BRICS and De-Dollarisation
Karsten Montag, writing in 'Multipolar', estimates a 10% loss of value of the US$ due to the introduction of an alternative by BRICS
Today, I would like to draw your attention to a quite recent piece by Karsten Montag, an engineer who also did a lot of ‘other’ work (consulting, software development). In early June 2023, he took a closer look at the looming introduction of a currency unit by the BRICS, which, unlike the US$ or the Euro, is said to be pegged to something tangible, e.g., gold or rare earths.
Source; emphases and bottom lines mine.
Dollar Will Lose 10% of its Value Due to BRICS Countries’ De-Dollarisation. Chain Reaction Looms
The plans of the BRICS countries—Brazil, Russia, India, China and South Africa—to no longer settle payments among each other in dollars and to introduce their own common currency have a deep impact on the United States. Multipolar Magazine has calculated the resulting loss in value of the dollar for various scenarios. One likely consequence: US government bonds will become unattractive as a financial investment. The threat to the US grows all the more as numerous countries want to join the BRICS group this year.
By Karsten Montag, Multipolar Magazine, 9 June 2023
The plans of the BRICS countries to break away from the global financial dominance of the US go back several years and initially began with the founding of a bank. In 2014, the New Development Bank was created as an alternative to the World Bank and IMF to support public or private projects through loans, guarantees, equity participation and other financial instruments. The founding members Brazil, Russia, India, China and South Africa own equal shares of the bank. In 2021, the United Arab Emirates, Bangladesh, Uruguay and Egypt were admitted as junior partners. Accession talks are currently being held with Saudi Arabia…
Is the postulation of the end of the dollar hegemony an overstatement?
In view of these developments, some media are speculating on a possible end of dollar hegemony. The magazine Responsible Statecraft stated in May under the headline ‘De-dollarisation: Not a question of if, but when’ that the sudden decline in dollar demand could trigger a dollar crisis ‘leading to very high inflation, or even hyperinflation, and initiate a debt and money printing cycle that could tear apart the social fabric of society’. However, the thesis was not backed up by figures.
An article on the website of the US investment bank Morgan Stanley, also from May, states quite the opposite: ‘While the dollar’s pre-eminent role in global trade and finance could diminish with time, recent fears about its demise seem overblown.’ There are indeed some figures in this text, for example on the share of the dollar, euro and yuan in payments in global trade, as well as in foreign exchange reserves. But the latter are, among other assets, funds held by central banks in foreign currencies for foreign exchange market interventions and to finance foreign trade deficits. And the share of the dollar in global trade does not give any clue about how many dollars are circulating outside the United States. Therefore, it is hard to draw conclusions about what impact the use of alternative currencies would have on the value of the dollar. For this, the bilateral trade volume of those states that turn their backs on the dollar is needed—as well as the actual amount of US dollars outside the US…
There are various approaches to estimating the importance of the dollar in global trade. For example, the dollar’s share of total currency reserves over the last 20 years was around 60%, while the euro's share was around 20%. In addition, the dollar accounted for about 88% of all transactions on the foreign exchange market over the last 20 years. This information is summarised in a document of the US central bank, Federal Reserve (Fed). The following figure is also taken from this document.
…
Various scenarios of de-dollarisation
From Figure 1 [not reproduced here] it can be derived that in 2021, the global exchange of goods was worth $22.3 trillion. The trade volume of the BRICS countries among each other amounted to 1.3 trillion dollars, which corresponds to a share of 6%.
If the BRICS accession candidates Saudi Arabia, Iran, Argentina, Mexico, the United Arab Emirates, Algeria, Egypt, Nigeria, Bahrain, Indonesia and Turkey are added, their total trade volume including BRICS countries amounts to 10% of global exchange, including all South American states, to 11%.
If all Asian states—except for classic allies of the US and Europe such as Japan, South Korea, Taiwan, Georgia and Azerbaijan—are added, trade between these countries crosses the 20% mark. If all these countries were to additionally stop exporting their goods to the rest of the world in exchange for dollars, their share of global trade would be 41%.
A similar picture emerges for global trade in services. Based on UNCTAD data, exports of services from North America, Europe, Oceania and their closest allies such as Japan, South Korea and Taiwan account for 70% of global trade in services in 2021.
The share of trade of the BRICS countries and their possible accession candidates in global trade may seem rather small at first glance. But as will be shown below, small causes can have large effects.
In order to assess the extent to which a shift away from the dollar in global trade could affect its value and what consequences this loss in value would then have for the US, the amount of dollars circulating outside the US needs to be determined. This is less trivial than one might suspect. Even the Fed, the only institution that is officially allowed to create US dollars, does not publish how many dollars are circulating outside the United States. In 2006, on the dubious grounds that this money supply, called the ‘Eurodollar’, would no longer play a role in the monetary policy process, the Fed stopped publishing it…
Eurodollar and the US foreign trade deficit—an exorbitant privilege
Tax evasion is one way US dollars enter the Eurodollar market. However, US imports are by far the largest source. American companies and consumers buy products abroad and pay for them in US dollars. However, since the United States has been running a steadily increasing annual trade deficit since the mid-1970s, a large portion of these US dollars does not return to the US.
In 2022, the US foreign trade deficit has peaked at a record high of almost one trillion dollars. Since the dollars drained from the US are needed to finance the ever-growing global trade, this creates an ‘exorbitant privilege’ for the US. The US central bank, the Fed, is literally forced to create new dollars because the money that has gone abroad is no longer available at home.
This ongoing process increases US debt, because money creation is always linked to the lowering of the base rate and money lending or the purchase of government bonds. But as long as global trade continues to grow and the US dollar continues to be used as the reserve currency for its settlement, the US need not fear bankruptcy. Because, in the end, growing global trade covers the debts of the United States. Where other countries would have long been over-indebted and bankrupt due to a decades-long foreign trade deficit, because they lack the foreign currency to buy oil, gas or other products abroad, the US can simply create the missing money supply anew. In this way, the people outside the US indirectly finance American prosperity, the subsidies of American companies and the US military—whose striking force is the ultimate guarantor of keeping this financial system up.
Estimating the volume of the Eurodollar
When the Fed stopped publishing the Eurodollar quantity in 2006, it estimated its amount at just under 430 billion US dollars. The US foreign trade deficit proves that this figure is probably too small by a factor of ten. Adding up the annual deficits of the United States, almost five trillion US dollars left the country between 1970 and 2005. By the end of 2022, this figure has risen to over 15 trillion. Various estimates show that these volumes are realistic and still even too low. In 1985, the Eurodollar market was estimated to have a net size of 1.7, and in 2016, 13.8 trillion dollars.
Another indication that the current volume of Eurodollars is more likely to be larger than 15 trillion is the ratio between the money supply M1—i.e. cash plus the amount of demand deposits, travelers checks and other checkable deposits plus most savings accounts—and the gross domestic product (GDP). In 2022, the money supply M1 in the USA was 19.8 trillion dollars, the GDP 25.5 trillion dollars, so the ratio was 78%. By comparison, in Germany the ratio of M1 money supply to GDP was 74% in 2022.
If we assume that a similar ratio exists between the money supply and the total volume of 32 trillion dollars for the settlement of global trade and that the share of US dollars in the money supply required for this is 80%, then the volume of Eurodollars in 2022 is likely to have been between 19 and 20 trillion US dollars. To simplify further calculations, a ratio between the money supply for global trade and the annual value of goods and services exchanged of 75% is assumed below…
Domino effects
If the US dollar loses value because too much of it is in circulation in relation to the goods and services exchanged, US government bonds also become unattractive [this is realistic—it happened to SVB]. What profit do annual interest rates of two to four percent bring if the dollar loses ten percent of its value in the same period? The mere abandonment of the dollar by the BRICS countries, including the accession candidates, in their bilateral trade is therefore capable of setting an avalanche rolling, at the end of which masses of US government bonds could be dumped, the credit rating of the US downgraded and the country no longer able to pay the higher interest rates if it incurs new debt—a fate that befell the Greeks, for example, in the early 2010s.
The threat to the US will even be greater when more countries turn their backs on the dollar, such as the South American and especially the Asian states. As analysed earlier, trade among these countries represents slightly more than 20% of world trade. Under the previous assumptions on the ratio of money supply to the volume of trade and the share of the dollar, the difference between the additional US dollars needed due to the growth of global trade and the effects of de-dollarisation would then no longer amount to -$0.9 trillion, but to -$3 trillion. If a US foreign trade deficit of one trillion dollars were added in 2024, there would be a total of four trillion dollars more on the Eurodollar market than would be needed for global trade. The dollar would thus suddenly lose 20% of its value. A severe economic and financial crisis, very high inflation and a US national bankruptcy would then be inevitable.
Bottom Lines
Do read the entire piece, it’s also available in German.
I like the argumentation (i.e., the ‘domino effect’), but there’s one blind spot that begs consideration:
Much of what passes for ‘world trade’ in the above piece and in reality is actually moving parts of, or unfinished pieces, across international borders—but this often happens within the same business conglomerate, even if some parts of it are ‘hidden’ in offshore holding companies, (sub)contractors, or subsidiaries.
In other words: any ‘global trade’ disruption is actually, first and foremost, a business risk. If your company is ‘too big to fail’, it’ll get bailed out. What turns this particular situation in a ‘global downturn’ is how much of the bail-out is going to said offshore holding companies, (sub)contractors, or subsidiaries.
And then we’re talking about the real possibility of companies (as in the ‘too big too fail’ category) being simply too big to be bailed out for any one country, which is precisely what happened to Greece a decade ago: too many liabilities and obligations to the likes of Deutsche Bank, Societé Génerale, and the like, which ‘required’ these institutions to go to the various national gov’ts (in Berlin, Amsterdam, and Paris) and, seeing that this wasn’t enough, they also went to the EU Commission.
If a comparable situation ever befell the US gov’t, well, it ain’t gonna fly too far, I suppose. The one thing DC and Wall Street have going for themselves is—the US military.
Yet, if the Ukraine quagmire is any indication of how credible a back-up the DoD is, well, the proof of the pudding is in the eating.
Finally, let’s not forget what this entails: ‘very high inflation, or even hyperinflation, and initiate a debt and money printing cycle that could tear apart the social fabric of society’.
I suppose we’re already at the ‘very high inflation’ point, with variations of the ‘debt [monetisation] and money printing cycle’ ongoing. There’s but ‘hyperinflation’ left on the menu.
US tax receipts in fiscal year 2023 were around 4.71 trillion dollars (source).
In the same fiscal year 2023, the US gov’t spent 1.39 trillion dollars more than it collected in revenues:
In FY 2022, the federal government spent $6.27 trillion and collected $4.90 trillion in revenue, resulting in a deficit. The amount by which spending exceeds revenue, $1.38 trillion in 2022, is referred to as deficit spending.
Here’s the 44,000 dollar question: how long will—can—this continue?
Excellent article. Although some flew over my non-economic brain, more was educational and gives hope for the next generation.
To answer your question: Until faith collapses.