Impact of China & Russia’s New Global Reserve Currency
How will this new development impact the US Dollar and the USA?
The sanctions against Russia in the war between Russia and Ukraine (it’s really a war with NATO) has given the BRICS countries a reason to roll-out a New Global Reserve Currency.
What is BRICS?
BRICS was established in 2006 with an aim to promote peace, security, development, and cooperation globally, among other things, BRICS International Forum — which is a political organization- consists of five emerging economies — Brazil, Russia, India, China, and South Africa.
Other countries set to join BRICS are Saudi Arabia, Egypt, and Turkey (as of June 14, 2022). BRICS account for over 40% of the global population and nearly a quarter of the world’s gross domestic product (GDP) with $13.6 trillion combined and total foreign exchange reserves of $4 trillion.
The president of the BRICS, Purnima Anand, said that the countries that have shown their interest in joining BRICS are already preparing their membership application, which will cut short the accession time, but noted that she doubts all three countries will join the alliance at the same time. Previously in June 2022, Iran and Argentina officially applied for membership in the organization.
What is a Global Reserve Currency?
Since 1944, the U.S. Dollar has been the primary Global Reserve Currency used by other countries.
A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to prepare for investments, transactions, and international debt obligations, or to influence their domestic exchange rate. As a result, foreign nations closely monitor the monetary policy of the United States to ensure that the value of their reserves is not adversely affected by inflation or rising prices.
A large percentage of commodities, such as gold and oil, are priced in the reserve currency, causing other countries to hold this currency to pay for these goods. An example is the oil from OPEC (Middle East) has to be purchased with U.S. Dollars.
How the U.S. Dollar Becomes the World’s Reserve Currency?
After WWII, the U.S dollar became the global currency reserve. In 1944, following the Bretton Woods Agreement, delegates from 44 nations formally agreed to adopt the U.S. dollar as an official reserve currency. Since then, other countries pegged their exchange rates to the dollar, which was convertible to gold at the time. Because the gold-backed dollar was relatively stable, it enabled other countries to stabilize their currencies.
The gold reserves backed their currency reserves, but the United States continues to print more money than the gold backing. The increased monetary supply of dollars went beyond the backing of gold reserves, which reduced the value of the currency reserves held by foreign countries.
The Gold-to-Dollar Decoupling
As the United States continued to flood the markets with paper dollars to finance its escalating war in Vietnam and the Great Society programs, the world grew cautious and began to convert dollar reserves into gold. The run on gold was so extensive that President Nixon was compelled to step in and decouple the dollar from the gold standard, which gave way to the floating exchange rates that are in use today. Soon after, the value of gold tripled, and the dollar began its decades-long decline.
Continued Faith in the U.S. Dollar
The U.S. Dollar remains the world’s currency reserve, due primarily to the fact that countries accumulated so much of it, and that it was still the most stable and liquid form of exchange.
The euro, introduced in 1999, is the second most commonly held reserve currency in the world. According to the International Monetary Fund (IMF), which is charged with promoting global growth and trade, central banks hold more than $6.7 trillion in dollar reserves and 2.2 trillion in euros as of Q4 2019.
China and Russia Challenging the U.S. Dollar
Russia and China are strengthening their economic ties with the continual Western sanctions on Russia as a result of the war in Ukraine.
BRICS countries, including Brazil, Russia, India, China, and South Africa are officially working on their own new Global Reserve Currency,
“The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” Vladimir Putin said at the BRICS business forum last month.
Why does Russia need a New Global Reserve Currency?
Russia has been cut off from the SWIFT system, it is also pairing with China and the BRIC nations to develop reliable alternative mechanisms for international payments to cut reliance on the Western financial system.
“We are actively engaged in reorienting our trade flows and foreign economic contacts towards reliable international partners, primarily the BRICS countries,” Putin said in his opening video address to the participants of the virtual BRICS Summit.
President Vladimir Putin also said that Russia is rerouting trade to “reliable international partners” such as Brazil, India, China, and South Africa as the West attempts to sever economic ties.
In fact, “trade between Russia and the BRICS countries increased by 38% and reached $45 billion in the first three months of the year” this year, the report says. Meanwhile, Russian crude sales to China have hit record numbers during Spring of this year, edging out Saudi Arabia as China’s primary oil supplier.
“Together with BRICS partners, we are developing reliable alternative mechanisms for international settlements,” Putin said.
For example, negotiations are underway to open Indian chain stores in Russia and to increase the share of Chinese cars, equipment, and hardware on our market.”
Why does China need a New Global Reserve Currency?
China is learning from sanctions on Russia and the weakness of China’s reliance on the SWIFT system in the event of future conflicts with the West.
President Xi echoed Putin’s sentiments, according to a June writeup by Bloomberg:
“Politicizing, instrumentalizing, and weaponizing the world economy using a dominant position in the global financial system to wantonly impose sanctions would only hurt others as well as hurting oneself, leaving people around the world suffering. Those who obsess with a position of strength, expand their military alliance, and seek their own security at the expense of others will only fall into a security conundrum.”
My Opinion on the Impact of the New Global Reserve Currency
The USA is no longer a powerhouse-producing nation of products but rather outsources most of its manufacturing to countries such as China, India, Vietnam, and other cheap labor countries.
An example is when the COVID-19 Pandemic hit the USA, there was a shortage of medical supplies for hospitals and the general population. Most of the medical supplies are produced in China and other Asian countries.
China’s trade surplus with the United States was $396.58 billion for the whole of 2021 (data from China’s General Administration of Customs). This means empty metal containers are accumulating across US Ports for years with no U.S. goods to ship back to China.
The introduction of a new Global Reserve Currency by BRICS (“BRICS Currency”) will mean countries will be able to pay for goods and services with the BRICS Currency.
The impact of the USD will be huge since the USD will not be the only currency for the payment of goods and services. Since the BRICS countries make up 40% of the Global GDP, over time, up to 40% less USD may be used.
The exchange rate of the USD against other currencies is based on supply and demand. If there is less demand for the USD and there is a potential oversupply of the USD, this will lead to a lower exchange price of the USD. It would lead to even greater inflation in the USA.
“Imagine up to 40% of the USD held by central banks and countries returning to the USA. That would devalue the USD significantly.”
Nobody seems to care or notice arguably the largest shift on the global macroeconomic playing field over the last half century may be taking place. This is the biggest news story in the coming decades.
Even before the Ukraine conflict started, both China and Russia were stockpiling gold and working on denominating transactions outside of the U.S. dollar. It was another “secret” that was out there in the open.
Furthermore, Russia has made moves to strengthen cooperation with China, such as through joint bomber flights and joint warship sails involving the Russian and Chinese militaries, as well as moves to portray such military cooperation as strategic coordination.”
How does Cryptocurrencies fit into the New Global Reserve Currency?
In my opinion, cryptocurrencies will play a greater role in the New Global Reserve Currency put out by BRICS.
Cryptocurrencies such as Bitcoin, Ethereum, the Earth Dollar, and stablecoins will play a greater role globally. Cryptocurrencies act as a bridge between currencies, allowing the BRICS Currency to be exchangeable to the USD, Euro, and other local currencies. Bitcoin is already a type of Global Reserve Currency.
As the USD diminishes in value, people will look for alternative ways to hedge against inflation. Traditionally gold and silver have been the preferred safe haven, however, gold and silver is not liquid. You cannot take a bar of gold to the grocery store and exchange it for a loaf of bread or groceries.
However, cryptocurrencies are a relatively safe haven for a hedge against inflation as well and are more liquid than gold or silver.
The Earth Dollar is introducing a new asset-backed currency (backed by Real Assets including graphite, gold, silver, platinum, palladium, rhodium, real estate, and natural capital assets. The Earth Dollar has asset backing like gold and silver while having the liquidity of cryptocurrencies like Bitcoin. The Earth Dollar is a type of decentralized global reserve currency that provides a safe haven for lovers of gold and silver but is more liquid.
Expect the New Global Reserve Currency put out by BRICS to be linked heavily to cryptocurrencies.
As countries hold more of the New Global Reserve Currency put out by BRICS, this will increase the demand for bridge cryptocurrencies like Bitcoin, Ethereum, the Earth Dollar, and stablecoins. The future looks bright for crypto. Can Bitcoin reach $100,000 USD? Yes, it can but will take time.
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