A new global reserve currency, under discussion among the BRICS countries, is being hailed as a ‘mortal threat’ to dollar hegemony. That’s laughable.
‘Putin and China just did the unthinkable, and the West is in big trouble.’
Thus opens a breathless piece of podcasting by an improbably spray-tanned former Fox News anchor named Clayton Morris.
He calls it ‘…a dramatic shift of the entire world economic order… absolutely groundbreaking…’.
Morris’s channel has almost a million subscribers; in only 21 hours since it dropped on Sunday evening, his video had been viewed over 370 000 times.
He says it is ‘probably the biggest story of the last 30 years, but it hardly got any news coverage at all. Does that surprise any of you? Seriously one of the most important stories of our lifetime happened this week and almost no one covered it.’
Hysteria
His conspiratorial hysteria centres on Vladimir Putin’s statement at a BRICS (Brazil, Russia, India, China, South Africa) forum on 22 June 2022, to the effect that creating an international reserve currency based on currencies of BRICS member-states was ‘under consideration’.
The Russian state-owned TASS news agency certainly covered it. So did Russia Today, which is basically the same thing, and which is one of Morris’s primary sources.
Another is a self-published article by the pseudonymous ‘Quoth The Raven’, whose blog Fringe Finance claims to offer ‘Liberty. Finance. Bullshit,’ and admits ‘I get shit wrong a lot.’
Solid story, then.
Rare-earth minerals
Redacted, the YouTube channel hosted by Morris and his wife, Natali, claims to save us from ‘media-driven falsehoods and corporate storylines’, offering instead ‘a concerted effort to save the truth, preserve information, and fight propaganda’.
He goes on to inform his viewers that this new currency ‘will be based on rare-earth minerals, guys,’ giving as examples gold, silver, uranium, nickel and copper, none of which are rare earth minerals, but all of which Morris claims to be invested in.
He goes into a riff on how the dollar, since the end of the gold standard, is ‘based on air, nothing’. This is not true, since the dollar is based on the ability of the US government to tax 330 million exceptionally wealthy and productive people.
The rest of it is a confused rant, mostly about how you should invest in uranium instead of dollars, which has exactly nothing to do with a BRICS reserve currency.
‘The new BRICS alliance is a mortal threat to the West,’ agrees macroeconomist and investment professional Philip Pilkington for Unherd. ‘Could a new trade bloc with its own reserve currency be a threat to the West and to US dollar dominance? Almost certainly.’
Well, no. Almost certainly not. The dollar sure hasn’t noticed:
Bloviating
I came across Morris’s podcast on a local WhatsApp group, with the note, ‘This is massive’.
It isn’t. It is mere bloviating on a theme that the BRICS countries have been going on about since at least 2014: that the dollar, and the multilateral finance institutions that are funded in dollars, present a threat to the emancipation and economic growth of the emerging economies of the ‘Global South’, and that the yuan, or some basket of BRICS currencies, should form a global reserve currency for the new world order in which China and its allies become the dominant economic force in the world.
The reason Putin mentioned it last month is that he isn’t allowed to play with the big boys’ dollars anymore, which makes him very cross.
BRICS
Sure, BRICS countries are trying to trade with each other using their own currencies, instead of dollars.
Sure, they have established a Contingency Reserve Agreement to mirror the International Monetary Fund (IMF), and a New Development Bank (NDB) to mirror the World Bank.
There is even some merit in that idea. The BRICS bank has provided a few billion dollars’ worth of finance denominated in recipient countries’ own currencies, but it still pales by comparison with the tens of billions the World Bank doles out every year.
By GDP, the BRICS countries are not insignificant. All of its economies are in the top 10 by purchasing power parity, except South Africa, which is a small zit on BRICS’s bum.
Together, they make up about 31.5% of the world’s economy, and account for more than a quarter of the world’s oil production, half of its iron ore, 40% of its maize, and 46% of its wheat.
Argentina, Iran, Saudi Arabia, Turkey, and Egypt are all angling for BRICS membership, which wouldn’t shift the needle much, although all of them have larger economies than South Africa does, both in nominal GDP and at purchasing power parity.
One should distinguish between a multilateral finance ‘currency’ such as SDRs and a foreign exchange reserve currency such as the dollar.
There certainly is a market for a multilateral finance currency other than the dollar, or the IMF’s Special Drawing Rights, which are based on a basket of dollars, euros, pounds, Japanese yen, and (since 2016) Chinese renminbi.
The BRICS proposal would involve a basket of renminbi, rupee, rouble, real, and rand, which at least gives it the opportunity for clever branding. R5 sounds way cooler than SDR.
But a reserve currency it isn’t.
Forex reserves
The US dollar has over the last two decades declined in its share of global foreign exchange reserves, from over 70% to under 60%. Three quarters of the swing, however, has flowed not into renminbi, but into the pound, the Swedish krona, the South Korean won, the Canadian and Australian dollars, and the Swiss franc.
Even though China is almost twice as big an exporter as the second-placed US, the yuan/renminbi (difference) only accounts for less than 3% of global foreign currency reserves, and a third of that is accounted for by Russia alone.
See, nobody wants it. Nobody wants rupees, roubles, reals or rands, either.
The reasons for that are fairly simple. The renminbi is under strict Chinese Communist Party control. Its exchange rate is fixed against a basket of foreign currencies, of which the dollar is the most heavily weighted. It is deliberately manipulated to favour Chinese exports.
The Russian rouble is volatile and very much non grata in the global financial community right now.
The Indian rupee, Brazilian real, and South Africa rand are all subject to exchange controls and are thus not freely convertible.
Sub-investment grade
What traders look for in a reserve currency is safety, convertibility, liquidity, and return.
The size of the market in US dollars, the predictability of US economic policy, the depth of that country’s capital markets, and the dollar’s convertibility make it a winner on three of those four criteria.
The BRICS currencies do offer a higher return, but that is because those countries are major credit risks. Each faces its own challenges, including socialist policies, fiscal deficits, corruption, crime, dysfunctional institutions, unmanageable debt, and political or economic instability.
On average, their investment rating is BBB-; two of the BRICS members, Brazil and South Africa, are sub-investment grade.
Nobody outside their little club of socialist and authoritarian countries is likely to use any of their currencies, or a basket of them, as a reserve currency. It would be far too risky, costly, and inconvenient.
Laughable
Putin’s statement was not very widely reported, not because of a media conspiracy or corporate plot, but because nobody cares. It wasn’t big news when the idea was first floated in 2014, and it isn’t big news now.
Nobody in their right mind (sorry, Messrs Morris and Pilkington) thinks the BRICS would be able to dethrone the US dollar as the world’s reserve currency any time in the foreseeable future.
To do so, they would first have to liberalise their economies to the same extent that Western democracies have done, and there is no risk of that happening soon.
The idea that BRICS could launch a credible rival to the dollar is simply laughable.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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