BRICS has been trending this week, as more nations apply to China to join BRICS, a new currency that will compete against the US dollar. In this video, I am going to show you some statistics that a lot of people do not know about and show you why I think BRICS will fail.
Please keep in mind that some of the claims I will make in this video are controversial. This is my opinion about the future. If you are making financial decisions, please consult with a professional.
BRICS stands for Brazil, Russia, India, China, and South Africa. These countries have announced they are working together towards issuing a new currency. Other countries have already applied to start trading in BRICS. On March 10, China helped broker a deal between Saudi Arabia and Iran. Both countries have applied to join BRICS. There are rumors that Mexico has now applied to join BRICS, although Mexico has not officially confirmed this. The fear is that emerging markets will challenge the US dollar as the reserve currency of the world. If enough people switch from using US dollars, to a new BRICS currency, unwanted US dollars would flood the global market, creating massive inflation overnight. Americans’ bank accounts could instantly decrease by as much as 50% in value. This would cause the US economy to collapse.
I believe the opposite is true: That the US dollar will continue to be used as the world’s reserve currency. There is really only one question you need to answer when you talk about BRICS: If people have to choose between holding their money in US dollars or China’s new currency (BRICS), which is better? I believe, given that choice, people will reject BRICS and continue to hold US dollars. I am going to give you 11 reasons why I think BRICS will fail.
- Currency decisions are comparative
This is the key concept to understand when you are discussing currencies. You are not deciding whether a currency is bad or good, but whether it is better than the other alternatives. Are there bad things about the US dollar. Of course. But, is it better than any other national currency? Definitely. If you have money in your bank account, you have to hold it in something. Are you going to use US dollars? Or the new BRICS currency? People are more likely to choose to continue using the US dollar, rather than a new and untested BRICS currency.
When you look at all the currencies in the world, the US dollar is the most attractive. The others are not even close. Around 59% of global bank reserves are held in US dollars. Over 60% of the world’s debt is issued in dollars. The US dollar is nearly 90% of global currency transactions. 74% of trade in the Asia-Pacific region uses the US dollars, 96% in the Americas, and 79% in the rest of the world.
So, the global economy currently runs on the US dollar. If you are a banker, and you have a pile of money sitting in your bank vault, and you have to decide what currency to hold it in, you are most likely going to choose the US dollar. You are comparing it to the other national currencies, which are not even close to being as attractive.
- Floating currencies are better than commodities
One of the major complaints against the US dollar is that it is no longer backed by gold. A lot of people get angry when I talk about this, but you need to understand that there is a downside to tying your currency to a commodity like gold. The downside is that commodities fluctuate in value all the time. They are very volatile, including gold. Volatility is a disaster for currencies. You do not want your currency to fluctuate. Otherwise, you could experience inflation, simply because the underlying commodity is fluctuating in value. That is the benefit of having a floating currency that is not tied to gold. The US dollar can then be managed by the US Federal Reserve that can set interest rates to control inflation.
Now I hear your argument, that the Federal Reserve has done a horrible job at controlling inflation. I agree. We have skyrocketing inflation, and the banking sector is collapsing. The Federal Reserve should be doing a better job. But just because someone is bad at their job, does not mean we should throw out the entire system. We need to fire these people and manage the Federal Reserve better. But even with all the mistakes by the Federal Reserve, the US dollar is still better than the alternative currencies.
I will give you a simple example. Imagine you gave someone a credit card and they misused it and ran up a huge balance. That does not mean that credit cards are bad. It just means they need to make better financial decisions. That is what the US is doing. We have been running up our credit card, and our politicians need to make better financial decisions.
- The US Economy is big
I do not think a lot of people realize the size of the US economy. It is huge. Here is a list of the top 10 countries in the world by GDP in 2022. These are the official estimates from the International Monetary Fund. The US is the largest by a lot. China is second.
When people talk about BRICS, they often show this chart, to show that the GDP of all the BRICS nations adds up to more than the US. One thing to keep in mind is that China is notorious for lying about their economic statistics. This GDP information could be fake. As much of a third of China’s GDP is related to real estate, and we know China’s real estate market is crashing.
US dollar is strong because it is backed by real economic activity. The US is a huge market that will continue to trade in dollars, and it is not going away. If there are financial problems, the US can always tax more or cut back on government spending. But the US as a financial system is likely to continue, which makes the US dollar reliable.
- The US Federal Reserve has a track record
You might argue with me about this, but remember that currencies are comparable. Comparing the US Federal Reserve to other banking systems throughout history, the US Federal Reserve has the best track record by a lot. No one else has done it better. That gives them a lot of credibility. The US has faced a lot of economic boom and bust cycles and the Federal Reserve has managed the currency through all of them.
You may not like the Fed. I understand. I get angry at them too. I think they make bad decisions too. But you must admit that when compared against history, they have performed better than past alternatives.
- The Euro failed
You need to remember that someone has already tried to compete against the US dollar. The Euro. And it failed to challenge the US dollar. The idea behind the Euro, is that if all the European countries got together, their GDP would be big enough to compete against the US. So, this is a very good case study to look at when we think about BRICS, because it was already tried before. The Euro today only accounts for 20% of the world’s reserve currency. The main problem faced by the Euro, is simply that it is difficult to coordinate between different countries with different priorities. You have Germany who wants one thing, and Greece who wants something completely different. So, it becomes very difficult to set financial policy across all the different countries. When you are a banker deciding what currency to hold, you are going to look at all the struggle between these countries and decide that the US dollar is more attractive.
- BRICS nations hate each other
The BRICS nations are even more different than the Euro countries. In fact, some of the countries hate each other. India and China are constantly fighting on their border. I talked about Saudi Arabia and Iran applying to join. They also hate each other. It is very hard to manage a currency in the best of situations, but especially when you hate each other. So, what is likely going to happen, is the first time that one country thinks they are being taken advantage of, conflict is going to break out. This is not the stable situation you want for a currency.
- The US has more gold
The US dollar is not backed by gold anymore, but gold does provide confidence, and indicates the stability of the financial system. The US has a lot of gold. In fact, a lot more than any other nation. According to the Gold Holdings as of December 2022, the US is number one with 8,133.5 metric tons. China is number 6 with 1,948.3 metric tons.
If the US dollar did run into trouble, they could always return to a gold standard if they had to.
- The US Military is strong
Military force is related to currencies. If other countries decide not to follow their agreements, you will have the military force to make them follow their agreements. The US and China actually have very similar size militaries, with each country having their own advantages. China has more soldiers, but the US has more equipment. The biggest difference between the US and China in terms of military, is that in America, we have the right to bear arms. US Citizens have a lot of guns. The US has 5% of the world’s population and 42% of civilian gun ownership. Whatever your opinions on gun control, this is good for the military, because it makes the US very difficult to invade. China on the other hand, has some of the strongest gun restrictions in the world. Only the communist government has guns. This makes China much easier to invade than the US. This makes US currency more attractive because the country is able to defend itself.
- China has a bad reputation
China has a horrible track record of managing their own currency. I cannot stress this enough. It is terrible. China’s main strategy for decades has been to purposely manipulate their currency so that Chinese goods would seem cheaper to the rest of the world. They purposely destroyed their own currency. So, now China is going to manage this new BRICS currency. How much confidence do you have that they will not try to manipulate this also?
There is an old saying that goes “A Tiger does not change its stripes.” This simply means that people tend to revert back to old patterns of behavior. I do not have a lot of confidence that China can suddenly switch to managing a sound currency.
- Communism disincentivizes Entrepreneurship
If you are deciding to hold US dollars versus this new BRICS currency, you are really deciding between Communism and Capitalism. Which system is going to generate the greatest return? We have so many case studies in history that show that Communism does not work. Do you really think that Communism will create more wealth than Capitalism? I do not. Wealth is generated by entrepreneurship, which is encouraged in Capitalism and discouraged in Communism.
- US issues are solvable
I must admit that the US does have problems. The US system is not perfect. But all the US problems are solvable. We can solve the banking crisis. We can solve inflation, if our leaders make the right decisions.
And I know that is a big “if.” There is no guarantee that the US dollar will remain the most used currency in the world. But it will if we have good leadership. And I understand why people are worried.
Let me show you one chart. Here are the US Imports from China by year. This are Chinese goods the US is buying and then sending China money. You can see a big decrease in 2019 and 2020. This was the trade war that Donald Trump started with China. Then Joe Biden took office, during the pandemic, and imports from China exploded. Why is our leadership sending all this money to China? Why did we do this? A better question is: How is this even possible? The entire global economy was shut down in 2021 from the pandemic, and still somehow we managed to send all this money to China? It seems like our leadership is currently working for the interests of China rather than American citizens. This is clearly a bad decision, but this is a mistake we can fix.
Let me show you another chart that is more promising. This shows the migration of people with more than $1M US dollars who moved to a different country in 2022. These are people with money and businesses. They are moving to places like the US. They are moving out of places like China and Russia. In fact, not one BRIC country is gaining high net worth individuals. These are the people who will drive future growth. The same thing happened right before WWII. People with money left areas of conflict and fled to the United States, where they worked together to create a positive outcome for the entire world.
In summary, when I look at the situation with BRICS, I think about all these reasons and conclude that BRICS is likely to fail. I understand why they are trying to do it, because other countries want to become the world’s reserve currency. But the US dollar is dominant, and I think it will likely remain dominant in the future.
SOURCES
BRICS https://www.usgoldbureau.com/news/is-brics-a-threat-to-the-dollar
US Dollar dominates global trade https://www.globaltrademag.com/how-the-united-states-dollar-dominated-the-global-trade-space/#:~:text=The%20U.S.%20dollar%20is%20by,the%20rest%20of%20the%20world.
GDP by nation (IMF) https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
Gold Rankings 2022 https://en.wikipedia.org/wiki/Gold_reserve
US Imports from China https://tradingeconomics.com/united-states/imports/china
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.