Commentary
The BRICS summit in its 16th year just concluded, with the agreement on a 32-page declaration. It is stuffed full of unobjectionable language about human rights, justice, freedom, equality, access, fairness, and you can list every other word in the dictionary of vagaries readily at hand for every political committee.
It commits to every vaunted and fashionable goal from openness to reciprocity to sustainability to climate change management and non-discrimination. It affirms fealty to every fashionable global institution: WTO, WHO, IMF, U.N., and so forth.
One word that does not appear in the document: dollar.
And yet that one word is the primary reason for the document, the summit, and the organization consisting mainly of Russia, China, Brazil, India, South Africa, and many other allied nations. The goal is clear. In the near term, this group is attempting a currency and trade union to protect itself from sanctions and political interventions from the United States and NATO countries.
In the long term, the goal is the creation of a world governed by multipolarity with other options besides U.S. dollar settlement. In short, BRICS is preparing to unseat the U.S. dollar and Petrodollar as the world reserve currency, and, in so doing, dial back power relations born after the end of the Cold War with the United States as dominant on the world stage.
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10/14/2024
What do they propose as the replacement for the dollar? They do not say but observers have noted that the likely replacements will be local currencies, a basket of other currencies, cryptocurrency, and even possibly gold. What matters is not the alternative but the target, which is the dollar itself. On this, all BRICS member states agree: it must be dethroned.
There is no chance of success anytime soon but the storm clouds for U.S. dollar hegemony are gathering. The push gained tremendous strength after the United States froze Russia’s foreign holdings of U.S.-dollar assets in response to Putin’s move against Ukraine. The policy choice here was extremely dangerous for the dollar’s credibility as a neutral settlement mechanism.
As the world reserve currency, the dollar is supposed to serve a purely economic function and otherwise be politically neutral. For the most part, that has been true. With this action, the United States announced not just to Russia but to the whole world that dependence on the dollar comes with political risks. Noncompliance could be met with asset seizure.
At that point, a large swath of the globe set out to firm up options.
“Taking a longer view, over the last two decades, the fact that the value of the U.S. dollar has been broadly unchanged, while the U.S. dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the dollar.”
The IMF offers evidence of the dollar’s use in foreign exchange, which becomes obvious once you adjust for exchange rates and interest rates. The dollar has risen in value even as it is used less in foreign exchange.
The U.S. dollar has been the world-reserve currency since just before the end of World War II. The 1944 Bretton Woods agreement is what codified the system for the postwar world.
The concern from economists at the time was based on sound theory from the 19th century. A strong and dominant currency would make exports expensive and imports cheap, which over time could invite mercenary behavior from other nations and deplete productive sectors in the dominant host country, namely the United States.
That concern was hardly pressing at the time. Plus, it was alleviated by the observation that the system set up not a global dollar standard as such but a gold exchange standard with a fixed price between the dollar and gold of $35 an ounce. Nations would settle their accounts in gold, which means that domestic prices in all nations would adjust for inflows and outflows of the base metal. This would lead to a balance of trade in which no country would enjoy permanent advantages or disadvantages.
That sounded good in theory but there were warnings along the way. Some critics observed that if outflows from the United States became high, the United States would face deflationary price pressure at home. While that might help solve the trade balance issue, it would create other problems for government financing and profitability generally. This observation stemmed from experience a decade earlier during the Great Depression: FDR had already devalued in 1933 as a way of dealing with growing insolvency.
Lacking other ideas, the so-called Bretton Woods system was adopted anyway, and called a gold standard even though no citizen in any country could exchange paper currency for gold. Domestic convertibility, the normal guarantee of quality only two generations earlier, was completely gone. Now only nations, meaning governments and their central banks, would ship gold as a method of final settlement. For a very long time, gold ownership for anything but industrial use or jewelry was illegal.
The system began to break down when the United States adopted extreme government spending in the 1960s, building welfare and warfare at the same time, and in need of financing to make it all possible. Meanwhile, gold outflows were increasing constantly, exactly as predicted. In 1971, Richard Nixon pulled the plug on the system and shut the gold window. His actions forced the United States on a pure paper standard, ending all protections against inflation along the way.
At last the discretion of the Federal Reserve became the only check on monetary and fiscal profligacy and the race to inflate began. Not even a decade later, the United States faced a terrible inflation, and we’ve bounced from crisis to crisis ever since. Meanwhile, the United States had been tasked with providing liquidity to the entire world with the needs of settling trade flows entirely deleted from the equation of international exchange.
What followed next is extremely obvious and the causes just as apparent. The paper U.S. dollar became the reserve asset of world central banks that funded their domestic manufacturing using U.S. assets for collateral. U.S. industries were depleted one by one while the rest of the world industrialized. The United States experienced unrelenting inflation and business cycle bouts even as its industrial base was hammered at every turn.
This is an expected result of U.S. dollar dominance abroad and a reckless paper-money expansion at home. Following the last four years of price increases due to monetary expansion during the pandemic years, the dollar has lost at least 20 percent of value and probably more, with estimates at 40 percent and more.
The picture becomes even more grim when you compare the value of the domestic dollar with its value at the founding of the Federal Reserve in 1913. The dollar’s purchasing power back then has been reduced to 3.1 cents.
(Data: Federal Reserve Economic Data (FRED), St. Louis Fed; Chart: Jeffrey A. Tucker)
Now you see why the expression “Penny for your thoughts” once meant something. Back in 1913, that was today’s equivalent of today’s 30 cents. We used to have Five and Dime stores that sold everything. Now pennies and nickels are mostly tossed. The Dollar Store has become the de facto Dollar Fifty Store. Everyone knows it.
The value of the dollar relative to other international currencies is a different subject entirely. Here the dollar is still the dominant currency. It has lost some standing but not enough to threaten its status. Today everyone running for office and all managers of the U.S. financial empire swear that they will insist on maintaining the dollar as the world reserve currency, even as we hear pledges to rebuild the manufacturing base. The two goals are in tension.
I will close with a heretical thought but hear me out. The United States should stop defending the dollar as the world reserve currency and start defending the dollar as a domestic store of value. This puts Americans first and asks the rest of the world to find its own source of liquidity. If that means using the dollar, fine; if it is something else, fine. The United States should not care either way.
Great advantages would accrue to U.S. manufacturing and export industries upon the loss of the obligation to maintain a currency for the globe. Our exports would be competitive again and foreign-based manufacturers would find themselves with disadvantages they have so far been able to avoid. Yes, with a sound money policy, the United States would face deflationary pressure but rising purchasing power would be welcome in light of all that we’ve endured.
It’s a simple matter of economic logic at this point: the United States cannot rebuild a competitive manufacturing base while, at the same time, forever defending the dollar on the international stage against all comers.
Would that delight BRICS nations? I do not know, nor do I think anyone should care. It’s time to establish sound money for Americans. We deserve that much after this grueling inflation that has so harmed U.S. citizens while leaving so many other nations untouched and even at a continuing trade advantage.
At this point, the United States has a choice: continue to be the money printer for the globe or defend the standard of living of the American middle class. The latter is a better choice.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
