13/09/2023
Tides are turning: The de-dollarization speculation
Many economists believe that de-dollarization is a fairytale being told around traders’ campfires. But to understand if an alternative to the USD reserve really is on the cards, we should start by asking: Is there a good reason to create one?
It’s not hard to imagine the appeal. An independent currency, not tied to one nation’s economy or government, is an attractive proposition. Countries wishing to trade with others wouldn't need to give up valuable goods or commodities in order to receive stacks of paper that might lose their value overnight.
US Media loudly insists the dollar is a safe choice. But is it? And for whom? Not for a country that finds itself on America’s naughty list and at the mercy of White House policy – ‘mercy’ not being a quality America is famous for.
The US controls the Swift international payment system, which allows it to weaponize international monetary transfers at the push of a button. Many countries have had their economies held to ransom in this way by US sanctions over the last 50 years.
Iran, Cuba, North Korea, Russia, Venezuela, Syria, Myanmar, Zimbabwe, Sudan, and China have all at some point refused to yield to America’s interests and found themselves sanctioned. But there are other economically weak countries that have simply bowed to US pressure after being threatened with restrictions.
And of course, countries relying on and holding USD have seen their national wealth diminish as their precious commodities are passed on to the US, in return for paper of questionable value. That value has been dropping year after year as the US debt ceiling broke and expanded, with trillions of dollars printed and dispatched to balance international debt. The USD's true devaluation is undeniable, but is only felt by other nations.
The US has kept its economy afloat on debt, through a scheme of essentially borrowing money from one to pay another over and over again. But such a system cannot last forever, and our generation may be the one to see this socioeconomic house of cards collapse.
The European Union is where de-dollarization would begin
Surely the EU, that long-standing US ally, will not abandon the dollar? Despite the ‘Nixon Shock’, Europe has remained economically tied to the US for decades. But has that been a fair and amicable arrangement?
In 2008, the EU’s economy was 10% larger than the US’s. Fast forward to 2024 and US GDP is projected to be 50% larger than all of Europe’s combined, exceeding $25 trillion. Even strong and loyal allies are feeling the sharp end of the USD stick now.
The White House claims its allies are unwavering, but against its wishes, Japan has already started buying oil from Russia and France’s President Macron is rumored to be attending the next BRICS summit on 22 August.
Skeptics say that another currency cannot replace the dollar because not enough countries will adopt it, but that theory is weakening with every passing month. As of 2024, USD is forecast to be used in around 47% of international trades: but that number is already falling, even before an alternative currency is available. What then, will that number be after BRICS release a gold-backed currency?
The five BRICS countries represent a substantial 40% of the world's population. If you add the 30+ countries currently applying for BRICS membership, that rises to well over 50%. If all of these countries start to partially use BRICS currency instead of USD, the rest of the world will likely follow, purchasing some of the currency in order to trade with the 37-nation alliance. And in a domino effect, dollar foreign reserve holdings would most likely plummet.
When might we see this mythical currency?
While some sources suggest the new currency could be announced at the next BRICS Summit, others say the five nations are some way from revealing this new world order.
The rumor began several years ago, but got its first official endorsement last month when deputy chairman of Russia's State Duma (lower parliamentary assembly) Alexander Babakov told reporters that the BRICS alliance was creating a new currency backed by gold and other precious commodities.
But India’s foreign minister S. Jaishankar recently said there were no immediate plans to introduce a currency, stressing that a BRICS currency would continue to be “a matter of national concern” for India for the foreseeable future.
India's perspective is shaped by its own unique economic circumstances and geopolitical considerations, relying on trade relationships with the West and being afraid of an economic standoff with the US.
Moreover, there are historical tensions and disputes between India and China that could be influencing India's approach to the alliance. India is wary of China's power and motives, and fears that the BRICS alliance might become too China-centric.
