated from. The actions of the United States and the European countries, including Britain, to confiscate Russian assets. And now we're seeing an increasing number of countries looking to either trade bilaterally in their national currencies or find other units of exchange that they can use as a kind of a clearing system or, or means of greasing the wheels of trade, so to speak.

[00:05:39] At any rate away from the US dollars. So countries would no longer have to sell their own currencies to buy US dollars to then buy goods from a third country. I'm not sure how you feel about that, but certainly it fits in. Very strongly with the theme that I've and you and I have been discussing of the world moving [00:06:00] away from US centrism or the Pax Americana, so to speak, and toward a more multipolar system.

[00:06:06] Yeah, 

[00:06:07] Philip Pilkington: absolutely. I think there is some kind of historical background to this as well. Clearly, this is clearly a Latin American. Project. Now, it may not always remain that it may be picked up by both sides in Latin America. We'll see, but from the news reports I read and from knowledge of the of the of Latin American politics, this is very much seen, especially by Lula as a sort of an anti-imperialist project.

[00:06:31] Lula is actually. Quite a left wing leader. This is, is generally forgotten. When he was first elected, I remember there was a lot of anxiety in the markets about how left wing is I, I remember working in financial markets at the time and people being worried about investing in Brazil because they thought Lula might be another Ugo Chavez.

[00:06:50] I. Personally didn't think that at the time, but those were the kind of concerns that were going around. They've disappeared now, but they were there. Obviously Lula is not o Ugo Chavez. He, he doesn't want to actually try and establish socialism in the country. I think he's somewhere between a center left leader and a socialist.

[00:07:06] I think he is more left wing than a, than a standard center left leader, and I think he probably does. In fact, I don't think I know because he can read his statements. He does view Latin American history and politics. Through a Marxist lens, in a sense he sees especially American influence over Latin America as being a form of imperialism.

[00:07:24] And so, uh, he sees, and, and I think a lot of leaders see, and they've articulated in it in this way in on the announcement of the currency, that this is a kind of a, an anti-imperialist project. So I think this is kind of, A long run ideational trend, an ideological trend that's long been ingrained in Latin American leftist circles, meeting at the same time an opportunity and the opportunity is being afforded for the reason that you say that the seizure of the reserves of the Russian reserves has raised questions about the, the viability of using the dollar as the reserve currency for, uh, nations that are not fully aligned.

[00:08:05] With, with the United States, Europe, United Kingdom, so on. So I think those two things have really come together, and it's a ki it's a very, very interesting moment. There's a lot that can be said about that. Is, is it just a, a fantastical, utopian, leftist project that will eventually, you know, lose popularity?

[00:08:21] Will it become a partisan issue within these Latin American countries? All of this, I think, needs to be discussed, but understanding the short term and the long term origins, I, I think, is helpful in understanding what's actually happening right now. 

[00:08:33] Andrew Collingwood: Right. So we've got, Long term Latin American project, and I know that even, even Bolsonaro thought about this idea of having some sort of currency union.

[00:08:44] And certainly for a long time within South America, there has been that left wing popularist movement. That has thought of a currency union as a means of generating much greater, uh, south American integration. But now we have that opportunity with, [00:09:00] you know, Russia leading the way, increasingly trying to negotiate trade in a local currencies with part bilateral trade partners, but also the Chinese looking to do that for instance.

[00:09:11] In a previous episode of this podcast, we spoke about the, uh, Peso Yuan, the currency swap line that the Chinese had extended, uh, the Argentinians to facilitate bilateral trade. So it's clear that we're moving in a direction where more and more countries are starting to explore this as a possibility. I wonder where the BRICS fit in with this, because it has been mentioned this week that if it was a unit of exchange rather than a currency union, it might be something that was tied in with the BRICS efforts to.

[00:09:46] Produce something similar where they could trade with each other outside the dollar system using their own unit of exchange. So it could also tie on that, and it seems to me at the minute that there's a, that there are great many moving parts, but they all seem to be moving in the same direction. It's like a, a, a complicated car wrench and that's powering the car towards a destination.

[00:10:09] But when you lift up the bonnet, there's a tremendous amount of intricacy and different moving parts that are all going at the same time. 

[00:10:15] Philip Pilkington: Yeah. Actually, no. It's interesting that you mentioned the, the pacer you on, obviously we, we talked to it that last week. I think, I think we actually deserve some further bragging rights on this because a lot of people, the, the impressions I've got online of the people who've, who've actually engaged with some of the arguments that we've made about this have tended to say, Well, a lot of them have dated that anything would happen, but then the people who kind of said, okay, well maybe if something happened, their default position seems to be, if it happens, it'll be a holy China centric system.

[00:10:47] It'll just be modernization of the, of the Latin American continent. And I think the announcement recently of this Latin American currency shows that that's probably not correct. I've never thought that was correct. I think the Chinese definitely want as much of the world as possible to use the Yuan, but I don't think the end game is to ize the world.

[00:11:09] I don't think it is at all. I think, I think the desire here is for a multilateral, or we might say multipolar currency system and that it'll come to resemble something like a bizarre or a marketplace where, you know, the Chinese want to buy soy in Argentina and they want to buy iron ore in Brazil, which they buy a lot of both and that they use this currency they might end up someday with some centralized currency.

[00:11:35] Uh, thing much like, you know, something resembling the imf, I suppose, although the IMF. Directly intermediate trade and, and then you, you'd swap the Yuan for the sir. I think they're calling it the, sir, this, this new currency. And that I think is much more where this whole thing is moving. It, it means, as you say, it'll be, it'll be a lot more complex.

[00:11:54] It'll emerge. It'll be what they sometimes call emergent properties. You know, it'll have all these small SPACs [00:12:00] that emerge and then after a while it'll just kind of produce its own macro effect. In a way, the scientist sometimes calls that, that emergent properties of a, of a small scale phenomen.

[00:12:09] Generating very large scale, uh, forces. So yeah, I, I, I, absolutely, I think that is the direction we're going in. I think anybody who's expecting, you know, the Chinese gun shops to turn up any day now and enforce you on, on people, I don't think any of that's happening. And I think if you try and view the world in that lens, you're not going to understand what happens in the next 10 or 20.

[00:12:30] Yeah, I agree and 

[00:12:31] Andrew Collingwood: I think you make a very good point with regards to bilateral trade, and I think certainly kind of central unit of exchange would help tremendously when it came to bilateral trade between countries, which, let's face it, are still emerging economies and they still have currencies which tend to be more volatile or potentially volatile than the developed countries.

[00:12:54] It would be difficult anyway, if you are going to start trading. Just constantly in local currencies. You know, Russia has, I don't know, 15, 20, 50 countries with whom it deals within Africa. Obviously there are some currency unions in Africa as well, but you know, if, if Russia had 15 currencies that it was trading with in Africa, it had the, the Rui, it had the rail, it had the, that starts to get quite difficult in terms of clearing everything, whereas.

[00:13:24] You know, with a central unit of exchange, just from a raw accounting point of view, I would've thought it would make things a lot easier. And not only that, you would also have a little, you know, a little bit of protection to facilitate trade and specifically kind of forward trade, forward looking trade contracts.

[00:13:43] If you had a stable currency that was pegged to perhaps a basket of commodities, perhaps some part of gold within that, perhaps. Kind of basket of local currencies as well. It, it, it tends to be difficult if you don't know, I don't know if the Turkish lira is going to lose 58% of its value between now and the date in six months time when you're going to take delivery.

[00:14:06] Things like trade finance and very difficult. To arrange when you have that degree of volatility. Whereas if there was a, a unit of exchange, call it a currency, if you like, that side of things would be made a lot easier, wouldn't they? Yeah, 

[00:14:22] Philip Pilkington: it certainly would. Uh, I think this, this then speaks to the big question.

[00:14:25] Could something like this work? I think the place to start is exactly, I mean, there's a lot to be said about something like this working. Probably the place to start is where you've started. An awful lot of the problems that developing economies have faced, especially since the end of Bretton Woods is exactly what you've said.

[00:14:42] Currency instability. Often generated by economic instability, but it's, it's often clear, which is the chicken and the egg there sometimes the, the currency instability causes the economic instability, high inflations, hyperinflations, and these get caught into the system and there's kind of a perpetual cycle that you see in [00:15:00] emerging markets where, where these emerging markets economies will get into a crisis situation.

[00:15:04] You can think about Turkey now, Argentina now as well, actually. But there are many, many examples of this since, especially since the under Burton Woods and. When they go into this kind of inflation depreciation spiral, they tend to try and take out hard currency loans, usually US dollar loans. And then as the currency inevitably declines, they'll end up defaulting on the dollar and it'll just, everything will restart.

[00:15:26] And this is why we look at somebody like Argentina, uh, or Turkey, and we kind of just, you know, investors just tend to shrug and they go, that's just the nature of those countries. And I'm not absolving the countries of blame of. Economic management or anything else. Often that plays a role. Often that is the primary role, although not always, but I don't think there's any, there's any reason naturally for these countries to be economic basket cases constantly.

[00:15:50] So I think, um, My impression from, from the discussion of this new currency or unit of exchange or whatever it turns out to be, is actually the, the, the most logical, the most logical way my mind goes thinking about it in the immediate instances is the goal is probably to try and get the Argentinian inflation rate down and to get the Argentinian economy stable.

[00:16:13] This has been done before. It was done in the 1990s when the Argentinians dollarized their economy. They pegged the Peso to dollar, I think it was a one-to-one peg. It was called a currency board. It was very strict. There was no, there was no changes in valuation or anything allowed. And this strict peg finally brought the, the longtime inflation of the Argentinian economy under.

[00:16:36] The problem was that they didn't issue the dollar. And when you borrow in a currency and you either borrow or you peg your currency to a currency that you do not issue, you do not control. You are putting yourself up to bankruptcy risk because if you issue too many pesos and you don't have enough dollars to back them up, and you're promising that these things are dollarized, Things can get a bit hairy.

[00:17:01] I if you're dollarized, you are encouraging your citizens to borrow in dollars effectively to take heart currency loans on. And that's ultimately what happened in the huge Argentinian Peso crisis in the late nineties and early two thousands. The Dollarization did work bringing down the inflation, but eventually the country went broke.

[00:17:20] And they haven't tried the dollarization since. Even the, even the right, the right leaning parties in Argentina who are very free market, uh, tend to have economics ministers to come from places like University of Chicago, kind of notorious free market, Milton Friedman School, they don't even want to try the currency board again, it was too disruptive, but if you had some alternative means of pegging the Peso to something else in the form of a currency board or maybe something a little bit so.

[00:17:49] And the difference is that that thing that you're pegging it to is something that you at least partially control. That could be a very compelling way to get [00:18:00] Argentina's inflation problem under control. And my bet is that they're thinking something like that. And I'm sure Brazil sees plenty of benefits there.

[00:18:07] If Argentina can get themselves under control, trade between Brazil and Argentina can grow and so on. I'd imagine that's probably the idea from Brazil's point of view. Although it is a very big project, it's almost like the, like the Euro or the European Union, it, it requires some ideological buy-in clearly.

[00:18:22] So I think before tackling the big macro question of do currency unions work, what's the. General history of them. What's the downsides? What's the upsides? I think focusing on what is probably the singular problem that the, at least the Argentinians are trying to solve here at least gives us a kind of a guidepost of, of what success and failure might be.

[00:18:46] And what direction they're moving in. Of course, all that depends on if my interpretation of the situation is correct. But I would be very, very surprised if Argentinian economists, central bankers and financiers and government people weren't thinking about stabilizing the very unstable Argentinian economy.

[00:19:02] I, that has to be at the forefront of their minds. 

[00:19:04] Andrew Collingwood: Yeah. I think it's interesting that you should mention the issues with suboptimal currency unions cause or whether currency unions can work full stop. Because Olivia Blanchard, the chief economist at the I M F tweeted out upon the emergence of the news.

[00:19:22] This is insane. Okay? And I think a lot of people, a lot of commentators around the world have looked at the experience of the Eurozone, which involves quite a lot of developed economies, and they have thought, well, this has not gone well at all. And the idea of imposing a currency union on. A bunch of emerging economies, each of which have in their past had pretty serious financial slash economic difficulties and catastrophes, and crises and hyperinflation, all kinds of problems.

[00:19:56] It just sounds like a recipe for disaster. I'm less sure I'm not a great fan of the Eurozone. I think it's been an awful failure in a great many ways. It hasn't been good. Almost every economy within the European Union who's joined. However, I I do wonder whether in South America it's a, it's really a different way of looking at things.

[00:20:21] They've got a different range of incentives and different backgrounds, so as you quite rightly said, Argentina, but not just Argentina or what every South American country has suffered. More than one currency crisis and economic catastrophe and, and bout of serious inflation. You know, within, well certainly post independence, but for a lot of them in living memory.

[00:20:47] And in addition to that, a lot of them already pegged or have recently pegged to a foreign currency. Usually, as you say, the dollar. In that sense, you know, they're [00:21:00] not facing some of the downsides that the European countries have were facing. For instance, countries like Spain and Italy are no longer able to lower the value of their currency or allow the value of the currency to fall in, in a, in a process of benign neglect, if you prefer, in order to regain competitiveness within the Eurozone and internationally.

[00:21:22] So when they lose competitiveness, when their current account balance. Out of whack. The only way really to regain that competitiveness is to engage in this grinding cycle of internal deflation, and that seems to me a lot harder and a lot more painful than, you know, just devaluing the currency or, or, or letting the currency devalue of its own accord.

[00:21:48] Especially when you've got countries like Germany who are also extremely tight fiscally and also work very hard to maintain their labor competitiveness. It makes it all very difficult. But for countries in South America, They either still have or are used to having currency pegs, which prevent devaluation anyway.

[00:22:08] And ultimately when they break cause catastrophe. So it might make sense, or at least it wouldn't be as painful for them to switch to this. And you know, in addition to that, you know, you also have incentives to have some kind of control. Over, as you said, control over the peg, so to speak. It wouldn't be a peg, it would be a current union.

[00:22:31] I think really the, the kind of considerations for South America when we're considering the value of a current union are quite different to those which we have 

[00:22:39] Philip Pilkington: in Europe. Yeah, no, that's absolutely right. I, I, it. Funny, I was, last week I actually was having a drink with an Argentinian friend of mine, and, uh, we were talking about, you know, the upcoming recession, potential recession in the United Kingdom.

[00:22:51] And, uh, you know, I was pretty gloomy, very uncharacteristically gloomy obviously. And he actually, he, he just turned to me and he laughed and he said, You Europeans don't understand what a crisis is, and he's been living here for years, you know, and he's absolutely right. In a sense, the, the, the kind of crises that you see in Latin America are just so, so much worse than anything we can imagine in Europe, even even what happened to Greece, which was terrible and.

[00:23:16] And tragic and, and very, very painful for the Greek people, it's still not really comparable with the, with the sort of crisis that you'd see in a place like Argentina or in Latin America. So I think that's kind of the first thing to, to keep in mind that, that when the Argentinians look over and even if they look over and they see the, the austerity project after the European sovereign debt crisis, and they, and they look and they see Europeans complaining about you.

[00:23:41] Double digit unemployment rates or, or whatever. They kind of go, yeah, but that's not, that's nothing in comparison. Yeah. That would be a 

[00:23:47] Andrew Collingwood: great adjustment for them. Right? That, you know, that would be something, yeah. That would allow them to adjust in a far more rational way than the sort of thing that's happened to Argentina two or three times in the last half century.

[00:23:59] People who [00:24:00] 

[00:24:00] Philip Pilkington: complain about very high unemployment, and I'm not diminishing high unemployment, it can be terrible. It's nothing in comparison to a hyperinflation, it's just nothing. There's, there's, there's nothing. Comparable to it. A very high unemployment means that people are outta money, people are on the doll.

[00:24:16] You see some social pathologies grow up around the edges of it. A hyperinflation is a temporary destruction of all economic and social relations. Not all social relations, but many key social relations. It's seeing your savings go up in smoke. Everything that you've worked 20 years for, it's absolutely devastating to a country.

[00:24:34] It's not, it's not just an economic crisis. It's a social crisis. It's a political crisis. It's everyth. So I can fully understand. Why if a European went to Argentina and said, be very careful with this currency union, you might end up having to engage in austerity and pushing your unemployment rate up to 12%.

[00:24:52] If the Brazilians aren't fiscally generous, the Argentinians would just laugh and say, we face down hyperinflation. You have no idea. You, it's, it's not comparable. So as you say, if they could get to the point where Europe is now, I think they would chalk that up to an enormous success. And I don't just mean in terms of living standards, that's obvious, but I'm talking.

[00:25:10] If the Argentinians were facing down crises like we've faced down in Europe in the past decade, they'd be perfectly, perfectly happy with that outcome. But I, I think, I think that kind of brings us to, you know, let's actually evaluate the Euro. Okay. Let, let, let, let's talk about that a little bit because I think, uh, um, A narrative has become settled on that, that shouldn't be settled.

[00:25:32] So, cards on the table first, I was very skeptical of the single currency for as long as I can remember. I've been very skeptical of it. When there were the debates taking place during the, during the death crisis, and especially during the, the Greek death crisis when Series O were elected and Giannis VAAs was finance minister.

[00:25:51] There, there was, you know, the, the reformist camp who said, we have to convince the, the Europeans to. This system and give Greece some nicer loans and some money and all that. And I was always on the more hard line. I mean, I had no influence over this. I was just a blogger at the time. But, and I was working finance actually at the time, but I was always of the opinion that you, you needed to get rid of the Euro to solve those problems.

[00:26:13] So I, I am not, not a friend, so to speak, of the Euro historically, but I'll make two points initially, which can be discussed a bit more. First of all, the Euro survive. The austerity crisis. It survived the Eurozone crisis that cannot be forgotten. It survived. Okay? Now, maybe people don't like that it survived, but it did.

[00:26:34] And you have to respect the fact that it did. And so people can talk about no fiscal union, you know, no currency union without a fiscal union, no fiscal union without a political union. Okay? I get it all. But it survived. It actually did survive, and even Greece stayed. Which is actually quite surprising cuz Greece probably should have laughed.

[00:26:53] So that's the first point. I, I think the second point is currency unions are bad for some things, but they can be [00:27:00] good for some things. Okay. So clearly what we saw in the, in the Eurozone crisis was that currency unions are bad. For heavy recessions, financial crises and deflations, you, you might call it large recessions.

[00:27:14] Anything that re that, that requires a large fiscal response. A lot of government spending, anything that, where the financial markets might start bidding up interest rates because they're, they're afraid of default because of two large borrowing rates by government. All of that, that is where you start to see the problems with currency unions that aren't properly integrated, and that's what we saw in.

[00:27:35] But that world is a long time away. People are still living in that world in finance and economics and politics. They're still coasting on those old debates, but those old debates aren't relevant anymore. We now live in an inflationary world in Europe, and actually, if people have been paying attention this past year, the Euro has been a godsend for a lot of countries in Europe because smaller countries with high inflation rates, Are getting much lower interest rates than they would if they didn't have the euro.

[00:28:04] I'll give you an example. Hungary has close to 20% inflation and in order to stabilize their currency, they're not in the Euro. They use the for in order to stabilize the foreign, they need extremely high uh, interest rates. I think the shadow rate of interest is something like 17% at the moment, and that's punishing on the local economy, but they need to do.

[00:28:24] To make sure that the foreign doesn't collapse, because if the foreign collapses, it'll worsen inflation and you'll get a spiral. The countries that have the euro don't need to do that. Their borrowing rates have gone up as e c B rates have gone up, but they, they, they're not having to hike rates extortionately.

[00:28:42] So what you see is, and this is very re relevant to a place like Latin. And anywhere like Africa or East Asia, if they ever pursue similar programs is if your main problem is not deflation, but rather inflation, having a currency union can be very helpful. And we're seeing that in the Euro now. So even I am, again, a skeptic of the single currency in Europe.

[00:29:06] But even so, I can admit the single currency is doing an awful lot of good in Europe right now. And if you want to go over to Budapest or Warsaw and ask them, would they love to have the interest rates the ECB are setting, you can bet your ball of dollar, they would. I'm 

[00:29:21] Andrew Collingwood: certainly not a great fan of the Euro.

[00:29:24] I still, despite the benefits to interest rates that you extremely well explained just before I think. Still a suboptimal currency union and it still causes more problems than it's worth. I just look at Italian standards of living, for example, and the Italian level of debt as well, where, you know, they've run, the Italians, for instance, have run a primary budget surplus for years, for decades, and yet the debt hasn't gone down at all.

[00:29:57] Okay. And not only that, but the, the stance of living, I think [00:30:00] are, are now lower. If not lower, not much more than when they're joined the Euro in, you know, the year 2000. I mean, these are really awful that, you know, that's a dreadful record. It really is. Now I understand that that was. Back in a deflationary world and now we're more in an inflationary world and certainly for Europe.

[00:30:21] That's, I mean, I think for the world that's going to be the case, but certainly that's going to be the case for Europe, given its sanctions on Russia, mean that it can no longer buy. Its energy, the kind of the wellspring of its economy from the economically most rational producers. So there's gonna be in, in inflation, undoubtedly, there'll be some injection of a wage price spiral.

[00:30:42] I'm not sure how far that'll go, but you can already see across Europe at the moment. Workers are starting to agitate for wages that keep up with the rate of inflation. So I understand your perspective with regards to having lower interest rates, but I'm not sure that changes the, I'm not sure that changes the calculus so much because.

[00:31:07] I just see the Euro as being overvalued for a lot of countries, like in an ideal world, the Italian lira and the Spanish Seder would simply be worth considerably less than the Euro currently is, and that has an effect ultimately on the competitiveness of their economies. So I, I actually understand your point and I, but I think your point certainly works even better for South America where you've had.

[00:31:34] You know, far great abouts of inflation and where a kind of a hard currency, the introduction of a hard currency could really help them. The other point, of course, is that this might be down to a little bit of ignorance. It's easier to see differences and nuance and, and shades of gray within an area that you know, that an area that you know a lot less about.

[00:31:56] And I know a lot less about South America than I do about Europe. My perspective is that the South American countries are probably a lot more similar in terms of the place that they're at in their development. I mean, certainly say, Brazil, Uruguay, Argentina, maybe Chile as well. Venezuela a special case.

[00:32:20] Places like Peru and Bolivia, less so, but certainly Brazil, Argentina, Uruguay, perhaps Chile are much more similar than say, Greece, Spain, Germany in the Netherlands. Uh, you know, I think there's a, a big difference there in terms of, or, or certainly shall we say, like the met part of Spain, Italy rather than the, the northern part.

[00:32:41] And I think. That's something else to bear in mind, that one of the things that makes the, the Euro difficulties, just the, the different gearings of the economy, the different competitiveness, the different wage levels, all of these things make it, you know, an issue. Uh, I wonder, is there that sort of [00:33:00] issue in, in South America, because my impression is that they're probably a lot closer, both in terms of their median incomes, their GDP per capita, their industries.

[00:33:11] You know, a lot of these countries tend to be resource based. You know, Brazil with it's iron ore and it's agriculture, and its timber and its rubber and. Chile and you know, with its great mineral wealth and metals, wealth, these countries tend to be commodities countries. They tend to be at a similar level of development.

[00:33:30] So I think again, for those reasons, it might also be more applicable. To South America than it is to you, but or certainly easier to impose. You've got greater incentives to do so given the, the economic history they have, that they have had and economic history within living memory. But they're also probably a little bit closer in terms of economies as well.

[00:33:51] The 

[00:33:52] Philip Pilkington: usual relevant metric is, is wages, right? I mean, it's actually unit labor costs, but we don't have to go in that direction. It's basically wages. What we see in Latin America from that perspective is Brazil and Argentina are very similar in terms of wages, in terms of their dollar, dollar wage equivalent.

[00:34:06] The rest of Latin America's quite varied. I think Brazil and Argentina are in the slightly wealthier group, not as wealthy as Chile, but more wealthier than Columbia. There is some diversions. The initial union is set to be apparently Brazil and Argentina, and they have fairly similar wage rates, so judged from a wage perspective.

[00:34:28] I think, as you say, I think this is, this is viable for Argentina and Brazil. If other countries want to come in and they have substantially lower wages, and some of them do, they'll need to think about how to deal with that. As you say this, this isn't clearly a single currency like the Euro. If it's a unit of trade or some sort of a peg arrangement, the country with the lower wages could peg at a different rate.

[00:34:50] You know, if they had half the wages, they could have half the value of their currency relative to the numera of the peg. So, but what you just said, the other thing that you said is, I think more so the case with Latin. If you, if you wanna model Latin American currencies, especially the rail, you don't really do it with the normal metrics, which is usually, it's not wages, but it's CE model based on relative price movements, which often reflects wages.

[00:35:19] The rail, on the other hand, you typically, you can model with the price of iron ore. It's, as you say, it's a commodities currency, so that, that introduces something very different if at least at the beginning. The Latin American trade block, let's say it issues this, sir, this, this trade currency, and let's say the Chinese are buying iron ore and soybeans, iron ore from Brazil, soybeans from Argentina.

[00:35:43] It probably will actually be the ar, the price of iron ore and the price of soybeans that drive. That currency. And so I don't know if that makes it easier to apply, but it definitely means that just looking at relative wage levels like you would in Europe, I mean [00:36:00] that was the trick in Europe. You'd look at how wages had grown too fast for productivity in Greece and they'd been suppressed relative to productivity in Germany.

[00:36:08] And you say that's gonna create a problem. And it did end up creating a problem in Latin America. I, I'd imagine at the. The wage differentials won't be as important as the round of commodities prices. I don't think they've mentioned it in relation to the sir, but prior to this, when the BRICS were talking about it, there was definitely talk of commodities backing and that that seems to me where this would fit.

[00:36:29] I don't think they need to, and I don't think they will approach this with a very, very coherent plan. I think this will be a second Sea thing. Try and get this unit. And then people will eventually figure out what is actually driving this unit. But if it emerges and it's floated and it starts trading, my first protocol would be to take soybean prices, iron ore prices.

[00:36:50] I think there's some copper if, if, if certain countries are added. I think there's some copper in the region as well, and I'd model it based on that before I went to wages, but we'll see. We'll see what happens. It'll be very interesting. One of the most 

[00:37:02] Andrew Collingwood: interesting things really would be how the United States reacts because of course, The United States has very much viewed South America as part of its sphere of influence.

[00:37:13] I guess he started in what, 1823 with James Monroe's Doctrine, which it became much later called the Monroe Doctrine, that no foreign, no power from the old world, which by which he meant Europe could come back into the Western hemisphere and colonize or or otherwise influence or control. Any of the nations, which had recently gained independence within the Western Hemisphere.

[00:37:41] But since then, of course, that's developed Philip into quite significant US meddling and interventions even in South American countries like Nicaragua, Panama, Colombia, Venezuela, Argentina, Chile, the Dominican Republic, Cuba. I mean, it would be easier to name the countries that the United States hadn't intervened, used force, fermented, kutas.

[00:38:05] I say that not as a bad or a good thing. I'm not passing judgment at all. I'm a foreign policy realist, so I, you know, I don't crouch this in moral terms, but it's undoubted that it's undoubtedly the case that the United States views South America as its sphere of influence Now. Of course traditionally, not only have those countries used the dollar as their main reserve currency used the dollar as their unit of trade, but also, as you said a few times, they've used the dollar as a peg for their currency.

[00:38:37] So they've been tied very much to the US dollar and the United States has been very involved in their economies as well. You know, farther north and Latin America, especially with Mexico and bailouts and various processes there, but also south of the imus in in South America proper. If such a currency union took off or looked like it was taking off and looked like it was gonna [00:39:00] replace the dollar, especially if it wasn't going to be just a local thing between Brazil and Argentina, but it was linked in with the BRICS in some way, if it was linked in with increased Chinese influence within the region last year, that, you know, last week we talked about the potential for a Chinese naval base in Argentina.

[00:39:20] If this sort of thing starts to become linked in with that, I would fully expect the United States to react quite strongly to, and when I say quite strongly, I mean, you know, ruthlessly to this, to knock this on the head to, to, to, to kill it in the cradle essentially, because the idea that. South American nations would be truly independent and sovereign in terms of who they had alliances with, who they traded with, I think would be anathema to us ideas of security within the, within the Western 

[00:39:51] Philip Pilkington: Hemisphere.

[00:39:52] Yeah, I mean, I can certainly see where you're coming from on the Monroe Doctrine. I mean, I've written 1 0 2 things about that recently. I, I've been very surprised at America not really taking the on Monroe Doctrine very seriously, or as seriously as they did in the. Perhaps I'm wrong about that. I'm not an expert, but you, you think you're 

[00:40:09] Andrew Collingwood: right.

[00:40:09] Actually, there's been a lot more kind of lackadaisical about it, right? Like certainly compared with the Cold War days, right? 

[00:40:16] Philip Pilkington: Yeah. Or even the nineties or whatever it, it feels that way. I mean, we'll just give some examples. The, the ones that have stood out to me, definitely the destabilization on the US Mexico border, that, that's baffling to me.

[00:40:27] It's very, it's a very strange thing to layer borders to become that destabilized destabilization of Mexico itself with the cartels and so on, is a bit unusual. I remember when they. You know, go after the drug, you know, the war on drugs. We all remember that with Reagan and all that. So that's a bit unusual.

[00:40:45] The other things that struck me as kind of strange are actually the fact that DC kind of backed Lula to begin with. Lula really is quite anti-American. If you read a speeches that surprised me, the kind of dayan with Venezuela recently has been very interesting to watch it. That makes more sense, I guess, cuz it's kind of all hands on deck.

[00:41:03] It's such just the oil, it's 

[00:41:04] Andrew Collingwood: the, it's the type of oil Venezuela produce. Heavy oil, which the United States needs to refine diesel, I believe. And that's also what the Russians were producing with their Euros blend, right? 

[00:41:17] Philip Pilkington: Yeah. Yeah. So, so like that makes more, as I said, that makes more sense to me. But I mean, still they're causing up to a, a regime that really was on the kind of axis of evil up until very recently and probably the most anti-American regime in the region.

[00:41:32] Arguably Barr in Cuba, but Cuba's an all place these days after Castro. So I mean, yeah, the Monroe Doctrine stuff I've taught has seemed to have softened a bit now. Now maybe you're right, all this will re-highlight the importance to America of Latin America, and it probably should, I'm not gonna lie, but I do wonder about kind of.

[00:41:50] Getting aggressive with it, would that even be the right response? In a sense, it seems to me that, that that actually might risk kind of alienating the con continent further. The [00:42:00] as as we talked about at the start, the long-term influence on this plan comes from kind of a, a left wing anti-imperialist, by which we ultimately mean in the, in the region anti-American idea.

[00:42:11] It maybe isn't a great idea to continue to stoke those fires. It, it seems like it would make more sense to try and. I'd compete on this one. America's quite good at that, and especially somewhere as close to home as Latin America to try to try and say to the, to the Latin Americans, you know, okay, you guys want to develop, you guys want to have this currency union.

[00:42:33] Okay, well maybe we can work with within those parameters. And, and, and again, this goes back to the point that, that the assumption that any sort of shift in the status of the dollars of reserve currency or in these new currencies or these new currency arrangements rising up is ultimately some sort of a, just a, um, a battering ram for the Yuan to take over.

[00:42:53] I think this is a really naive assumption and that, and that the way to play. In a multipolar world is to come to the table, play your deck. You know, there's no reason why if the br, if the, if Latin America formed some sort of a currency union that, you know, there wouldn't be a way to work that in to some sort of trading relationship with the us.

[00:43:13] I don't care to make any predictions about what will happen when a player gets to a certain level at the table. I think it's kind of worth maybe saying, okay, well, you know, sit over here. Both deal a deck of hands. I, I, I think that could make an awful lot of sense, but we'll see 

[00:43:27] Andrew Collingwood: where it goes. Okay, so there's two points here.

[00:43:29] The first reason, the, the first point I guess, is in the United States being a little bit more relaxed or maybe indifferent or, you know, certainly not, not quite as attentive to South and Central America as it was, you know, even 10, 15 years ago. And I think that's undoubtedly been the case. I think though, that there's two reasons for that.

[00:43:51] The first reason was the emergence of the, the neoconservatives or the liberal universalists, whatever words you wanna put on them, whether they're, you know, Democrat or or Republican. But those guys embarked on a quite hubristic mission to remake the world in America's image, certainly from the turn of the century and.

[00:44:13] They've been focused a lot on that because it was a unipolar moment. They could try to impose their way of life and their way of training because there was no competitor to the United States within the world. There were no other great powers within the system. But as soon as you have another great power, which China is, and perhaps Russia is to a less degree as well, and he moved to a, a bipolar or a a, a multipolar world, as I think will emerge then hard.

[00:44:40] You know, really hard strategic calculation and quite cynical and strategic calculation in, in, in Naked national Self-interest comes much more into play because that's the point of foreign policy ultimately is to secure. And its interests. Now, when it was a [00:45:00] unipolar world, for instance, at the election of Lula is a fantastic example of this, right?

[00:45:05] So the reason that the Americans were supporting Lula, even though he has an anti-American streak, even though he is a bit more left than left of center, and, and that's exactly the sort of person that the Americans would look to avoid in favor of somebody who was quite right wing as Bolsonaro was, was because.

[00:45:24] Sauer was kind of associated with Trump at the rise of right wing populism around the time that Trump was elected and the Manhattan. Auction set, charity auction set just couldn't bring themselves to support somebody like Bolsonaro. And that's a great example of what happens when it's a unipolar world or when a country feels that it's the only great power within a unipolar system.

[00:45:49] The mos and pathologies of the ruling elite start to count in terms of how they go about foreign policy. But that's not gonna last forever. What's gonna happen is with China's rise and perhaps Russia's rise as well, and you know, perhaps other nations like India, well now you're in a system with more than one great power and security interests are going to come back into play.

[00:46:10] And you know what? New York Times opinion editorial writers think about the relative morality and decency of doula and Bolsonaro would be, whoa, much less important. Bolsonaro is generally pro-American, so I think that's a great example of. American actions will change as the world switches from being a unipolar world to a multipolar world.

[00:46:34] I think the second point that I would say is that, okay, if it's just a currency union or a unit of trade, The reason that I don't think the Americans would be happy even in that situation because that in theory wouldn't affect them. I mean, south America could take this, you know, go the whole hog and have its own currency union and wouldn't that be fantastic?

[00:46:52] And how on earth would that affect America that. It doesn't involve Chinese naval bases patrolling the entrance of the Panama Canal or, or some other really serious strategic interest of Americas. Of course it doesn't. But the issue is that, as we've seen, the United States really likes to use its dominance within the financial system, both through banking and through the currency as a weapon.

[00:47:19] So if South America started reducing its reliance on the. Reducing the amount of dollars in reserves, reducing the amount of dollar debt it has, removing the currency peg to the dollar. Well, that really. Reduce America's toolkit when it comes to applying pressure. I mean, it could no longer crash an economy for a start.

[00:47:38] So that's why I would argue that the Americans wouldn't necessarily like that. And as it becomes more clear that America has a genuine rival within the a, a new multipolar system, then security interest will become more prevalent and it'll become more dominant over, you know, interest of morality and, and grandiose ideas.

[00:47:59] The world all [00:48:00] becoming a collection of left wing progressive nations flying the rainbow flag together. 

[00:48:05] Philip Pilkington: Oh, I'm not, I'm not disagreeing with you. I, I, I just, I just think that the, what the, what the seizure of the Russian reserves has shown us, and I, I think it's becoming increasingly accepted now. I wrote an article about it in March, a couple of weeks after it happened, or even days after it happened.

[00:48:20] And I suppose it was quite controversial then, but I think it's becoming increasingly accepted. That financial systems are delicate entities. They're trust-based systems. Really what provides the value of the dollar, whether it be the actual nominal value of the dollar or its value as a reserve, is really the trust in the dollar that it's a trustworthy, stable currency.

[00:48:40] And to a large extent it is, but uh, the seizure of the reserves is what kind of started this chain of events. And to continue down that route would seem. A form of madness to me, it, it, it needs to be recognized that currencies are ultimately trust-based relationships. That you can weaponize them in small ways.

[00:49:00] Sanctions against Iran, I think is about as big as you can go without losing the, the trust factor. And even on that, by the way, they had to get Indian buy-in on that. If, if anyone recalls now seems like a, a world, so something like 

[00:49:12] Andrew Collingwood: stealing or, or seizing the taliban's. Right. So that's, 

[00:49:16] Philip Pilkington: yeah, seizing the taliban's gold fine.

[00:49:18] That's no big deal. But once you start playing a bigger game, um, what we've seen, we've seen the consequences. We are where we are now, arguably because of that, uh, reserve seizure. So I think it'll be very unwise to go down that route. I'm not saying they won't, I'm not saying the Americans won't, but I think it'll be very unwise and much better to look at not what the other guys' weaknesses are, but rather what your strengths.

[00:49:39] Dollar still has a lot of strengths. The US financial system still has a lot of strengths. The US remains some of the best business people in the world. There's no doubt about any of this, so I, I think it will be much more in their interest and I, I actually think this generally, with the whole multi polo theme, I think it will be much more in their interest to play to their strengths in this regard.

[00:49:57] To try and engage constructively with this stuff, but, but we'll see Moving forward.

bottom of page