Lost in the hype over nations clamoring to join the BRICS block is a question I have not seen anyone address. 
Let’s call the BRIC-based currency a “Brick” . One measure of “success” would be use as a reserve currency in a significant percentage of global trade.
A second measure of “success” involves sanction avoidance. The second measure is far more likely to succeed for many reasons. Let’s start with the first measure of success.
What Would it Take for the “Brick” to Succeed?
- The Brick would need to float freely. The yuan doesn’t.
- The Brick have to be a genuine reserve currency to achieve widespread use.
- A functioning Brick-based bond market. This requirement is also for widespread use.
- A significant desire by individuals to trade in Bricks and accept Bricks rather than local currencies or the dollar.
- Willingness of China to stop export mercantilism.
- Trust
Export Mercantilism
The yuan failed to succeed as a global reserve currency because the yuan does not float, because China has no functioning bond market, and because of simple trade math. China runs trade surpluses with most of the world. Oil exporters ar a major exception. As a result, China mathematically accumulates US dollar reserves. Attempts to shift reserves to the Brick would fail for the same reasons.
Unless and until China is willing to stop export mercantilism and the US trade deficit shrinks, mathematically someone must accumulate us dollar reserves. Mathematically, dollar accumulation is unavoidable.
And for most of the world, there is little benefit to trading in Bricks for reasons that follow.
Trade is Between Individuals, Not Nations
Fundamentally, trade is not between nations.
Aggregate reporting of trade deficits such as the persistent US deficit with China, makes it appear otherwise. But the deficit is really a result of a sum of individual transactions.
For example, you or I go to a store and buy a tool at Home Depot. More likely than not, it’s made in China. A Toyota may be assembled in the US or Mexico with parts from Japan, China, or Mexico.
Taking a step back, the intermediate buyer, say Home Depot, makes big orders with various Chinese manufacturers.
The same applies to a Brazilian Store Owner (BSO) dealing with China.
To place its order with a Chinese merchant, the BSO would need to convert Brazilian currency to Bricks, place an order with a Chinese Manufacture willing to accept Bricks, then the Bank of China would swap Yuan for the Bricks and then what?
What precisely does the Bank of China do with all the Bricks it is accumulating given that Bricks are a trading currency, not a reserve currency?
Are there any Brick bonds? No, because the Brick only a trading currency.
Aramco Example
Consider Saudi Arabia’s oil producer Aramco. What does Aramco do with the Bricks it receives for oil? Why do the Chinese buyers of oil have Bricks in the first place?
Will Aramco even take Bricks? If so why?
China’s Trade Balance Select Countries 2022
I pieced the above image together from the VusualCapitalist article Visualizing All of China’s Trade Partners
Assume for a second that every company in Saudi Arabia agrees to trade in the Brick. The Saudi companies receive $40 billion worth of Bricks for oil.
How do Saudi companies use those Bricks?
We need to make another assumption: Assume Aramco etc., swaps the Bricks for dollars with the Saudi government. What does the Saudi government do with them?
Global Trade $32 Trillion in 2022
Global trade was a Record $32 Trillion in 2022. If you add up all of China’s trade with India, Brazil, Russia, and Saudi Arabia in the above image, you get $612.3 billion. We also need to add in Brazil’s trade with India, and Russia’s trade with Saudi Arabia, etc. But how much is that?
There is no Brick-based bond market and thus no way to collect interest holding Bricks. There is an increasing lack of trust in dollars, but no reason to have any faith at all in the Brick.
And remember my preposterous assumption that all this BRIC-related trade is in the Brick. It surely won’t be. For all the hype about how big the BRICS+++++ block is from a GDP standpoint, how much total trade would they do among themselves even if every trade was in the Brick? Would it even be $1 trillion out of $32 trillion? If so, that’s roughly 3 percent.
Is 3 three percent significant? 10? And who is accumulating US trade deficits?
Gold Backed BRIC Currency Silliness on Dethroning the Dollar
I frequently hear talk of a Gold Backed BRIC Currency, but there are never any details for obvious reasons.
If Russia or China had a gold-backed BRIC, what would that even mean? Would you trust it? Buy it?
Assuming the Brick is gold-backed, it would needs to be convertible to gold on demand for there to be any trust.
Also see my previous post BRICS+ Is Forecast to Dominate the World’s GDP, But What Does That Mean?
And none of this addresses China’s export mercantilism or US trade deficits. Here’s a major irony. If an when the Brick succeeded as a reserve currency , US deficits would shrink.
What About Sanctions?
None of the conditions for a meaningful launch of a BRIC-based currency are in place, at least on a dollar volume basis. Talk of dethroning the dollar is silly.
However, sanction avoidance is another matter. Coupled with central bank digital currencies, countries and individuals will have a clear means of sanction avoidance. US sanctions on Iran, Venezuela, and other nations and individuals are a tiny percent of global trade, but those sanctions are not trivial to the individuals and countries sanctions.
America’s Love of Sanctions Will Be Its Downfall
The US uses sanctions as a foreign policy tool. It has weaponized the dollar.
ForeignPolicy says America’s Love of Sanctions Will Be Its Downfall
In the past two decades sanctions have become the go-to foreign-policy tool of Western governments, led by the United States. Recent economic and personal sanctions packages applied to Russia for its invasion of Ukraine as well as to Chinese companies for national security reasons mean the two powers have joined a growing club of U.S.-designated bad boys such as Myanmar, Cuba, Iran, North Korea, Syria, and Venezuela.
By 2021, according to U.S. Treasury Department’s report, the United States had sanctions on more than 9,000 individuals, companies, and sectors of targeted country economies. In 2021, U.S. President Joe Biden’s first year in office, his administration added 765 new sanctions designations globally, including 173 related to human rights. All told, the countries subject to some form of U.S. sanctions collectively account for a little more than one-fifth of global GDP. China represents 80 percent of that group.
It’s a mistake to total up trade when almost all of it involves China. But to the over 9,000 individuals and companies sanctioned, those sanctions matter.
Lesson of the Day: If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation
On July 20, 2023, my lesson of the day was If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation
A Brick currency is not a requirement for sanction avoidance. Any central bank digital currency would suffice. But a Brick makes things much easier, especially in cases where a nation does not want to openly antagonize the US but would instead prefer to just look away.
If a Brick makes it easier to avoid sanctions, individuals and companies sanctioned will use it, even if it is relatively illiquid.
Iran has been invited to the BRICS group. Iranian companies could trade oil to China for Bricks, then Bricks to Brazil for food, then Bricks to India for medical supplies. Goodbye sanctions.
What Constitutes Success?
If we change the definition of success from a meaningful percentage of global transactions to a meaningful way of avoiding US sanctions, the Brick has a potential to be a big success.
Iran and Russia, not Brazil or China may easily be the biggest BRICS success stories.
Notably, both Trump and Biden are overly reliant on tariffs and sanctions. But the US will not be able to enforce sanctions and track transactions that it cannot see.
This would not result in a new world order as hyped, but it could put an end to US setting sanction policy for the entire world. Retaliation is coming as sanction avoidance, not as the end of US dollar dominance in trade.
Mish, you have been on top of this particular topic for years, and your messaging on the topic has been very consistent and Spot On in my opinion!
With that being said, I think it’s clear without question, the number one reason this will not occur anytime soon, and that is “Trust”
At the moment some could, and would state that, about the U.S. at the moment. They would be wrong about trust however, due to the open society America live in. Not all honest and all seen, but overall transparent and understandable information to allow for enough trust to proceed further. Not so much in China…
“What Would it Take for a BRIC-Based Currency to Succeed?”
A perpetual miracle?
Mish’s comments are very similar to what Peter Zeihan has opined.
Peter Zeihan has also pointed out that the Euro is a practically dysfunctional back up currency shown by the chaos between the EU member countries economy inequities during the 2008 GFC. Before the GFC, the Euro was the number 2 reserve currency this has now slipped to number 4.
Euro remains #2 at approx 20% of foreign currency reserves in 2022.
link to en.m.wikipedia.org
To answer the question in the title: A complete transformation of BRIC societies from their current state, to a state of high output based on high trust.
Can anybody explain in layman’s terms the major differences between:
– US dollar
– Euro dollar
– Possible (?) new BRIC currency
– Bitcoin (or ETH etc.)
First off it is important to know what money is… that is in what form it exists. Around 1900, monetary systems began to evolve from physical money (eg. FRNs) and specie (silver and gold) to “ledger money.” This was because checks and checking were beginning to become more widespread, and it was more efficient to adjust ledger entries and use accounting measures to, well, account for transactional flows.
All of the currencies you mention are ledger money. Some have called this “ghost” or “synthetic” money but in essence it is ledger-based and dependent upon balance sheet space at the banks.
The other thing you need to know is fractional reserve lending. This is a type of money creation that allows banks to create money by issuing loans. This works well when the economy is expanding, but creates doom loops as economies contract, that is we see asset prices falling and monetary destruction. Hence the need for injections of liquidity in such crises, like the Great Depression and the GFC, both of which were monetary or liquidity crises, not “financial” as The Fed would have you believe.
The US dollar is money that is within the ledgers of the Federal Reserve banking system. It is created by the domestic banking system making loans. Because this system is now small compared to the global system, credit creation and velocity are really slow in the domestic FR system. In fact, most large loans even in the domestic US are financed though our next currency…
The Eurodollar began in the 1950s, evolving for various reasons, the best known of which was the Marshall Plan.Originally this meant actual USD deposits that the European and Japanese banks could use to create credit and get their economies going. Sine they were now offshore, these USDs were called “Eurodollars” because that’s where most of them went. As the system continued to evolve, and loans were paid off with interest, the need for actual USDs to create credit disappeared. There was enough offshore money that it could generate new credit without USD transfers out of the US domestic system. This monetary system’s growth, ie credit creation, was accelerated by the financing of the Vietnam War and then again by the re-pricing of oil in the 70s. This fast expansion of the Eurodollar system to handle these larger international flows is what created the Great Inflation that reigned from 1969-82. That’s why nothing The Fed did had any effect on inflation. The inflation was coming from outside the Fed system.
These Eurodollars thus are off-shore ledger entries denominated in USD but not created by the Federal Reserve system. When you have ledger-based money it isn’t really accurate to say you have a currency, but rather a currency system, and thus we don’t really have a reserve currency, rather we have a reserve *system*. The Eurodollar system is thus the global reserve system and has been for decades. This system is unregulated, opaque and has no central bank.
A BRICK or 5R (or whatever) is just an attempt to evade the deflationary forces in the Eurodollar system. And to a lesser degree, policies like sanctions. So a BRICK isa proposed new ledger-based monetary system that can operate internationally to allow capital flows.
In the above systems, banknotes have become a derivative of their ledger entry, rather than the other way around, like it was say in 1899.
Bitcoin is also a ledger-based system, is also outside The Federal Reserve system and is outside the Eurodollar system. It is self-contained but can transact with various domestic central banking payment systems. It too is denominated in USD. It stands no chance of supplanting any of the above other currencies, because it has too much volatility and lacks adequate distribution. Thought experiment: if you were to corner the market in Bitcoin and own every single BTC, what would its value be? Well, it would rapidly approach zero. Since no one else is using it, just you, no counterparties have any incentive to accept it. It has no intrinsic value either… by being backed by something that does have value or by offering efficiencies that the above currency systems don’t have. Bitcoin creation is not via credit but by computers solving complicated, energy intensive mathematical problems called mining, which creates new Bitcoins on the ledgers of the miners.
Blockchain however looks very useful. It is basically an automated ledger and settlement system and thus could replace much of what we today call “banking”. It also could bring much needed transparency to the Shadow Banking eurodollar network by recording and displaying changes of ownership to financial collateral, like USTs.
Hope that helped.
Solon, I agree with most of what you said. I say most because honestly, I don’t fully understand it.
Thanks for the effort you put into this commentary. I will reread this a few times to digest it all.
“ These Eurodollars thus are off-shore ledger entries denominated in USD but not created by the Federal Reserve system”
Very interesting. Two questions:
1. Do these off-shore ledgers exist on European bank ledgers?
2. If these are all denominated off-shore, why do all foreign currency transactions need to go through NY clearing houses?
US has the biggest debt markets in the world. To dedollarize, you need to convert debt and assets to the new currency. If most debt is denominated in dollars-in the hundred trillion range-well you need to get dollars to pay it off or convert dollars to BRICKs. You need dollars to dedollarize. To convert assets from dollars to BRICs you need to sell assets ion dollars, rebuy them in BRICKS.
BRICS stand no chance of supplanting the entire Shadow Banking eurodollar network. Mish nails pretty much all of the fundamental reasons, but the details are a little wrong. No need to get too deeply into that here because the fundamentals are correct. Except for perhaps one: the reasons why BRICs are looking into this.
Sanctions are likely *a* reason, but not likely the top one. There have been sanctions before. They never prompted a group of nations to take on a near impossible solution. The Soviet Union participated in the global markets with no issues, through banks in Montreal, Switzerland and elsewhere. The Shadow Banking system allows capital to find its way around the world outside of regulation and control. There is plenty of redundancy in the system to allow for this. It might take more time and frictional costs but it will still happen. We can see this in the present day with the ineffectiveness of the sanctions on Russia. So it can’t be all about sanctions.
It’s something else. And that something else is the fact the system is failing and dollar funding (ie eurodollars which is what the entire global international offshore system creates and uses) is drying up. This originally harmed emerging economies, but it is now spreading to places like Germany. The global economy has become synchronized by its financial system and everyone is going down together, just at different speeds.
So think of a sports team. When the team is winning, everything is all sunshine and lollipops, no one internally has any issues. When the team enters a stretch of prolonged losing, rumors start popping up… of dressing room issues, of disagreements and politics in the front office, of interfering owners, etc.
This is what is happening with the global reserve system (and it really is a system more than it is a currency). That system has now been on a 16 year long losing streak. Which creates internal strife and finger pointing. Players want to be traded to a new team, but there’s no other team they can be traded to.
You also find out in the aftermath, that a lot of these rumors about your sports team are just talk. Dialogue with subtext. No one wanted to be traded, they just wanted to start winning again. The same is true for the BRICS nations. And others too. The world just wants to start winning again. We have an entire generation that has never known an economic boom.
So as this losing streak continues, the world is going to further fragment and deglobalize. More and more countries will behave like the BRICS and complain. International relations will deteriorate. And because no one understands what is really money and how capital flows, fingers will be pointed at all the wrong culprits (like the USD and The Fed). You can see here how the USD can get scapegoated to allow for a new global digital currency run by an international organization.
Covid and its lockdowns are a cover for our collapsing system as the Global Powers That Be try to bridge the world from today till when they can institute their system of digital control, hoping the existing system won’t fully break in the meantime. This bridging is likely to have the opposite effect. They are clueless–like the central banks that inform them—about how the existing system works, so anything they supplant it with will make things even worse.
Think of this…. The Davos/CBDC people are essentially saying the exact same thing the BRICS nations are saying. They want a different system. They of course also want to leverage the present crisis into a new system that gives them advantages of power and control. They stand as much chance of success as BRICS has of succeeding.
The whole BRICS reserve currency thing is “factoring in the perturbations of Mars”. In other words its an attempt to reform the present anomalous paradigm when the only thing that will actually work…and accomplish what conservatives and libertarians say they want…is to cognite on the exact new paradigm concept and then apply it in the most efficacious ways and places in the economic process.
link to youtube.com. Interesting video on this topic.
It’s pretty much a non-event from what I see. All these countries would like to be a part of a Bric reserve currency but none of them individually nor collectively want to pay the price to be it so it will go nowhere. As a vehicle to avoid sanctions it could act as a sort of clearinghouse but China, India or the Gulf states don’t need it. On the other hand it could be useful for the weak states in the group. Probably a structure will be set up but it will be more window-dressing than functional.
I think the BRICS+ formed because the US weaponized the USD which was the world reserve currency.
I feel that the need of a BRICKS+ currency is mainly for:
-take power away from a country that tries to police the world
-encourages any BRICKS+ nation to trade within each other.
Many of the nations are some form of Communism meaning that they never want to give up power. So if they say the new currency will be gold backed, it will still be manipulated. Only free citizens who control their government can have a currency that is on the gold standard.
More a trade zone against amerikan imperialism than currency. No more free trade classic liberals or libertarians in our empire. All gone to dark side.
“Lesson of the Day: If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation”
“Show me the incentive and i will show you the outcome.”
1) In order to succeed Chi has to tone down his aggressive behavior.
The BRICKS+ trade has to go through a filter, the unsinkable islands that stretch from Japan to Malacca Straits. Peace and stability are mandatory. Clogging is deadly.
2) The BRICS+ have an excess of poor people.
There are over eight billion people in the world and most of them are there : China, India, Iran, Egypt, Brazil…plus the BRICKS+ bench. Their iron fist control them.
China finances a silk road in Egypt, Pakistan, Iran, Argentina, piling debt, with 20% youth unemployment…enslaving frontier nations.
3) The Saudis get a nuclear plant and drones for oil. Putin gets deflated RMB
and Rupees, losing money. The new members compete with Russia in the oil trade.
4) The BRICKS+ try to lift the poor by expanding industries, imitating South Korea in the 60’s and China in the eighties. In the next global recession they will cannibalize each other.
5) The Chinese bond market is #2 behind the US, about half its size. The rest have none and no large international banks.
6) They are a bunch of dictators marketing their national industries.
In global terms, the recession has already begun.
6. Consumer consumption based economy – Somebody has to buy all the crap they make. By eliminating the dollar$ from of the equation they lose the buying economic engine of the world
“ By eliminating the dollar$ from of the equation they lose the buying economic engine of the world”
The US is only the buying economic engine of the world because the dollar$ is the reserve currency.
The more a hypothetical Brick would be used, the less the US would be the buying economic engine of the world.
A new currency backed by Argentina and Iran. What a wonderful idea.
I really do not know if a BRICS currency will come about anytime soon. I think the bloc will allow the members to trade in their own countries currency. Sanctions will be the dollar downfall is correct we cannot weaponize our currency if it is to be the world reserve currency. Heck we now sanction countries because they disagree with our policies. Many countries being gay or LGBTQ will land you in prison or worse and even though I may agree/disagree with that it is not the USA business to try and change these countries to suit our needs. Religious governments are in the same boat. Look around the world now and many sanctioned countries are there because they do not agree with the West about Ukraine.
BRICS exist as an anti US political organization. They allow other countries to stand up to the US with less fear of reprisal. If the US sanctions them, they can still trade with other BRICS countries. And as more countries join BRICS, there’s a greater incentive for others to join.
China wants/needs BRICS currency to survive an invasion of Taiwan. Would allow them to avoid impact of US sanctions.
Look who wants to join – every country impacted by US sanctions – Syria, Iran, etc… This is a potential starting list of countries.
If the currency gets off the ground, it would start off slow, but could slowly gain it’s own momentum. What it becomes is impossible to say but could have unexpected outcomes.
How does the euro work?
I doubt a brick will exist any time soon, nor do I think it would be a good idea. But, there’s nothing preventing it from working.
The Euro works because it is the currency of a continent that makes just about everything, in the best security organization in the world and has reasonably decent economic and social policies especially compared to most other countries in the world and possesses a credible central bank so put together there is confidence in the currency. What is lacking is a unified fiscal policy.
The Bric organization has nothing comparable now and probably never will.
Is this supposed to be sarcastic?
Some people have been expecting the Euro to collapse ever since it came into existence but it that hasn’t happened. You wonder why? That is the answer. If you live in the Euro zone maybe you would understand. If you don’t you probably wouldn’t. Need I mention that the Euro is the second largest reserve currency after the Dollar? It is not the Ruble, the Yen nor the Yuan. Wonder why? Could it be an international conspiracy by investors and banks to keep their money in a currency with little risk?
Half the countries in the EU are effectively bankrupt.