Till debt do us part

For the last 500 years, a new dominant currency – or reserve currency – has emerged in Europe roughly every hundred years. During the colonial era, Portugal, Holland, France and England all had their turn. The change from one dominant currency to the next was typically accompanied by wars and social upheaval.

For much of the 20th century, the US dollar was the world’s dominant currency. History suggests that the dollar is approaching the end of its natural cycle. This time the challenge comes from Asia. China is leading an effort to develop a parallel monetary system that will split the global financial system.

China has powerful allies. The BRICS countries, Brazil, Russia, India, China and South Africa, represent 41% of the global population. The so-called “de-dollarization coalition” has started using currency swaps to bypass the dollar system. The next step could be a BRICS settlement currency based on a basket of the currencies of participating countries.

The de-dollarization trend is not limited to BRICS. Countries in Africa, Latin and Central America, and the Middle East are likely participants. Saudi Arabia has indicated it may join the BRICS coalition.

Fifty years ago, the Saudis partnered with the US to create the petrodollar. This time they could be instrumental in creating a petro-BRICS currency. Other OPEC nations are likely to follow, which could lead to a repricing of the $7 trillion oil market.

Despite decades of warnings about global warming and the investment of billions of dollars in green technology, the global addiction to fossil fuels continues. Oil got its moniker of “black gold” for good reasons. The wealth of a country is directly related to the amount of oil it consumes.

A 42-US-gallon (159-liter) barrel of oil that typically sells for less than $100 compresses the energy equivalent of 25,000 man-hours of labor. That is the equivalent of 12 people working an entire year before the Industrial Revolution. Virtually the entire global supply chain relies on diesel fuel.

BRICS brings together the world’s largest importers of energy, China and India, with the world’s largest producers of energy, Russia and Saudi Arabia. If candidate members were added, BRICS would dominate not only the global oil market but numerous other commodities such as wheat, fertilizer, industrial metals, uranium and gold.
BRICS nations have several reasons for reducing their reliance on the dollar system. As long as oil is traded in dollars, the US is a virtual toll booth for the global oil market – and most other commodities. Moreover, the US has enormous sway over the global economy.

When the US Federal Reserve raises interest rates, the dollar appreciates against the currencies of other countries, making the import of oil and other essentials more expensive. Similarly, countries and companies with dollar-denominated loans pay more in their own currency to service their debt.

BRICS countries are also concerned about the decreasing value of the dollar. The 2008 financial crisis and the 2020 Covid crisis led to massive money-printing that added trillions to US debt. Since 1971, when the US decoupled the dollar from gold, the value of the dollar has decreased by some 70%.
BRICS nations are increasingly using currency swaps to bypass the dollar system. Details are sketchy, but the next phase could be the introduction of a payment system based on a basket of currencies.

The weight of each currency would be proportional to the GDP of participating countries, their share in international trade, population, territory, natural resources, and various commodities, including gold.
The BRICS nations have been tight-lipped about the architecture of the new system, but China’s central bank digital currency (CBDC) could be a model.
No gold, no oil

If the BRICS currency expanded to countries of the partially overlapping Eurasian Economic Union (EAEU) and the Shanghai Cooperation Association (SCO), it would include more than half of the global population as well as the lion’s share of the world’s commodities. It could lead to oil, commodities, and gold being repriced in the BRICS currency.

But the priority for BRICS nations is to put in place a parallel international payment system. It would better insulate the participating countries from Western sanctions, and it could serve as a backup for the worst-case scenario: the implosion of the global dollar system burdened by an unsustainable debt of $300 trillion, most of it denominated in dollars and currencies of other Group of Seven nations.

Before the Ukraine crisis, Europe was well placed to become an economic partner of the BRICS bloc. The European leadership eliminated that possibility when it inexplicably cut itself off from Russian energy even before securing alternative resources.

By losing access to Russia’s enormous resources, the European Union virtually assures a drastic reduction in European standards of living. Germany put its business model and economic miracle (economic miracle) at risk – and with it the broader European economy.
Macroeconomist Luke Gromen, struggling to find an explanation for the self-destructive European policy, surmised last month that “the leadership of Europe has been compromised in some way that they are acting against the interest of Europe.”

Another explanation could be that the self-absorbed EU leadership has little understanding of macroeconomics. The EU will be squeezed between Eurasia and North America and may not survive in its current form.
Macroeconomist Jan Nieuwenhuis believes that over-indebted countries have six options to address the debt crisis: economic growth, default, higher taxes, austerity, debt relief, and inflation. The last of these six is now running rampant and threatening the living standards and pensions of millions of people and could lead to social unrest.

“When people on lower incomes can’t make ends meet, they tend to revolt,” says Nieuwenhuis. “Social instability leads to political instability, which leads to monetary instability, which leads to more social instability. In many countries, like the United States, we can already observe this doom loop.”

Central bankers are now openly talking about revaluing their gold holdings to backstop their balance sheets, and thereby their currencies. Gold on the balance sheets of most central banks is valued at $35 per ounce, the same as the official price in 1971 when the US decoupled the dollar from gold. The current price of $1,800 reflects the depreciation of the dollar over the past 50 years.
Precious-metals traders in London report that gold purchases by central banks are accelerating. In the third quarter of this year, they bought 400 metric tons of gold, the largest amount in a single quarter since 1967. Commercial banks and institutional investors also increased their gold holdings.

Gold is not an investment that produces a yield, but rather an insurance policy against depreciating or collapsing currencies. Gold buyers fear the current financial system will freeze up, and that a monetary reset will follow. They expect gold to replace the dollar as the benchmark for this reset.

In much of the world, gold has historically been regarded as a store of value in times of crisis. It has always retained this status in Asia – and among bankers. When a borrower offers to provide a bank with a kilogram of gold or a kilo of silver as collateral for a loan, the banker will take the gold.


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