BRICS stands for Brazil, Russia, India, China, and South Africa. At the end of the meeting, the United Arab Emirates, Egypt, Iran, Saudi Arabia, Argentina, and Ethiopia were invited to join the group in January 2024.
A lot of news stories about the meeting have been about the effects of this large group of countries. For example, there has been talk about how the U.S. dollar might no longer be used as a global reserve currency if this group is seen as a threat to the US or even the IMF.
A few things need to be made clear
A lot of political experts think that China gives money, loans, or help to other countries for free. China has a lot of money, but it doesn’t want to be a world reserve currency. The Bank of International Settlements says that its currency is only used in 5% of all deals around the world right now.
Capital controls are in place in China and Russia. Without the freedom to move money around, there can’t be a world reserve currency. To have a stable fiat currency, you need more than just solid gold stocks. It is important to have an open, honest, and diverse financial system in order to protect economic freedom, investment, legal security, and the free flow of wealth.
There are a lot more strict rules and requirements for loans from China and Russia than many leaders think. Some leaders in emerging markets seem to think that joining China and Russia will be a great way to get free money.
Another issue with making a BRICS currency is that China and Russia have no desire to lose their own currency in order to weaken it with the money of a group of producers that has a bad track record of keeping their monetary imbalances under control. The currencies of the BRICS guest countries have lost a lot of value against the U.S. dollar over the last ten years. Bloomberg says that the Argentine peso has dropped by 98%, the Egyptian pound by 78%, the Indian rupee by 35%, the Ethiopian birr by 68%, and the Brazilian real by 55%. The Economist says that the Iranian rial has dropped by 90%. Putting weak currencies together doesn’t make a strong currency.
Let us not forget that the Russian ruble has also done badly over the last ten years, falling 68% against the U.S. dollar according to Bloomberg, even though its central bank is known for being pretty cautious.
It has lost only 14% of its value against the U.S. dollar over the last 10 years, making it the best “BRICS and guests” currency.
For a fiat currency to be stable, the person who created it must support it as a store of value, a way to pay for things, and a way to measure things. There needs to be freedom of capital and independent organizations that protect investors legally, both in the United States and other countries. Even though the USSR had power over half of the world, its disastrous kopek showed that having a strong military power does not guarantee a currency that is accepted as a store of value.
Also, China doesn’t want to deal with all the problems that come with being a global reserve currency, such as making sure that the financial and monetary system is very separate from political power. Many experts don’t take into account the fact that the Federal Reserve is not fully controlled or managed by the government. This is what has made it successful as the world’s central bank. The Fed isn’t totally separate from the government, but it’s about as separate as a central bank for a paper currency can get.
Joining countries whose governments want to turn unchecked government spending into money and make monetary problems much worse can’t make a stable currency unless they follow the euro’s lead. In the euro, Germany set the main rules for monetary and fiscal policy for the other countries. This is because Germany has the most careful and responsible fiscal policy. Though the eurozone and the ECB have tried to be like the US and the Federal Reserve, they have lost most of their real alternatives to the US dollar. And the euro is the best example of paper money since Bretton Woods; let’s not take away its good points.
The BRICS option has a big flaw to begin with. China and Russia are going to have a hard time putting limits on their partners’ economic and monetary policies. Don’t forget that some of these partners joined the group because they thought they could make money and spend it without any limits. They thought that now they would be able to do this forever, and their monetary imbalances would be shared with other countries.
The euro has been successful because liberal democracies with strong institutions, broad economic freedom, and legal certainty agreed to align their policies for the common good. This created a strong currency that avoided the disasters caused by the inflationary spirals that were common in Europe in the past when governments destroyed people’s savings and wages to make up for their budget deficits. This doesn’t look like it would be easy to do again with BRICS and guests.
China can gain more power over these countries, though, by enforcing strict monetary and economic policies. It is the BRICS country with the most debt, but it probably won’t be like Germany in the eurozone and be ready to take on other countries’ debts in exchange for a common project. China will have more power over the other countries in the group, but it probably won’t lower the currency to threaten the safety and stability of its huge people. It’s likely that the Chinese government is looking at how the euro is losing its monetary soundness and deciding that it can’t take the same risk with some of these new partners. That being said, China will likely use its huge financial strength to give money, find new ways to grow both at home and abroad, and get cheap, plentiful goods.
The BRICS meeting was a big win for China. Most likely, the Chinese government knows that many of its partners will keep making their imbalances worse. This could help China strengthen its place as a leader. But it’s hard for me to think that China will agree to make a currency that other countries can use to cause inflationary imbalances.
In the U.S., the government may hurt the value of the dollar if it keeps running deficits of two trillion dollars a year, which is more than the estimated fourteen billion dollar deficit by 2030, and if it keeps getting advice from irresponsible people that it can print as much money as it wants without any risk. The U.S. dollar is the most widely used currency in the world. Its fiscal credibility, political independence, and economic freedom make it the leader. If the government works to weaken these things, the dollar will no longer be a safe currency.
The U.S. dollar will not die because of competition from another paper currency. This is because governments are too tempted to destroy the value of the money they issue. It’s likely to come from separate countries.
