China and Brazil just finished a trade deal in their own currencies instead of the dollar. This is bad news for the world’s reserve currency, but it’s not the only bad news.
Last week, a Russian official said that the BRICS countries are working on making a “new currency.” This is another sign that the dollar is losing its place as the world’s most important currency.
Alexander Babakov, who is the vice chairman of the State Duma, which is the Russian legislative assembly, said that the switch to settlements in national currencies is the first step. This has already happened when oil deals between India and Russia were paid for in currencies other than dollars.
The next step is to get digital or some other fundamentally new form of money into circulation as soon as possible. I think that at the BRICS [leaders’ summit], it will be announced that this project is ready to go. Work is already being done on it.”
That meeting is set to happen in August.
Babakov said that the BRICS countries are working on a plan that “does not defend the dollar or the euro” and that “a single currency” tied to gold or “other groups of products, rare-earth elements, or soil” is likely to emerge from the group.
The BRICS block is made up of India, China, South Africa, and Brazil. It is home to about 40% of the world’s people and makes up 25% of the world’s GDP.
Iran officially asked to join BRICS last year, and a report from The Cradle says that many other countries, like Saudi Arabia, Algeria, UAE, Egypt, Argentina, Mexico, and Nigeria, are also interested in joining.
Jim O’Neill, who used to be the chief economist at Goldman Sachs, came up with the BRIC acronym. In a paper that was just published by Global Policy Journal, he called for BRICS to grow.
“The US dollar is way too important in the world’s economy,” he wrote. “When the Federal Reserve Board has started periods of tightening or loosening money, the effects on the value of the dollar and on other things have been dramatic.”
It’s clear that many countries are trying to use the dollar as little as possible. The US government’s reckless borrowing, spending, and making new money keeps lowering people’s trust in the greenback. The fact that the U.S. uses the dollar as a tool in its foreign policy also makes many other countries hesitant to depend on dollars alone.
The IMF says that the dollar’s share of the world’s foreign-exchange reserves fell below 59% at the end of 2021, continuing a decline that has been going on for 20 years.
Surprisingly, the share of the pound sterling, the yen, and the euro, which have all been reserve currencies for a long time, has not gone up as the share of the dollar has gone down. Instead, the shift away from dollars has been in two directions: a quarter into the Chinese renminbi and three quarters into the currencies of smaller countries that have played a smaller role as reserve currencies.
The US government has a lot of trouble with this.
Uncle Sam’s spending and borrowing are only possible because people want dollars. The fact that the dollar is the world’s reserve currency is the only reason the US can get away with huge budget deficits and a national debt that keeps getting bigger. It creates a built-in demand around the world for dollars and US Treasuries, which soak up the new money and keep the dollar strong. But what if that demand goes down? What will happen if BRICS comes up with its own currency and stops trading in dollars?
If the number of people who want dollars goes down, the greenback’s value will fall quickly. That means American prices will go up even more. In the worst case, it could cause the dollar to fall apart completely.
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