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BRICS to introduce gold-backed currency in August, heralding end of dollar hegemony


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Okay, everything in the thread title after the comma is a total exaggeration, and this is coming from a fairly unsavory source (the news desk at RT, Russia's state-supported tv channel) but this could still be a fairly significant development if true.

 

Yes, the BRICS countries have been advertising for awhile that they were going to float a new common currency for them to use amongst each other for international trade, but up until now the bets were all on it being similar to the Euro--i.e., having nothing backing it except a political agreement.

 

Having it backed by their gold reserves, on the other hand, would give it a level of seriousness and economic heft that it wouldn't have if the BRICS were just getting together to sign Maastricht 2.0.  That's because there hasn't really been a significant multinational trading currency backed by gold since, um...the dollar under Bretton Woods.

 

So I'd actually say that the chance for something like this to change the global monetary order is fairly non-trivial if the BRICS can effectively defend the gold peg.

 

And therein lies the big question.  Having your currency backed by gold reserves means that running a balance of payments deficit essentially bleeds those reserves into surplus countries.  You have to actually achieve a decent level of economic integration to get the arrangement to work, and you have to be very disciplined with your trade balances; if you're not, and you run deficits against countries outside the regional bloc, all your gold ends up in the hands of foreign powers.  And if you have unbalanced trade inside the currency area, you wind up with all the gold in the hands of a single internal super-creditor, which leads to political dysfunction. (ask Germany what that dysfunction looks like, it knows a lot about it)

 

I definitely think it could happen, but...when I look at the BRICS economies, what I see doesn't exactly scream 'balance' and 'discipline'.

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11 minutes ago, Air_Delivery said:

Would they even have enough gold reserves to do this?

Russia- 2327 tons

China- 2068 tons

Brazil- 130 tons

India- 795 tons

South Africa- 125 tons

In comparison United States has 8,133 tons

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41 countries have applied for BRICS-membership

The other countries with large amounts of gold are which I don't believe will be joining are.

Germany- 3355 tons

Italy- 2452 tons

France- 2437 tons

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3 minutes ago, Remarkableriots said:

Russia- 2327 tons

China- 2068 tons

Brazil- 130 tons

India- 795 tons

South Africa- 125 tons

In comparison United States has 8,133 tons

The other countries with large amounts of gold are which I don't believe will be joining are.

Germany- 3355 tons

Italy- 2452 tons

France- 2437 tons

Thats still chump change as far as far as mult state currancies go. The total amouthe between the 5 core countries is worth about 336 B. By comparison the US has  2.347T in circulation and the Eurozone has  1.54 trillion euros.

 

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7 hours ago, Air_Delivery said:

Thats still chump change as far as far as mult state currancies go. The total amouthe between the 5 core countries is worth about 336 B. By comparison the US has  2.347T in circulation and the Eurozone has  1.54 trillion euros.

 

5,445 tons of gold would be worth around 304 B.

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23 hours ago, mclumber1 said:

Would you be able to base a currency on more than just one precious metal?  Like, a mix of platinum, silver, gold, etc.?  

Yes, and this has been tried before.  There is lots of debate on why it is or is not possible to sustain in the long term.  By the 20th century the consensus amongst economists was that it would inevitably collapse due to Gresham's Law.  But the consensus amongst economists has a history of being very, very wrong.  I personally think it could work, and maybe work even better than a gold standard, but you'd need to have a very adept financial and fiscal authority to manage it.

 

16 hours ago, Uaarkson said:

How exactly does this “herald the end of dollar hegemony” lmao?

Dude, it's a thread about a BRICS currency, how else am I supposed to get people other than econ nerds to click on it?

 

Anyway, the idea is that once there is a currency other than the dollar out there that a critical mass of countries choose to save in and use to settle trade balances between themselves, they will stop buying treasury bills to finance international trade, and as their primary form of savings.  Then when the US wants to buy something from, say, China, the BRICS bank could say "sorry, we don't take dollars anymore, you gotta pay in our currency."  This would reduce US hegemony in other ways, most acutely by preventing the US from using its balance of payments deficits to to finance its spending abroad (i.e., its war spending), forcing it to reduce its political and military reach.

 

I'm sure the question that immediately comes to mind is "Wasn't the euro supposed to do that?  Why hasn't it?"  And the short answer is that it actually did--EU countries have significantly reduced their US treasury holdings since the introduction of the euro.  The problem is that A.) the artificial constraints put on the Euro by its rather neoliberal engineers has prevented it from being flexible enough to sufficiently expand its supply to a degree that it can finance the entirety of the Euro area's savings and international trade without relying on dollars, B.) the fact that it rests solely on a political agreement, rather than any 'real' source of monetary power, has prevented its wider adoption abroad, and so reduced its capacity to break free of the fully global dollar system. Also, C.) the US has so far effectively offset the fall in demand for treasuries by Europe by getting countries like Japan and other American allies in East Asia to buy them in increasingly massive amounts.  They do this largely because they want to have huge holdings of dollars so they can intervene in financial markets to stabilize exchange rates, not only during times of crisis but in boom times, when increased imports would threaten to depreciate their currencies unless they sell reserves against the dollar.

 

But that's not sustainable, as the East Asian financial crisis showed.  And that's part of the idea here for the BRICS--if they can trade in common currency backed by gold, they can use gold reserves to stabilize their exchange rates rather than dollars.  That would dislodge the US as the center of financial activity for their economies, and end the leverage the US has over them, and any consequent ability to push them around politically minus costly military intervention.

 

Like I said--nice idea, but as others have already pointed out, politically and financially integrating the BRICS into a cohesive bloc that can operate independently of American finance is a tall order given the pretty large differences between many of their economies.  Plus you need international financial institutions to back you up, otherwise you'll be bullied back into dollar submission by the IMF and the World Bank.  I think the BRICS New Development Bank is an attempt to create an IMF/World Bank rival for this purpose.  Again...lovely concept, but a tall order.  As tall as the American military-industrial complex it'll be combatting.   

 

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Currency’s pegged to pieces of metal are more real, man!1

 

When a fiction is believed widely enough, it can have the same effect as truth.  But the underlying non-fictional truth tends to re-exert itself over time.

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