For those anxiously awaiting the demise of the U.S. dollar, something awesome happened during the last days of August.
Leaders of the so-called BRICS countries – Brazil, Russia, India, China and South Africa – met in Johannesburg to discuss ways to end the dollar’s dominant role in the global economy.
The presidents of four of the BRICS nations attended in person. Unfortunately, Russian President Vladimir Putin had to attend remotely. That’s because if he set foot in South Africa, officials there would be obliged to arrest him – as that nation is a signatory to the International Criminal Court, which has issued an arrest warrant for him.
Host nation South Africa is also furious at Putin for blocking Ukrainian grain exports.
Still, these leaders pushed on toward their ultimate goal of ending the dollar’s global hegemony – a move which they suggest will help launch a new world order of peace, harmony and prosperity.
Yet other troubles surfaced that couldn’t be papered over.
Trouble for Currencies
China and India, both nuclear-armed founding members of BRICS, have been fighting again high in the Himalayas, restoking their 1962 border war in the region, which brought a difficult defeat for India.
Needless to say, it could be tough to launch a joint global reserve currency if your two biggest members are at war.
Despite their border spat, the two giants (the two most populous nations on the planet) have something in common: Neither wants to turn its currency into one that is easily traded (as the dollar is today).
In fact, both nations now employ capital controls to prevent currency outflows. And both want to maintain those controls for the foreseeable future.
A primary appeal of the dollar for international transactions is that the U.S. government has no such control and does not intervene in currency markets to strengthen or weaken the dollar against other currencies. It allows the dollar to flow freely across borders and its value to be set in currency markets.
As a result, the dollar rises and falls based on various factors, which can present unique opportunities for other asset classes, as my old friend Rich Checkan recently pointed out in an Insight column.
[Editor’s Note: The Oxford Insight is reserved for Members of The Oxford Club. Here are the archives.]
Unable to make much progress on a reserve currency alternative to the dollar, the BRICS leaders did do something to move the ball forward: They formally invited six other nations to join their group. These are Saudi Arabia, Iran, Argentina, Egypt, Ethiopia and the United Arab Emirates.
Unfortunately, again, if you’re looking to expand global democracy and human rights and launch a better world order, Saudi Arabia and Iran aren’t particularly helpful to your cause.
Geopolitical analysts who have been watching the evolution of the BRICS seem to agree that a major motivating factor of the conference is to curb Uncle Sam’s ability to use the dollar to implement sanctions against other countries.
(After all, if you’ve invaded one of your neighbors – and as a result have had some of your currency reserves frozen or are suddenly locked out of the “Swift” system of international transfers – wouldn’t you, too, like to end the dollar’s supremacy? For those unfamiliar with Swift, it’s the global financial artery that allows the smooth and rapid transfer of money across borders.)
So it seems that, for at least some of the BRICS leaders, their agenda is mainly to avoid the consequences of bad behavior in the future.
Unable to see a way forward for a new global currency, the five BRICS leaders settled on some small measures to trade with each other in their own currencies instead of converting to dollars for trade.
Does that mean the dollar as a global reserve currency is on the way out, as some hysterical media accounts have suggested?
Well, the numbers are revealing.
Numbers Don’t Lie
According to the International Monetary Fund (IMF), which closely tracks currency reserves, the dollar accounts for 58% of global currency reserves, far above all other currencies, including the euro (21%), the yen (6%), the British pound (5%) and the Chinese renminbi (3%).
That suggests a very high level of confidence in the greenback.
As the IMF notes, this confidence is undergirded by the U.S. economy’s “stability and openness to trade and capital flows, and strong property rights and the rule of law.” It’s further supported by “the depth and liquidity of U.S. financial markets,” which are “unmatched.”
The dollar also dominates global trade: It is used in 90% of global foreign exchange transactions, according to Bank for International Settlements data.
And the dollar has been gaining strength since mid-July. The U.S. Dollar Index, which tracks it against six other major currencies, is up about 6% since then, which is a major move.
Finally, I always have to laugh when I think of how this BRICS idea began. It was a grassroots, organic movement to shed U.S. imperialism and start something new, right?
In fact, the acronym was invented in 2001 by former Goldman Sachs Chief Economist Jim O’Neill as a marketing ploy to attract money to the investment bank’s global asset funds. And really, there’s nothing more Western and hegemonic in this world than Goldman Sachs, is there?
Don’t desert the dollar just yet.