The rippling effects across the world’s stock markets and banking systems occasioned by the US Fed’s lowering 500 basis points (.5%) off its Federal Funds rate is a strong signal of the continued centrality of the dollar in the international financial system. The federal funds rate is the target interest rate, set by the Fed, at which commercial banks borrow and lend their extra reserves to one another overnight, and the lending rate to personal and commercial borrowers is tied to this rate.
In the meantime, although the US still has the world’s largest economy, with its GDP of US$28 trillion, with the relative decline of its exports, it is now second in world trade, at 8%, compared to China’s 14% and GDP of US$18 trillion. World trade demands a common payment system, and after WWII, the US dollar emerged as the dominant currency when it became the world’s main creditor and factory; dominating new technologies, international transportation corridors, and access to vital resources. It established the Breton Woods institutions of the World Bank and the International Monetary Fund (IMF), among others, to intermediate dollar circulation.
But its hegemonic role has now been considerably eroded, and is now being challenged not only by China, but by the BRICS+ grouping that is actively working to create an alternative financial infrastructure anchored by new institutions outside of US control. The five founding member countries of the BRICS, created in 2011, are Brazil, Russia, India, China and South Africa. They account for 27% of global GDP, 20% of global exports, 20% of global oil production, and 41% of the world’s population.
With the recent addition of Iran, Egypt, Ethiopia, and the United Arab Emirates, BRICS+ account for 29% of world GDP, 25% of world exports, and 45% of the world’s population and, as importantly, 42% of oil production.
In theory, this offers them a platform to change the status quo in the global financial architecture; and from this perspective, it is in our interest to follow these developments now that oil production has been added to our traditional gold exports, which are denominated in US dollars, and we have a greater need to protect our transactional flexibility reserve viability. Even countries also friendly to the US, like us, and such as India, had to obtain permission from Washington to trade with other countries, and had to strenuously defend their purchase of Russian oil, cheapened after the US embargo.
The BRICS+ are meeting in Russia in October, and apart from considering the application of a large number of countries jostling to become members – including Turkey and Venezuela – a key topic would be the need to de-dollarise; decouple from US banks by, among other initiatives, the creation of a new BRICS+ currency. After the 2023 Summit, Brazil President Lula announced that the group had spoken in favour of a “working group to study a reference currency for BRICS.” He also declared, “The creation of a currency for trade and investment transactions between BRICS members increases our payment options and reduces our vulnerabilities.”
But as one commentator has noted, “A BRICS currency will also require a BRICS central bank, commonality in monetary policy, alignment of fiscal policies, and synergy between political regimes across the trade bloc. Yet, as things stand, the BRICS currencies have mismatched central banking regimes, and are not easily convertible — unlike the EU when the euro was established. China and Russia’s central banks are also state-controlled, whereas SA, India and Brazil have independent central banks. A big question is whether China or Russia would surrender sovereignty over their national currencies, which would be crucial to the success of a common currency. ”
A good precursor is the fate of the BRICS “New Development Bank” (NDB), officially launched in July 2014 at the 6th BRICS Summit held in Brazil, and capitalized with US$50B. The NDB granted its first loans at the end of 2016, but has since not made much of an impact.
We should not expect any game-changing announcements from the October BRICS+ meeting.
