Do the BRICS pose a threat to the US?
Commentary
The summit of the so-called BRICS—Brazil, Russia, India, China, and South Africa—has closed with an invitation to join the group extended to the Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates.
The summit has generated a lot of headlines about the impact of this widespread group of nations, including speculation about the end of the U.S. dollar as a global reserve currency if this group is perceived as a threat to the United States or even the International Monetary Fund.
Several things, however, need to be clarified.
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Many political analysts believe that China lends, invests, or supports in return for nothing. China is a major economic power, but it has shown no interest in making the yuan a global reserve currency. Its currency is closely managed and currently used in 5 percent of global transactions, according to the Bank of International Settlements.
China and Russia have capital controls. It is impossible to have a global reserve currency without freedom of capital movement. More requirements are needed than solid gold reserves to have a stable fiat currency. It is essential to guarantee economic freedom, investment, legal security, and the free movement of capital, as well as an open, transparent, and diversified financial system.
China and Russia are also much more demanding and rigorous lenders than many politicians think. If we were to look at the headlines, it seems that some emerging market politicians think that joining China and Russia will be a kind of free money panacea.
Another problem with creating a BRICS currency is that, logically, neither China nor Russia has the slightest intention of losing their national currency to dilute it alongside a group of issuers who have a doubtful track record in controlling their monetary imbalances. Over the past 10 years, the currencies of the BRICS guest countries have depreciated significantly against the U.S. dollar. The Argentine peso has fallen by 98 percent, the Egyptian pound by 78 percent, the Indian rupee by 35 percent, the Ethiopian birr by 68 percent, the Brazilian real by 55 percent, according to Bloomberg, and the Iranian rial has collapsed by 90 percent, according to The Economist. Putting together weak currencies does not create a strong currency. However, increasing the global use of the yuan or the ruble is much more likely.
We must not forget that the performance of the Russian ruble (negative 68 percent against the U.S. dollar, according to Bloomberg) in the last decade has also been poor despite having a relatively prudent central bank.
The best “BRICS and guests” currency against the U.S. dollar in the last 10 years is the Chinese yuan, with a depreciation of only 14 percent.
For a fiat currency to be stable, it is necessary that the issuer defends it as a reserve of value, a generally accepted payment method, and a unit of measure. Freedom of capital and independent institutions that provide legal security to domestic and international investors are essential.
Moreover, China seems to have no interest in taking on all the challenges required to be a global reserve currency, starting with a financial and monetary system with a high level of independence from political power. It can extend the use of the yuan through its financial system and lending to partner nations.
Many analysts ignore that what has made the U.S. Federal Reserve a success as the world-leading central bank is that it is not under total state control or public management. The Fed may not be completely independent, but it is as independent as a central bank for a fiat currency can be.
Joining countries with governments that advocate monetizing uncontrolled public spending and massively increasing monetary imbalances cannot create a stable currency unless they implement the example of the euro, which seems unlikely. In the euro, Germany, the country with the most prudent and responsible fiscal policy, dictated the main lines of the monetary and fiscal rules to the rest. Unfortunately, the eurozone and the European Central Bank (ECB), by imitating the United States and the Federal Reserve, have lost most of their options to be a real alternative to the U.S. dollar. Still, the euro is the greatest fiat monetary success in the post-Bretton Woods era, so let us not deprive it of its merit.
The BRICS alternative currency would start with significant problems. China and Russia would have major difficulties imposing fiscal and monetary policy restrictions on their partners. Let us not forget that several of these partners have joined the group thinking that from now on they will be able to continue printing money and spending without control, while their monetary imbalances will be distributed to other nations.
The euro has been
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