The BRICS summit in Johannesburg could have far-reaching ramifications for the world of finance as the bloc expressed discontent over the preeminence of the U.S. dollar in its intra-member bilateral trade agreements.
“At the ongoing BRICS Summit in Johannesburg, a key topic that has attracted wide attention is the further development of new and complementary reserve currencies and settlement mechanisms. This suggests the global economy is slowly moving toward a post-U.S. dollar era.
At the end of March, Alexander Babakov, deputy chairman of the Duma, the lower house of the Russian parliament, said the BRICS countries were working on creating a new trade currency. Babakov expected the BRICS Summit to intensify that process.
Interestingly, this marginal comment was quickly inflated to magnificent disproportions in the West when the fact is that BRICS seeks to foster prosperity through diversified development.
Ever since then, some international observers and media outlets from The Wall Street Journal to the Financial Times have derided the idea of a BRICS currency, calling the attempt as ‘de-dollarization’. A BRICS currency, they warn, could undermine the dominance of the U.S. dollar, which they see as a nightmare of sorts.
In May — oddly, amid the U.S. banking crisis — economist Paul Krugman attributed the de-dollarization ‘brouhaha’ to crypto-cultists and Russian President Vladimir Putin's sympathizers, as if the trend was nothing but a misguided anti-U.S. melee.
Thanks to its organizational flexibility, BRICS makes taking unilateral, bilateral and multilateral measures possible. Such measures range from gradual reforms to more unilateral individual measures, which are being promoted by aspiring BRICS members and coalition partners, too, as they share the grouping's vision.
Reportedly, 23 countries have formally applied to join BRICS, while an equal number of countries has expressed the desire to become BRICS members. Countries looking to join the grouping include Saudi Arabia, Iran, the United Arab Emirates, Argentina, Indonesia, Egypt and Ethiopia. After the 1955 Bandung Conference, non-aligned countries launched a political movement. Today, BRICS is building an economic bloc.
It is the rising number of large and populous emerging economies which has made possible the kind of bottom-up network effects, which will be critical to launching the new infrastructure for the proposed complementary settlement mechanisms. These bottom-up effects are based on the choices of sovereign states. By contrast, the dollar's predominance is imposed on the rest of the world; it has nothing to do with sovereign choices.
When the dollar is weaponized by U.S. foreign policy in the name of the international community but without the latter's broad support, it puts trade invoicing and settlement, foreign corporations, and central bank reserves at risk. Hence, the recent warning by Fitch Ratings that it may be forced to downgrade dozens of U.S. banks, even the likes of JP Morgan Chase.
The Silicon Valley Bank, the Signature Bank and the First Republic Bank collapsed, and UBS took over Credit Suisse in the spring. And 200 more banks could be vulnerable to the type of risk that caused the SVB's collapse. Across the U.S., 2,315 banks, almost half of the total, have assets less than their liabilities.
Today, U.S. public debt hovers around $32.6 trillion — $2 trillion more than a year ago. Since 2008, U.S. debt as percentage of GDP has doubled, soaring to over 120 percent. According to the non-partisan Congressional Budget Office, persistently large federal deficits will push federal debt above 181 percent of GDP by 2053”. -Dan Steinbock, China Daily
While the greenback's hegemony isn’t going to erode away overnight, with more and more countries seeking to reduce reliance on the currency, BRICS and their united front against the dollar’s dominance will enable them to reshape the world’s economic landscape entirely.
In all likelihood, a multipolar currency world, where local currencies gain prominence, will emerge forth as a direct result of this recent campaign by a growing number of developing nations to diversify away from dollar-centric systems.