The Dollar Dethroned

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by Scott Kelly

Time to stock up on bitcoin, bourbon and bullets as the U.S. dollar falls under attack and will soon be worthless. At least, according to some of the latest headlines. The BRICS nations are declaring their intention to  break away and form their own currency club, creating a competitor to the dollar that will further accelerate the decline of American power abroad and put us on increasingly unstable financial footing. The use of the dollar as the world’s global currency has been a boon to American prosperity in the post World War II era, elevating the status of our banks, allowing us to finance our deficit spending, and giving us the ability to impose unilateral sanctions to support our foreign policy objectives. So, what are the odds of BRICS pulling this off?

The BRICS nations are Brazil, Russia, India, China, and South Africa, with a few other smaller players as well. How did all of these nations get together? Goldman Sachs in the early 2000s made up a new acronym to describe a group of developing nations with strong economies. That’s it. There’s nothing else holding these countries together, other than eventually a few of them started to drink the kool aid and talk about a new alliance they were going to form to create an alternative to the dollar backed global financial system. A key talking point in all of their meetings has been how they’re going to start trading amongst each other in a currency other than the dollar, specifically to curtail America’s influence in their affairs. Sounds great, and on paper it might look like they could pull it off, but this would actually cause more problems for the BRICS nations than it would solve.

First of all, to do this, either they all need to agree to use one of their existing national currencies, or create a new one. The only country with a monetary supply large enough to use their own currency would be China. However, 99% of China’s currency is kept at home, a deliberate decision by the Chinese Communist Party to help insulate the Chinese economy from larger fluctuations in global markets, and allowing them to manipulate it freely to maintain the ability to cheaply export goods. Using their own currency as the medium exchange for other nations at any meaningful scale would take power away from the CCP, and they’re not going to let that happen. Even if they wanted to, other nations would have to trust the CCP to not manipulate its currency whenever it felt it was in their interest to do so, and that’s a big ask. Especially for a nation like India, who has seen ongoing border clashes between its military and China’s and is an active competitor for influence in the Asia Pacific. 

To create a new, common currency for exchange would also create problems. If it was adopted as the common currency among nations domestically as well as for international trade, it means each country would have to rely on the others to follow the agreed upon rules for banking practices and the fortunes of one country would affect the value of the currency in others. This has already proven difficult within the European Union with Britain leaving the alliance over just such concerns. It’s almost impossible to imagine that the BRICS nations, with differing forms of government, cultures, economic interests, and spread out across multiple continents on different sides of the world would be able to effectively do what Europe has barely managed to pull off. The level of transparency between the nations central banking systems would be politically impossible domestically, as it would curtail the ability of the current regime in each nation to hide financial issues (insolvency, corruption, etc) from their own populations. This is much more of a problem for some BRICS countries than others, but is still a huge barrier to overcome. 

The real issue behind why the BRICS nations will likely never be able to create a meaningful alternative to the dollar is the most basic issue behind the creation of any currency, trust. No one country in the BRICS group has a reason to trust any other. In fact it’s the issue of trust that causes almost everyone in the world to use the U.S. dollar. The dollar is backed by the largest economy in the world, with a well regulated banking system and legal system that creates transparency around who possesses how much of the currency and what its current value is.

Yes, the Federal Reserve changes interest rates whenever it wants and Congress prints money like crazy, but they’re transparent about it, and countries abroad have little need to worry that a change in U.S. administration would radically adjust the value of the dollar or their ability to use it for commerce. No one needs to trust each other, as long as they trust America to be transparent about its finances, however foolish those finances may sometimes look. 

So for now the dollar may lose some global market share to countries entering bilateral agreements, or expanded use of other well established currencies such as the Euro, but it’s not going anywhere, while the most valuable thing about a hypothetical BRICS currency is the headlines and talking points it produces for pundits and politicians. 

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