An end to the dollar’s status as the world’s reserve currency would mean disaster for the U.S. economy. The United States depends on global demand for dollars to facilitate its borrowing and spending. The greenback’s status helps support America’s economic and military dominance.
You will sometimes hear talk about the dollar’s demise. Of course, many brush this off as fear-mongering, and while a complete collapse of dollar dominance seems unlikely, an equally problematic scenario remains within the realm of possibility—the evolution to a “multipolar world” where the dollar plays a much less dominant role.
The Dollar: One Among Many?
In a multipolar world, several currencies would play a significant role in the global financial system. Dollars would remain important, but the role of the greenback would diminish as other currencies, including the euro and yuan, gain more influence. A multipolar world would also drive a diversification of global reserves, with gold and other currencies making up a larger percentage of holdings.
We’re already seeing this trend develop. Central banks have added over 1,000 tonnes of gold to their reserves each of the last three years. To put that into perspective, central bank gold reserves increased by an average of just 473 tonnes annually between 2010 and 2021. Meanwhile, the percentage of dollars held by central banks has dipped by 14 percent since 2002.
The Rise of BRICS
The rise of the BRICS economic bloc could help usher in this multipolar world. As economist Peter C. Earle noted in a recent article published by The Daily Economy, “Member nations have increasingly expressed interest in reducing reliance on the U.S. dollar, exploring alternative payment systems, and strengthening trade relations within the bloc.”
BRICS is an economic cooperation bloc originally made up of Brazil, Russia, India, China, and South Africa. As of Jan. 1, 2024, the bloc expanded to include Egypt, the UAE, Iran, and Ethiopia. Saudi Arabia has also been formally invited to join. It has yet to formally accept the invitation but is active in the bloc. Turkey, Azerbaijan, and Malaysia have formally applied to become members.
The expanded BRICS has a combined population of about 3.5 billion people. The economies of the BRICS nations are worth over $28.5 trillion and make up roughly 28 percent of the global economy. BRICS nations also account for about 42 percent of global crude oil output.
The BRICS has several “partner countries” including Algeria, Nigeria, Uganda, Kazakhstan, Malaysia, Thailand, Uzbekistan, Belarus, and Bolivia.
There is no question some of the BRICS members would love to see the U.S. and its currency taken down a peg or two, Russia and China leading the way. However, the October 2024 summit in Kazan, Russia, revealed it is easier to talk about de-dollarization than it is to actually de-dollarize.
Russia was pushing hard for BRICS to consider an alternative payment system to replace the dollar-denominated SWIFT system. But after the summit, Russian President Vladimir Putin conceded that there was no immediate plan, saying members of the economic bloc “have not and are not” creating such a system.
Nevertheless, plenty of rhetoric came out of the meeting indicating that the U.S. shouldn’t think de-dollarization is off the table.
Earle argues that given the rising status and economic power of the BRICS, a new multipolar global financial order “centered around commodity-based currencies and reduced dollar dominance,” is plausible.
He points to three factors underscoring this plausibility.
- The ongoing diversification of reserves. As already noted, central banks are rapidly expanding gold holdings, with several BRICS nations, including India and China, driving this push. Earle said this signals “a shift towards commodity-backed assets and away from dollar-centric reserves.”
- Alternative payment systems. When the U.S. and its Western allies locked Russia out of the SWIFT payment system in the wake of the invasion of Ukraine, it set off warning bells throughout the world. Many world leaders realized that if the U.S. can weaponize the dollar against Russia, it can use it against them as well. This weaponization of the dollar has helped drive the acceleration of de-dollarization as countries scramble to minimize the exposure to the greenback. As Earle pointed out, talk about the creation og BRICS Pay “exemplifies efforts to establish financial infrastructures that bypass traditional dollar-based systems, facilitating trade in local currencies.”
- Geopolitical realignment. With its expansion, BRICS now includes diverse economies. Earle said this “indicates a collective move towards a multipolar world, challenging the unipolarity of dollar hegemony.
Earle argues, “The new BRICS lineup represents a broader shift toward multipolarity.”
“The inclusion of oil-rich nations such as the UAE and Iran could alter energy markets, while the growing African and Asian presence in BRICS gives the organization a stronger foothold in regions traditionally influenced by Western powers. Countries like India and China, which often compete for regional influence, must now navigate a more complex dynamic within the expanded group, balancing cooperation with national interests.”
The Erosion of the Dollar and the Rise of Gold
BRICS isn’t likely to “bring down the dollar,” but this new financial order could erode its status. As Earle pointed out, this has ramifications for the U.S. economy.
“A concerted move by BRICS nations to reduce reliance on the U.S. dollar in international trade could diminish the dollar’s global dominance. This shift might lead to decreased demand for dollars, potentially resulting in a weaker currency. While a weaker dollar could make U.S. exports more competitive, it may also lead to higher import prices, contributing to domestic inflation. Additionally, reduced global demand for dollar-denominated assets could increase borrowing costs, impacting everything from government debt to consumer loans.”
And as already noted, even a small decline in dollar-dominance could be significant.
Because the global financial system runs on dollars, the world needs a lot of them, and the United States depends on this global demand to underpin its bloated government. The only reason the U.S. can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.
But what happens if that demand drops? What happens if BRICS nations and other countries don’t need as many dollars?
A de-dollarization of the world economy would cause a dollar glut. The value of the U.S. currency would further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through more price inflation eating away at the purchasing power of the dollar. In the worst-case scenario, it could lead to hyperinflation.
Again – the world doesn’t have to completely abandon the dollar to create negative impacts. Even a modest drop in the demand for the greenback will ripple through the U.S. economy.
VanEck analysts Imaru Casanova and Joe Foster argue that we’re already seeing some economic tremors due to de-dollarization, noting that despite its continued dominance, “The dollar has been devaluing relative to gold—an unprecedented trend.”
It is unprecedented because it has happened during a period of relative dollar strength and the absence of any economic crisis. They say the current gold bull market is being driven by an erosion in confidence in the dollar.
“[P]eople and nations that have long used, coveted and hoarded the U.S. dollar are now losing faith and trust in the currency as a store of wealth. This shift began in 2008 when the global financial crisis led many to question the efficacy of the banking system and western economic hegemony. It escalated with sanctions and freezing of assets imposed on Russia by the U.S. Other countries fear that similar retribution or ‘weaponization of the dollar’ is possible for lesser infractions than the hostile invasion of another country.”
Casanova and Foster also note that the Trump administration has weaponized tariffs, creating resentment and further eroding the confidence that had historically underpinned the greenback.
“The U.S. dollar’s strength against other currencies has traditionally been supported by the robustness of the U.S. economy and its reputation as one of the safest jurisdictions in which to invest.”
The VanEck analysts warned that “irresponsible fiscal policies and political chaos in the U.S. suggest that one or more of the traditional drivers of gold may reemerge.”
“As a result, the world is slowly and methodically moving away from the dollar, a shift most evident in changes to currency reserves and increased central bank gold purchases.”
Casanova and Foster said they believe this is the beginning of a long-term trend “that will become recognized as a crisis of confidence in the U.S. dollar.” This could drive gold prices even higher than many expect.
“If a digital asset like Bitcoin, created and residing within servers, can be valued at $100,000, then surely an ounce of a tangible, reliable safe-haven asset like gold could reach a small fraction of that value.”
********
.jpg "Argonne Assembles Electric Vehicle Experts to Create Better Experiences at Charging Stations")