2023-08-27 06:03:58
The summit of the so-called BRICS (Brazil, Russia, India, China and South Africa) has closed with the invitation to join the group extended to the Emirates, Egypt, Iran, Saudi Arabia, Argentina and Ethiopia.
The summit has generated a slew of headlines about the impact of this extended group of nations, including speculation about the end of the dollar as a reserve currency and that this group of nations is perceived as a threat to the United States and even the Fund. International Monetary.
Several things should be clarified. Many political analysts believe that China lends, invests or supports for nothing. China is a great economic power but has no interest in being a global reserve currency. Its currency is not used in only 5% of global transactions, according to the Bank Of International Settlements.
China and Russia have capital controls. You cannot be a global reserve currency without free movement of capital. It takes more than solid gold reserves to have a stable fiat currency. It is essential to guarantee economic freedom, investment and legal security and the free movement of capital, in addition to having an open, transparent and diversified financial system.
China and Russia are much more demanding and rigorous lenders than many politicians think, who assume that getting into a club with China and Russia is going to be some kind of free money panacea.
Loss of value
Another problem with creating a BRICS currency is that, not surprisingly, neither China nor Russia have the slightest intention of losing their national currency in order to dilute it alongside a group of issuers that have not had a particularly positive record of control their monetary imbalances. In the last ten years, the currencies of the BRICS countries have depreciated massively against the dollar due to their monetary excesses as well as their lack of global demand. The Argentine peso has fallen 98%, the Egyptian pound 78%, the Indian rupee 35%, the Ethiopian birr 68%, the Brazilian real 55%, according to Bloomberg, and the Iranian rial has plunged 90%. % according to The Economist. Uniting weak currencies does not create a strong currency. We cannot forget that the performance of the Russian ruble (-68% against the dollar) in the last decade has also been poor despite having a relatively prudent central bank. The best currency against the dollar in the last 10 years of all the BRICs is the Chinese yuan, with a depreciation of 14%.
For a fiat currency to be stable, the issuer needs to defend the currency as a store of value, generally accepted method of payment (not tax, mind you) and unit of measure. Freedom of capital and independent institutions are needed to provide legal certainty to domestic and international investors. Having a military power does not guarantee a currency accepted as a store of value, as demonstrated by the disastrous Soviet kopeck despite the influence of the USSR in half the world.
The success of the US Federal Reserve
Furthermore, China does not have the slightest interest in assuming all the challenges that being a global reserve currency requires, and which begin with having a financial and monetary system with a high level of independence from political power. Many analysts are unaware, due to ideological obsession, that what has made the Federal Reserve a success as the world’s central bank is that it is not one of total control and public management. We’re not going to say it’s completely independent, but it’s as independent as a fiat currency central bank can be.
Uniting countries with governments that defend monetizing public spending without control and massively increasing monetary imbalances cannot create a stable currency unless what was done with the euro occurs, which the country -Germany- with the most prudent and responsible fiscal policy dictate the main lines of the monetary and fiscal norms of others. Unfortunately, the Eurozone and the ECB, by trying to play the US and the Federal Reserve, but without their investment security and economic freedom, have lost their chances of being a true alternative to the dollar. And that the euro is the greatest monetary success in post-Bretton Woods history, let’s not detract from it.
What currency do I want my savings in?
In the end, the question that the citizens of the BRICS countries are going to ask is the same one that they have been asking for decades: In what currency do you want to have your savings and salary?
The BRICS alternative starts from a significant Achilles heel. China and Russia are going to have significant difficulties imposing fiscal and monetary policy on their partners. Let’s not forget that several of these partners have come together thinking that from now on they will be able to continue printing money and spending without control, but their monetary imbalances are going to be distributed to others.
The euro has been a success because liberal democracies with independent institutions and broad economic freedom and legal certainty agreed to adjust their policies for the common good, a solid currency that would avoid the debacle created by the inflationary spirals that were the norm in Europe historically when governments they dedicated themselves to passing their imbalances to the salaries and savings of citizens via monetary destruction. Now demand those commitments from a group of countries that unite totalitarian regimes and governments delighted with extractive and inflationary fiscal policies.
China, however, can increase its control over all of these countries by maintaining a tight monetary policy and fiscal austerity. It is the great lender, but it is not the Germany of the euro willing to absorb the excesses of others in exchange for a common project. China is going to increase its control over the countries of the group, but it is not going to endanger the stability and security of its huge population so that others come and sink the currency. The Chinese government sees how the euro loses its monetary rigor and knows that this risk cannot be assumed with some of these new partners. Now, lend them and increase their options for internal growth in addition to accessing abundant and cheap raw materials, do not hesitate.
China, the big winner of the BRICS
China is the big winner of the BRICS summit. You know that most of your partners are going to continue triggering their imbalances and will allow you to strengthen your leadership position, but… give them a currency that they can use to trigger inflationary imbalances? I don’t believe it.
Meanwhile, in the US, the government could jeopardize the credibility of the dollar if it continues with deficits of almost two trillion dollars a year, an estimated deficit of more than 14 trillion dollars by 2030, and with a growing number of irresponsible people advising them, saying that You can create all the money you want without risk. The leadership of the dollar, the most widely used currency in the world, is generated by its fiscal credibility, independence of institutions and economic freedom. If they sink them, goodbye dollar.
The end of the dollar, if it comes, will not come from competition from another fiat currency, as the temptation for governments to destroy the purchasing power of issued currency is too strong. He’s probably coming for independent coins.
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