Sniping at the dollar

Lord O’Neill of Gatley – Terence James O’Neill, probably best known for his inventions of the acronym BRIC, which stands for Brazil, Russia, India and China – is a former Conservative Party minister in the UK and a former chief economist of Goldman Sachs. That seems like a solid capitalist pedigree. Yet O’Neill published in March a paper arguing that the Dollar is too dominant. “The US Dollar plays a far too dominant role in global finance” said O’Neill.

And the newspaper long regarded as the bastion of capitalism, the Financial Times, has floated the idea that the Dollar’s dominance may be coming to an end.

O’Neill suggests that the BRIC group (now BRICS, thanks to the addition of South Africa) should expand to develop a globally fairer multi-currency global system. He is pushing against a door which is already cracked open. And, like many economists, he optimistically overlooks possible problems resulting from his recommendation. Let’s say O’Neill is right. That still leaves open the issue of how we peacefully and smoothly get from here (Dollar dominance) to there (a harmonious multipolar currency world).

Joining O’Neill and the FT is Alexander Babakov, the deputy chairman of Russia’s state Duma (or parliament), who has now called for a new common currency between the BRICS nations, either a digital Rouble or the Rupee. “New Delhi, Beijing and Moscow… now institute a multipolar world that is endorsed by the majority of governments… Its composition should be based on inducting new monetary ties established on a strategy that does not defend the US’s Dollar or Euro, but rather forms a new currency competent of benefiting our shared objectives… Our goal should be focused on writing new rules in the financial sphere in order to enable the use of an already common currency”, said Babakov.

Trusting the US

In 1945, President F.D. Roosevelt joined the US in an alliance with Saudi Arabia. In 1971, President Richard Nixon took the US off the gold standard, which freed the US government to create more fiat currency if it desired. With no limits over how much money it could conjure up and spend, the US could indulge in unfunded expenditure and tax cuts, running up a national debt now rapidly approaching $32 trillion and which is set to explode in the next two decades. In the absence of any substantive asset such as gold, countries and citizens have been required to trust governments to have benign policies that would safeguard the value of paper money. Has that been such a success?

In 1979, Saudi Arabia and the US agreed to use US Dollars for crude oil contracts. Other countries followed suit, recycling their petrodollars through sovereign wealth funds. The growth of the Dollar into international reserve status, which followed the rise of the petrodollar, has granted the US enormous power to enforce its foreign policy. The Canadian economist Robert Mundell, winner of the Nobel Prize for Economics, remarked that “great powers have great currencies”. Control of money = power and power = control over money. In the 20th century, the US was a great power; two decades into the 21st century its greatness is under attack; therefore so is the Dollar’s position. The long authority of the US is being challenged, by Russia and China; the dominance of the Dollar is being eroded.

In 2019, Russia and China agreed to settle all their mutual trade in their respective currencies rather than the Dollar. The Ukraine war has speeded this process up. President Putin reiterated his determination to avoid the Dollar in trade recently, saying that China’s currency would be used for payments between Russia and countries of Africa, Asia and Latin America. Saudi Arabia has now said it will invoice some (how much is unknown) of its oil exports to China in Renminbi; Brazil is using China’s currency for some of its China trade and France has done a liquid natural as sale via China’s currency.

The BRICS group of nations is now drawing up plans to allow other countries to join. South Africa is the chair of the BRICS group in 2023; Naledi Pandor, South Africa’s foreign minister, said in January this year that “the world is changing in very worrying ways. Countries are searching for like-minded partners around the world. Many countries are finding that the approach of BRICS is one [in which] they would like to take part”.

Self Defense

The BRICS group has around 42% of the world’s population but less than 15% of the voting rights of the International Monetary Fund (IMF). In 2015, the group formed the New Development Bank, seen as a counterweight to the IMF. Bangladesh and the UAE joined the bank in 2021, and Egypt and Uruguay are expected to follow soon. Algeria, Argentina, Bahrain, Egypt, Iran, Indonesia, Saudi Arabia and the United Arab Emirates are also hoping to join the BRICS group. China’s rising significance in international relations was enhanced by its brokering a deal between Iran and Saudi Arabia in March, ending seven years of military and diplomatic hostility between the two.

There’s no suggestion that the Dollar is in immediate danger of being displaced from its international reserve status. The Dollar has acquired its dominance through a combination of the US being the world’s largest and most open economy, that the US enforces the rule of law, and that its financial markets are the largest, most liquid and least controlled, and that the Dollar is freely convertible. That all remains true – for now. The IMF says that the stability of an economy and its policy decisions “matter” (i.e. are vital) for a currency to gain international acceptance.

But clearly the trend is towards a multipolar currency world; the Dollar’s share of global reserves has shrunk from 72% in 1999 to 59%. The BRICS group has an appetite to grow, even though its aims are a little incoherent. One implication of Jim O’Neill’s call for the expansion of the BRICS group is that it needs to find an alternative to the Dollar for mutual trade. Perhaps Lord O’Neill will be hired by the group for his advice?

South Africa’s foreign minister is quite correct – the world is changing, has changed, in very worrying ways. Trust in the US was largely unquestioned. Until quite recently we all were happy to place our trust in the Dollar, even though it has lost more than 90% of its purchasing power since 1933. As 40% of the world is thinking about what currency could replace the Dollar we need to defend our assets against the great uncertainty that slowly but surely is headed our way. Gold has been regarded as money for aeons; today with Glint it can be used as money for everyday life.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.