this post was submitted on 11 Jul 2023
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United States | News & Politics
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BRICS has already surpassed G7 in terms of GDP when adjusted for PPP, and that's the main force behind dedollarization. What is likely to happen is that there will be two parallel economies for global trade. One will be based on the US dollar and another on the BRICS currency.
What that means for US is that dollar based trade is shrinking, and along with it the demand for dollar. So, when US does a bunch of QE, there won't be the same level of demand for the dollar as there war previously.
Meanwhile, the yuan in particular is valuable to countries for the simple reason that China is the biggest trading partner for majority of the countries now. Countries can always convert yuan into something tangible they need from China. The dollar has no inherent value behind it.
Which currency might that be though? Don't get me wrong, I'd love to see a world where we don't have to pitch in to US spending by solely using dollars for trade, but I don't see any BRICS currencies being able to rise in the next 30 years to be even in the same league as the dollar.
The plan is to have a currency that's backed by a basket of commodities that BRICS countries produce. Given that BRICS countries are where most of commodities and manufacturing is located, I definitely see a rapid rise for such a currency. Especially coupled with projects like BRI that China is aggressively pushing. China will be building infrastructure in developing countries on a massive scale, and all the trade that will result from that will most likely be done in the BRICS currency.
I'd like a source for that, because I'm pretty sure the EU is the biggest trading partner for a majority of countries. Yeah, it's not a country per se, but it acts as one when it comes to trade.
And I'm not sure what you mean by the yuan having more inherent value. Fiat currencies have no inherent value, they're only worth what you can trade them for. So it really doesn't matter if you hold yuan, dollars, or pounds, they can be easily exchanged for another reserve currency for transactional purposes.
How much the country backing the currency exports isn't particularly important. Maybe it was hundreds of years ago when mercantilism was relevant, but it isn't relevant today.
As the yuan grows in popularity, the dollar will certainly lose some status, but it's not likely to crash. Look at what happened to the pound when the dollar supplanted it, or the yen when Japan's economic growth slowed, both are still valuable and stable currencies today. So the yuan gaining popularity doesn't spell doom for the US, it just means monetary policy will need to adjust to manage changes in demand. That's it.
https://www.wilsoncenter.org/blog-post/china-top-trading-partner-more-120-countries
I mean that countries buy products from China which means that they can always convert yuan into something they need. This was basically the premise behind petrodollar as well. When you could only buy oil in dollars, that made dollar valuable as an international currency.
Of course it's important, it's why Russia is currently trading with India in yuan instead of rupees. They can't spend rupees on anything they need, but they can spend yuan.
Both UK and Japan are in an incredibly precarious economic situation right now, and US has astronomic debt servicing of which is directly tied to global demand for dollars. If this demand starts shrinking then US will not be able to service the debt and will be forced to default.
If you have any reserve currency, you can convert it to something you need because many other countries accept it for trade. That's the whole point of being a reserve country.
If you hold dollars, you can use them to buy things from the EU, Mexico, etc because they accept dollars for trade. You aren't locked in to buying from the US, and the US honestly doesn't export that much anyway. The reason people like trading in dollars isn't because of the things you can buy from the US with it, but because it's an established currency that isn't likely to see surprising changes in valuation or monetary policy. It has nothing to do with the US producing a ton of physical goods.
The yuan will only "win" if they can prove that their currency is more stable than other currencies, and that will take decades to establish trust.
The Indian rupee isn't a reserve currency, the yuan is. So Russia can use yuan to trade with other countries easier than it can rupees, and both countries will have yuan on hand because it's a reserve currency.
That's the same way with pounds, yen, and euros. People use them not because they intend to buy things with them from the UK, Japan, or the EU, but because both parties in the transaction have them since they're established reserve currencies.
That's a bit hyperbolic.
Japan is seeing stagflation largely because their population is dropping, and that's due to cultural and policy choices. If you look at their domestic policy, they're actively trying to increase the birth rate to get things back on track. If they can't, they'll need to loosen up their immigration policies, which is culturally unattractive to them.
The UK is having issues because of "Brexit," yet the economy remains relatively strong despite half-committing to exiting the EU. It's a temporary thing.
Both countries have a clear reason for the economic situation they're in, and they're both reversible. Also, their respective currencies have remained relatively stable during that time as well. They're both still incredibly prosperous, they're just not growing as much as they'd like to.
The concern with dollars now is that if US has a beef with your country then they can just steal your reserve funds and cut you out of trade. This obviously isn't a concern for the vassals, but it's increasingly becoming a concern for countries that want to retain their sovereignty.
We're already seeing lots of trade happening in yuan, and the trend is only growing. It's a self reinforcing process because as more countries use yuan for trade the more it becomes legitimized and thus more attractive for other countries.
Yuan is not a reserve currency at the moment.
It's absolutely not, economic fundamentals are terrible in both countries, and standard of living is rapidly declining. UK issues go far beyond brexit which has become a popular reason to blame all the problems in UK on. Brexit simply accelerated many underlying trends that have been developing since at least Thatcher days.
While the problems may be reversible in theory, it's pretty clear that such reversals are not really possible given the political climate in these countries. The trends that are happening will continue accelerating going forward.