The US$ is crashing, and will no longer be the world standard?

There are decades in which nothing happens, and weeks in which decades happen. This quote, attributed to Vladimir Lenin from his written account of the Bolshevik Revolution, alludes to major events sometimes being long in the making but short in the execution (or executions, as it were). The Russian revolution occurred a half-century after the publication of Das Kapital, only after a lifetime of oppression by the last czar, Emperor Nicolas II, and finally after the onset of World War I in 1913. Discontent among Russian workers and the general populace came to a head during those few fateful weeks in the autumn of 1917 and thus giving it its more proper name, the October Revolution, which went from long decades to short weeks. Hemingway said a similar thing about bankruptcy, happening first gradually, and then suddenly.

So, too, it is appearing to go with the US dollar which, by numerous accounts in mainstream media, is on a gradual decline. Is the decline about to get sudden?

We need to go back in time briefly, to see where the dollar stood eighty years ago to where it is today.

First, following the end of World War II, the venerable greenback muddled its way along as the world's dominant currency somewhat against its will for several decades as the backbone of the Bretton Woods monetary system. After that, in 1971, the dollar threw off its golden shackles and became a purely fiat beacon of freedom from the shining city on the hill, a light in the dark decades of the Cold War. After the fall of the Soviet Union and emergence of powerful globalization forces in 1989, the dollar began to underpin the reserves of almost every trading nation on the planet as America bought the world. Throughout all that, the dollar has been, as economists like to say, a store of value, one which people and nations have trusted alongside gold and marginal quantities of euros and yen for almost eight decades now.

Furthermore, the dollar is the preferred money for the buying and selling of oil, a system known as the "petrodollar" -- not an actual currency, mind you, a petrodollar that you can exchange for, say, a bunch of bananas, or exchange your hard earned rupiah or pesos for. Rather petrodollar is just a convenient name for the system it has come to characterize. The US dollar is the medium of exchange for the biggest commodity on the planet.

Lastly, and one cannot deny this, the dollar is the currency of the world's balance sheet, a unit -- in fact, again, the unit -- of account to which most other denominations are converted to so as to make some sense when talking about things like comparisons of GDP and international trade. All that data is reported in US dollars, and most people in any nation have it as a reference to their own national currency exchange rate, as in how much their money is worth if it was instead in dollars.

So the dollar handily satisfies all the three major characteristics of money described above, which are often somewhat superfluously shortened to SoV, MoE, and UoA. It also satisfies those characteristics better than gold and better than every other currency, except those which exist within other countries' own borders (and sometimes not even then, looking at you Ecuador, El Salvador, and Zimbabwe, who gave up your own currencies through corruption and hyperinflation, and also you Venezuela and Cambodia, where you can't survive without dollars even though it's not the official currency).

The question of the day, then, is will the United States dollar continue to do SoV, MoE, and UoA better than the currencies of all other countries?

Donald Trump, for one, doesn't seem to think so.

Trump recently made an impromptu election speech shortly after his arraignment on 34 counts of fraudulent business activity. He spoke on a number of topics -- yes, including witch-hunts and all that -- but interestingly he also chose to highlight something which I believe will be a key to the 2024 US Presidential election, stating:

Our currency is crashing and will soon no longer be the world standard, which will be our greatest defeat, frankly, in 200 years.

That's quite a bold statement, even from a president known for the boldest of statements. Surprisingly also implying the loss of the dollar's status as the world standard (the global reserve currency, for you finance and economics types) would be the greatest defeat since a young America lost the War of 1812 to the British! Say what you will about Trump's grasp of history, he apparently has a multi-century perspective to surpass even that of China's century of humiliation.

Is the statement above just another case of Trump's hyperbole? Or, rather more importantly, is there something so big is at play that it will similarly shake the now-mature nation to its core?

I'm going to have to split this into a series, the Rise-and-Fall-of-the-Roman-Empire-style of LinkedIn post, so herein is Part I of The Way the New World Order Works.

All and all you're just... a... 'nother BRIC in the Wall

Let's take a few examples from recent weeks, starting with the topic du jour of geopolitics, the "BRICS" countries ?-- Brazil, Russia, India, China, South Africa -- apparently working on the creation of a new currency, as covered in a flurry of stories this past week across all major media.

First, let's take a step back and remember that originally, the BRIC group -- originaly comprised just four nations, without South Africa -- was a concept on a PowerPoint slide from some Goldman Sachs banker's emerging markets investment pitch deck more than two decades ago, a moniker which at the time was a handy notation to capture the idea that Brazil, Russia, India, and China were the big expanding economies at the turn of the millennia, and those which would likely lead the world 50 years later.

Surprisingly, the concept went from investment banking buzzword to Chinese national policy in just a few short years. The policy was that the biggest emerging market countries should be part of their own trading bloc, and that such a bloc should be led by China.

At the time of the BRICs formation in 2006, allies were rather hard to come by given that China, Russia, India, and Brazil were seen as basket cases, and things hadn't improved much by 2009 when the Western world had circled the economic wagons following the Global Financial Crisis in 2009, so the BRICs were, at first, ranking barely above, say, MERCOSUR on anybody's radar.

In 2010 after intense lobbying from South Africa's president at the time, Jacob Zuma, and a tour-de-force combination of hosting the World Cup and sharing copious amounts of South African wine at the country's pavillion at Expo 2010 Shanghai (also known as the World's Fair, at which I was an observer and minor participant in, once even strolling down the pavillion boulevard with Zuma and a top Chinese Politburo member, but that's another story, tsamina mina, eh eh, waka waka eh eh ! ).

The end result was that South Africa was added to the roster of emerging market besties, making BRICs (small 's') into the "BRICS" it is today.

A positive take on BRICS is that it is one part China's own multi-continental version of the above-mentioned MERCOSUR, the South American trading bloc, and another part like the OECD, the collection of 38 countries today (that started as 30 Western and European countries in the 1960s) which acts mainly as a political organization designed to align economic development among member nations, thereby creating a common path to prosperity.

So, then, BRICS is meant to be a trading bloc, an economic development organization, as well as an institution for enabling higher-level diplomacy as a group, even while it is serving China's own need to be seen as a global player with a club of its own, establishing it in the same role as the US was post-WWII when many of today's current international organizations were created.

Less charitably, BRICS symbolizes the flow of natural resources (from Brazil, South Africa, and Russia) to China, and then finished goods from China back to all of them as well as to the rest of the world. Those natural resources are things such as Brazilian iron ore, South African precious metals, and Russian oil and gas.

What about India, what does China buy from them, you might ask? The short answer is China would frankly rather not have India in the organization at all, competing as it eventually will for more and more of the resources China itself needs and, what's more, is surpassing China demographically, giving India a younger, larger and cheaper workforce and thereby making it a more attractive place to put manufacturing facilities.

That's not even mentioning India becoming a market just as large as China's in terms of domestic consumption. You have to blame Jim O'Neill, the Goldman Sachs banker, for including India because you can't spell BRIC without "I" and evidently he wasn't thinking about the Galwan Valley and the Line of Actual Control when he had his MBA interns write his PowerPoint slides.

All that is to say, the BRICS started off as a kind of club-of-their-own for demonstrating China's global diplomacy, morphed into a Chinese-led resource-extraction-and-utilization cartel, and now, in recent weeks it would seem, has taken up the banner of the need for a new global currency to end the dollar's dominance.

But has that last part only just started? Well, no, in fact, it has been around for a while. How long?

If one goes back to August 2022 at the annual summit of the BRICS nations, Russian President Vladimir Putin said that “The matter of creating the international reserve currency based on the basket of currencies of our countries is under review... We are ready to openly work with all fair partners." So this seems to have been a proposal for the creation of a kind of SDR - a Special Drawing Right - that would be backed by the currencies of all the BRICS nations, and hopefully used amongst them and others who fall under the 'fair partners' category, such as Turkey, Egypt, and Saudi Arabia.

It's debatable whether an SDR is an actual currency however, it's more of a financial instrument akin to a derivative. The concept is used already by the International Monetary Fund to handle, among other things, bailout loans to flailing nations such as Argentina so that the repayability of the loans is not tied to the rising value of any one particular country's currency. Other than that, SDRs don't get used all that often and it's unlikely a BRICS SDR would be used much outside of the zone.

But wait! It turns out that 2022 was not the first time the BRICS had announced the need for a new global reserve currency. In fact they appear to have first done so all the way back in 2009, at the annual BRIC summit, where then-Russian-President Dimitry Medvedev said that the current international reserve system was not performing its function, and that "a new supranational currency was in the making." According to Reuters , member states were tasked with looking into the creation of a new currency at their own central banks. Sounds familiar to what was announced in 2022. History may not repeat itself but it often rhymes, as the old saying attributed to Mark Twain goes.

Back to the BRICS currency as described in the flurry of articles in early April 2023, it seems this most recent news came about for two reasons.

One, that there was a Russian lawmaker Alexander Babakov who apparently stated that, based on an as-yet-unconfirmed report, progress was being made on a new reserve currency possibly backed not by a basket of basket-cases' currencies, but by actual gold, oil, and other commodities which the BRICS have in abundance.

And two, that this new reserve currency would be a topic of conversation at ... the annual BRICS summit to be held in August 2023, just like it was at the last annual summit in 2022, and at the annual summits possibly going all the way bacck to 2009. Some might call this a pipedream but new supranational currencies designed to supplant the dominance of the US dollar and remake the global reserve system do take time, it would seem.

A third but less-cited reason this was indeed newsworthy was that it was going to be a digital currency, similar in concept to something called a CBDC - a Central Bank Digital Currency.

These CBDCs are in vogue at the moment, given the current state of global financial affairs (i.e., high post-coronavirus inflation and interest rates, banking failures such as Silicon Valley Bank and Credit Suisse and so on) and the growing political movement against "TradCrypto" -- Bitcoin, Ethereum and other blockchain networks as well as more general corporate and other malfeasance such as the collapse of crypto exchange FTX and numerous DeFi scams and NFT rugpulls.

One part of this attack comes from US politicians such as Elizabeth Warren who are facing re-election in 2024 and need an issue to latch onto that is sure to drive voter anger. For her, crypto fits that bill nicely and she has already had several opportunities to air her views in congressional hearings and the like.

The other part of the attack, which some are calling Operation Chokepoint 2.0 (more on that in a separate article), is from the US financial regulators, including the Securities and Exchange Commission (SEC) and the Commodities and Futures Trade Commission (CFTC), carrying out a legal assault against crypto trading exchanges such as Coinbase and Binance.

So far we've talked a lot about BRICS and their planned common currency, which is now being touted as a kind of solution using a CBDC, but more fundamental questions remain. Among them:

• Which of the five BRICS' central banks is going to ultimately control the BRICS' CBDC, if it actually gets created? Will it be the Chinese, who have the tech infrastructure and who have been pushing for the overall idea of de-dollarization longer than just about anybody, so they get to claim dibs? Or the Russians, who have been the most vocal about making it happen since 2009? Or will it be all the countries managing it together? Unlike the European Union, BRICS is not (yet?) a monetary union and it's hard to say at this point it ever could be given that it would require each country to give up its own monetary authority and China, at least, would never agree to such a stipulation.
• Who will actually use the CBDC? Is it meant to be a settlement currency similar to the SDR in which the member-states settle their balances of trade, in which case it is similar to the IMF's SDRs? Will such use be open to other countries who are not BRICS members but still have a balance of trade with member nations? Or is it to be a circulating currency, which companies and consumers in any of those countries can use alongside of national currencies in parallel? Will we one day all use BRICSbucks on our mobile phones from anywhere in the world?

Nor have obvious problems been addressed, the biggest of which being the potential for neo-Mercantilism given that China is buying all the resources relatively cheaply, and then selling relatively more expensive finished goods back. This will result in China accumulating more and more of the BRICS currency which, if it indeed becomes gold- and commodities-backed, will ultimately make China into Scrooge McDuck with the other four nations looking on in bewilderment at the loss of their national endowments.

Many other problems will exist, not the least of which, would other nations even trust a new global currency created in part by Russia? Sure, many nations are willing to buy Russian oil cheap during the Ukraine war, but will they want to share a currency with it?

In conclusion it seems to me that while we can see that the BRICS call for a new currency is not itself new, it's been part of a policy of China and Russia for almost two decades. In that sense, rumors of the dollars demise this week have been greatly exaggerated. But is this the end of the story? I think not, and I see a far bigger trend taking shape that does see the dollar begin to decline. Part II and III of this series will look at additional aspects of this debate, and illustrate how it may in fact be part of an orchestrated strategy of national competitiveness. Will de-dollarization succeed? Should it succeed? These are also important questions which we will address.

I could say more now, but I think it's good to let you the reader think on the questions above yourself, and become part of the conversation, either in the comments below or add me on Twitter @jasoninch

[This post was not written with the aid of ChatGPT]

#usd #brics #china #sdr #currency

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Post-script:

It's been a while since I have written on LinkedIn, or any platform for that matter, and I'm about to opine on some of the biggest economic, technological, and political stories of the past few months (and as we'll see, years) in a series I'm thinking of calling How the New World Order Works. Let me know what you think of that working title, I'll grant it is maybe a little too "conspiracy theory" in tone but it captures the zeitgeist I have been observing for the past two decades.

The origin of that name comes from the fact that I'm a big fan of Noam Chomsky, and How the World Works is the title of a 2011 anthology of four of his classic works. But that wasn't my first brush with HtWW. For that I have to go back to the mid-1990s and the early news and commentary website Salon.com, where writer Andrew Leonard published one of the first of what would later come to be called "blogs."

While everyone today is familiar with blogs (and they are somewhat dated in the time of Twitter threads and Substack subscriptions) back in 1996 blogs were an innovative communications medium which we didn't even have a word for other than a weekly journal, or rants by Andy Rooney of 60 Minutes, or regular columnists such as the New York Times' Thomas Friedman.

Leonard, on the other hand, wrote "online" about important trends concerning US domestic and international affairs and, more broadly, the United States' place in the world, and global affairs in general. His writing made use of angles including technological, demographic, cultural, and political influences on those things. He wrote in an editorial, opinionated way while providing links to sources and further reading. Naturally, then, he called his blog How the World Works.

I loved the conversational style of writing, I became hooked on wonky economic ideas that I'd never been taught in school. And what's more, I'd even credit him with reawakening my interest in China's role in the world, an interest which had waned after I'd completed a degree in Pacific Asian Studies and had no idea what to do with it once Japan's economic bubble collapsed and, later, the entirety of Asia collapsed during the Asian Financial Crisis of 1998. He revived my curiosity by covering early examples of China's outward ambitions. I learned later that Leonard's own early career had brought him to Taiwan, so his writing was also grounded in the experience living abroad and Asia-centric, somewhat like my own early career.

His picture of the world encompassed all of those varied inputs, and his meandering posts were not constrainted by the amount of words that could fit in a column. The expansion of his arguments down various tangents and then back again would lead him and the reader to interesting and exciting ideas. For more about Andrew's writing and his blog in particular, read his essay about how and why he created How the World Works .

For that series, which lasted about six years, I am eternally grateful. It changed my life in so many ways. Thank you, Andrew.