The BRICS block of nations has revealed that they are working on a common currency for mutual trade, and to ditch the Dollar. Although the development has caused a stir among many, the actual practice of moving away from the Dollar might be more complicated than anticipated. To better understand why de-dollarization is more complex than it seems, we should first understand how the Dollar maintains its international standard.
After the two destructive world wars, the United Kingdom substantially depleted its gold reserves. The U.S. being a major arms supplier, gained almost three-fourths of the global gold supply. No other country had enough gold to back it. The 1944 Bretton Woods Agreement established the U.S. dollar as the primary reserve currency in the world.
Although all ties with the gold standard were broken in the 70s, the U.S. Dollar continues to be the global standard currency. President Richard Nixon famously established what is known as the Petro-Dollar. In 1971, U.S. stagflation caused many runs on the dollar. Several countries wanted to exchange their U.S. Dollars for gold. President Nixon took the dollar off the gold standard in order to save the country’s remaining gold reserves. However, with BRICS working on a common currency, many believe it could mean the end of the Dollar’s dominance.
Will the BRICS currency replace the Dollar?
The U.S. Dollar represented over 80% of global forex transactions and over 50% of global trades. Even if the BRICS nations decide to use their own currency, it would need to replace an entire well-oiled system that has evolved over the last 50 years.
According to Alfonso Peccatiello, The Macro Compass Founder & CEO, competitors could not alter the Dollar’s dominance because,
“Well, it’s because being the U.S. Dollar seems fun and an ”exorbitant privilege” from the outside.”
This might be hard to swallow for some as “fun” isn’t something many would call being chained to the Dollar. Every time the United States prints more money, other countries around the world suffer, as the value of the dollar degrades.
However, the U.S. Dollar is also a very liquid asset which makes it attractive for investors. For the BRICS countries to replace the Dollar, they too would need to address liquidity concerns.
Additionally, Peccatiello stated that “Entities outside the U.S. have accumulated $12 trn (trillion) of USD-denominated debt.” To break the Dollar’s dominance, this $12 trillion debt system would need to be deleveraged. Nonetheless, Peccatiello mentioned that,
“A true de-dollarization of our system can and will happen over time, but it won’t be orderly.”