Paulo Nogueira Batista: “The US is showing that a superpower in decline is extremely dangerous”
Interview with the Brazilian economist, the intellectual force behind the BRICS
For Spanish and Catalan versions see La Vanguardia
Scion of the Barbara family, Catalan migrants who were pioneers of industrialization in Brazil, Paulo Nogueira Batista Junior is one of the great heterodox economists whose thoughts have driven the BRICS project. Former director of the IMF and vice president of the BRICS bank, his main concern at this moment is to advance the agenda for the replacement of the US dollar as global reserve currency and challenge the payment systems that depend on the US currency. This is an urgent matter, he argues in this interview, because a mega-financial crisis is looming in which the US dollar will no longer be a safe haven.
One piece of advice you have given in recent interviews is “fasten your seatbelts!” Why?
I think we need to fasten our seatbelts for many reasons, but the main ones are the decline of the United States. Not just the decline itself, but the violent reaction of the United States to this decline. Western powers have been accustomed to ruling the world for centuries. Now this dominance is being challenged, and they are kicking and screaming. History teaches us that a superpower in decline can be extremely dangerous. And the United States is clearly showing this at the moment. But the other issue is the fragility of the US economy and also the European economy.
Why?
Because, first of all, there are underlying problems that are not being addressed. Large fiscal deficits, growing public debt with no end in sight, lack of political will to tackle these fiscal problems. An aging population, which has serious long-term fiscal implications, as you know. And the political powers in the US and Europe are unwilling to address these problems. In the case of Europe, there is an additional factor, which is the fact that Trump is withdrawing the defense umbrella from the Europeans. So they will face additional fiscal pressure, which is the need to increase defense spending.
This has been going on for a few years. Why is there imminent danger?
I think we need to buckle up because there are a number of signs that one or more bubbles may burst in the US and European financial systems. Especially in the US. We cannot rule out the possibility of a repeat of a major crisis similar to the one we had last time, in 2008 and 2009. And, of course, this financial crisis will come at a time when the US and Europe are in a very fragile situation, more fragile than when Lehman Brothers went bankrupt in 2008. This, in turn, will accelerate the decline of the US and the dollar.
Since that so-called “Freedom Day” in early April, when Trump announced the battery of tariffs, the dollar has ceased to be a financial refuge. If there is a crisis, do you think we could see a flight from the dollar, unlike the flight towards the US dollar in 2008 after the collapse of Lehman Brothers?
Yes. In previous crises, there has been this paradoxical safe haven effect, meaning that even though the crisis originated in the US financial system, people fled to the dollar as a safe asset. But what happened after April 2 is the first significant sign of a change. So if one or more bubbles burst in the United States and the financial system collapses, we may see a flight from the dollar and the U.S. financial system, as investors move away from U.S. Treasury bonds and toward other assets such as gold. But gold is already very expensive and its price is historically very volatile. Other currencies may be safe havens, but the euro is a satellite of the US dollar. And the other Western currencies are small. Perhaps the yen could be an option. But for the most part, the movement will be toward the renminbi. And this will create a problem for China.
Why?
Because what would happen in that scenario is a massive influx of short-term speculative capital, speculative capital, into the Chinese currency. What options would the People’s Bank of China, have? It could allow the currency to appreciate. This would hurt the competitiveness of Chinese exports and economic growth. And there is also something that is rarely mentioned. China is on the verge of deflation, and if there is a very large appreciation, it could push the economy into deflation. Deflation is dangerous from an economic point of view because it leads economic agents to postpone their spending in anticipation of further price falls. This is what happened in the global economy in the 1930s. Therefore, I believe that, in the event of a crisis in the US, the Chinese central bank could allow some appreciation, but not much. What else could it do? It could simply intervene in the currency markets, selling and buying dollars and euros. But that would also be a bad solution, because they already have excess reserves of dollars and euros. The Chinese are in that situation, that is, they have excessive reserves denominated in dangerous currencies. Therefore, they would not want to accumulate more dollars and euros. They can impose capital controls. That may be the best solution in the scenario I am outlining. But if they do that, the renminbi will move even further away from convertibility. So, in a scenario where the dollar no longer plays a safe-haven role, there are no good options for the Chinese.
It feels like the right time for several non-Western countries to start developing some kind of reserve currency and alternative payment systems to cushion the blow in the event of another financial crisis like the one in 2008. What do you think?
Well, I’m actually finishing an article on this very topic. I’ve been thinking about it a lot. There is certainly room for a new reserve currency. Who would create it? I think it could be a group of countries. I wouldn’t call it a multilateral initiative. But it would be a plurilateral initiative of, say, 15 or 20 countries. From the BRICS and the global south, mainly the largest ones. China, Russia, Brazil, Indonesia,
Is it urgent?
I think so. The system is collapsing and there is no one to fill the void. It is a very delicate situation for all of us, given the size of the United States and the size of the European economy. They are in decline. But they are still very large. If the crisis that many believe is coming happens, everyone will rush to come up with ideas on what to do. So we had better discuss these issues now. I raised this in Russia a few months ago and in China as well. And there are many people who are open to this debate and willing to contribute. But we are still at the beginning. We have not developed a systematic debate on this in official circles. There is a certain paralysis. Even in academic circles, the debate is notWe have not developed a systematic debate on this issue in official circles. There is a certain paralysis. Even in academic circles, the debate is not progressing. I have proposed a specific approach, which I detail in the report I will send to experts in Brazil, China, and Russia.
Why is a new payment system necessary?
Because in addition to the economic weaknesses I just mentioned, we are seeing more and more cases of the geopolitical instrumentalization of the dollar in the Western financial system. The West has used the payment systems it controls as weapons to punish and exclude countries and people it does not like. In reality, it is not only countries considered enemies, but also countries that maintain trade relations with them. It is one of the examples of the violence of a declining superpower. The US is harming itself. It is breaking trust in its currency, breaking trust in its payment and messaging systems such as SWIFT. In my opinion, the BRICS have moved too slowly.
Perhaps the slow pace is because the United States has been so aggressive on this issue...
Without a doubt. The United States has always been very hostile to any attempt to unseat the dollar. It is a long-standing policy. It does not matter whether it is Republican or Democrat. The role of the dollar is a privilege and they do not want to give it up.
Are things different with Trump?
The difference with Trump is that he adopts the same stance, but proclaims it loudly and aggressively. And I think this has intimidated many countries because they fear the reaction of the United States. There are countries that are very vulnerable to Western pressure. Take, for example, two of the new BRICS members, Egypt and Ethiopia. They are subject to IMF programs and know full well that if they displease the United States, they may have difficulty implementing their programs at the IMF.
Will that put them off deinitively?
I don’t think so. People are realizing that the only thing we can expect from the United States in the current situation is instability, threats, political interference, and economic mismanagement. That is what lies ahead. So there is no point in beating around the bush. We need to be clear on one strategic issue. The Western order is collapsing. The world is in chaos and is being undermined by the United States itself. Therefore, countries such as China, Russia, Brazil, and other countries in the global South must realize that the time has come to make their voices heard, to prepare more and more carefully. Because I don’t see any new ideas or new initiatives coming from the United States, Europe, or Japan. In fact, we have a vacuum of ideas which corresponds to the vacuum and the power.
Why can’t Europe join forces with the large developing economies and build some kind of alternative together?
It would be great if Europe were more independent from the United States. Perhaps Trump’s current actions will end up being a wake-up call for Europe. But I don’t see it happening. It’s difficult to imagine a scenario in which Europe would join forces with countries in the global south to create something new. For Europe to regain its independence, it needs a new De Gaulle. And decisive leadership is currently lacking in Europe. Europe has a long way to go to rebuild its independence. I’m not saying it should be against the United States. That would be absurd. But it has to show that it can live without the US. Americans never liked the euro. And many people, in Brazil for example, had hopes that the euro could become an alternative to the dollar. But these hopes have been dashed. The euro has become a reserve currency. It accounts for around 20% of registered reserves. But it never managed to rival the dollar.
Why not?
I think Europe’s political subordination to the United States has become increasingly evident. The euro became a satellite of the dollar. Just look at what happened with Russian reserves. When the United States froze dollar-denominated reserves, European authorities followed suit and froze Russian euro-denominated reserves as well. So the euro has become as insecure as the dollar. It is no longer an alternative. It is part of the same package.It’s part of the same dollar-dominated package. Instead of creating an alliance, Europe joined the US in its efforts to surround and destabilize Russia. Now look at the absurdity of the current situation. The US dragged Europe into a real confrontation with Russia over Ukraine. And now the US has changed its mind. It wants to leave and leave Europe alone with Ukraine! This should be a wake-up call. Europeans should realize that they cannot trust the US.
Do you think Trump is accelerating the search for of a global solution?
Definitely. What message is Trump sending to the rest of the world? Look, you can no longer trust the US. You have to find your own solutions. And some countries may be up to the challenge. I think China and the BRICS will step up.
Could China try to replace the US as the dominant power despite the problems you mentioned regarding the renminbi as a reserve currency?
It is possible that the hegemony of the West and the United States will be replaced by a new hegemony of China. China is becoming very strong. It is very efficient. I just spent four weeks there. And I was amazed by the progress. It is very dynamic. It is hard-working. It plans, it is deliberate in what it does. It does not improvise. The difference with the US, where there is an incredible level of improvisation, is striking. Despite all this, many people overestimate China’s power. Because China’s GDP is greater than that of the US in terms of purchasing power parity, and has been for some time. But in terms of GDP per capita, which is the relevant measure for many calculations, it is a middle-income country. It has the problems and vulnerabilities of a developing country. So I think the Chinese may be becoming increasingly ambitious and increasingly confident, but I also think they are cautious. That is my interpretation of the stance they are taking. On every issue, what does China do? It takes the pulse of the situation. It takes one step at a time, without rushing, with a long-term vision, patience, strategic patience. Therefore, I don’t think they are going to try to achieve global hegemony. Not even in the event of a hard landing in the United States. I don’t think they will do that. My perception of the Chinese is that they prefer a My perception of the Chinese is that they prefer a peaceful solution, a cooperative approach as far as possible. They are cautious in their language, cautious in their proposals. This could change, of course. Success could go to their heads. But I think that, for now, the old-fashioned cautious approach still prevails.
What is your personal experience like with China and the US in multilateral institutions?
When I was executive director for Brazil and other countries at the IMF, I had a lot of contact with the Chinese. Then I moved to Shanghai to set up the BRICS bank. And comparing relations between Brazilians and Americans and Brazilians and Chinese, the latter were much better. Much more pleasant and constructive. Not without disagreements, of course. We don’t agree with the Chinese on everything, but there is dialogue. With the United States, all you get is a monologue.