by Zain Jaffer
Recently in August 2023 representatives from Brazil, Russia, India, China, South Africa, (BRICS) and other interested countries met in South Africa to strengthen the BRICS alliance. It was announced in the meeting that six new countries would officially join the BRICS alliance in January 2024. These six new countries include Saudi Arabia, United Arab Emirates (UAE), Iran, Egypt, Ethiopia, and Argentina. Several of them are oil producing countries.
One of BRICS major goals is to create a new currency that would replace the US petrodollar as the basis for pricing crude oil and for general trade. Reports indicate that the planned BRICS currency would be backed by a precious commodity like gold to be acceptable to many countries.
In 1971 after then President Richard Nixon took the US dollar off the gold standard, there needed to be a way to ensure that the world would still want US dollars even though it had become a fiat currency. Fiat means “by decree.” The way they devised, which is still in effect, was to promise Saudi Arabia and most oil producing countries that America would use its military and political power to keep stability in their region if they in turn would use the US dollar as the petrodollar currency.
For the past few decades even until now this has been the normal way to price crude oil. However, when the Ukraine-Russia War began last year, the US started to freeze Russia’s assets in various jurisdictions, including their bank accounts. This caused a major consternation among various nations, including the major powers above.
In addition, other countries that have been negatively affected by the US, other political and economic decisions are also warming up to supporting the BRICS alliance, especially those who have not normally been America’s allies, or even those who have had overt antagonistic tendencies towards it.
Many countries around the world are also concerned about the US deficit because they are purchasing US treasury bonds as part of their sovereign holdings. With the US debt now at $32T and growing fast, they are concerned that sometime in the future their bond holdings will not be paid back because the debt has far exceeded the US GDP and tax collections. Even Fitch Holdings, a respected US based credit ratings agency, has downgraded the US from AAA to AA+.
Aside from the US national debt, there is also a high amount of money supply in the system measured by the Federal Reserve M2 metric. This high M2 has been causing the high inflation that the Fed has been trying to lower through interest rate hikes, to make debt tighter and more expensive. The M2 money supply skyrocketed primarily because of the 2020 CARES Act that saw direct cash injections to the public who were quarantined during the COVID pandemic.
Both the fast growing debt and overreliance on it both from a government and consumer perspective, the Fed interest rates hikes, and an overreliance on overprinting money because of Modern Monetary Theory (MMT) have convinced many countries abroad to support the BRICS plan, or at least be curious about it.
While it is not likely that the BRICS will be replacing the US petrodollar anytime soon with their own gold backed currency, the mere fact that they are getting significant consensus shows that the US needs to clean up the way it handles the US dollar. If the US insists on business as usual, it may find that crude oil is already being priced by oil producers using the new currency.
SOURCES
https://edition.cnn.com/2023/08/24/business/saudi-arabia-brics-invitation-intl/index.html