The ruble is riding high on the foreign exchanges. This has been coming for some time as the dollar declines:
Russia is ready to develop a new global reserve currency alongside China and other BRICS nations, in a potential challenge to the dominance of the US dollar.
President Vladimir Putin signaled the new reserve currency would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
GDP USA 25.0 trillion
GDP China 20.0 trillion
GDP India 3.5 trillion
GDP Brazil 2.0 trillion
All the other countries are too small to be listed.
So in nominal terms, the new reserve currency is essentially backed by China and India. I include India and not Brazil because India has the largest population on the planet, that population is young and the GDP of India is (in general) growing faster than any other economy. Brazil has none of these attributes.
So the new reserve currency represents about the same GDP as the USA and it is based on two economies that are growing faster than the US economy. From here, in nominal GDP terms it looks like it is a decent competition. Of course it is not a done deal and China could implode India could disintegrate. What does not matter is Russia. It is irrelevant.
Now looking at the PPP we get a different picture. This is where it gets interesting.
PPP China 30.0 trillion
PPP USA 25.0 trillion
PPP India 12.0 trillion
PPP Russia 4.0 trillion
PPP Brazil 3.5 trillion
This shows the that the new current would be backed buy PPP’s approaching 50 trillion vs the USA at 25 trillion. However, while the PPP GDP of the US dollar seems to be based solely on the US dollar, in reality the US dollar, especially regarding
PPP is probably more of a consortium of economies. That consortium is also close to 50 trillion. The big difference is that these economies all are facing demographic head winds and have historically (last 30 years) had very slow growth compared the China and India.
To me, I see an edge for the Asian consortium, but the demographic problems in China and the instability in India are significant problems so making a call right now seems imprudent.
I think that the USA’s ‘weaponizing’ of the dollar payments system has given the move away from the dollar a massive boost. Once the alternative system is up and running watch countries jump ship.
I’d imagine that Russia and China would weaponise any currency that they had control of or influence over, but until then…
Will the new system be in RMB? I have not studied it at all.
If in RMB what happens when the Chinese depeg from the dollar? What happens with the huge inflation rate in China?
Will the Saudis want any part of that?
Would it help VZ? Or just screw around with their oil’s value?
We can not look at a new system as a flat trading system. It is going to be in one currency. Probably RMB. That is high risk. It is not a future reserve currency right off the bat.
As the RMB is trading in a range right now against the USD, we can not expect the RMB to be a reserve currency of significance for perhaps 10 years. This assumes the imploding Chinese economy comes back some how in a world order of eastern (China and Russia) v western economies. I doubt the west will have sympathies for the Chinese economy. We are moving on.
Nice on paper not really. Looking under the hood it is garbage.
One requirement for a reserve currency is that the countries involved have a good legal system that is transparent and enforceable for foreigners.
For all the problems the US might have including the “weaponization” of financial systems it would be hard to consider the Russian and Chinese legal systems as providing adequate protection for foreigners. I don’t know about the other countries that were mentioned.
Will the new system be in RMB? I have not studied it at all.
Who knows, but I doubt it.
If I were designing the system I would create a new currency, something like special drawing rights, possibly with some gold component in it. For over 50 years the world has been running on a fiat currency system and this has led us to where we now are, so I would expect some gold in the mix.
Internally each country would continue using its existing currency. The experience of the euro has shown the dangers of different economies being forced to use a single currency.
Interestingly many of these countries are holders of large amounts of gold, so I’m still buying it!
Thanks for the tip. I am so excited to be able to know the world will depend on Russia, China, India, Brazil and South Africa, all of which have ranked below the world average for “government stability” for the past 20 years.
I can certainly I see why everybody would want to jump into this pool. Wheee!
If I were designing the system I would create a new currency,
Then you link it to the gold holdings of several sovereign nations?
You really think Xi and the Chinese are going to create a new currency? You think China the main power in that wont insist on the RMB?
You think the false reports that the US treasury has not audited its gold ever are true? So the gold must be missing? Which creates the false belief that the US does not actually have more gold in our treasury? Or that we owe gold we do not have?
Serious stop reading only blogs you believe in for your facts.
I wont be following you anywhere on this.
I’d suggest others not even waste their time on due diligence.
Do not be so certain the US dollar will not be replaced as a reserve currency.
There are already mechanisms such as SDR’s established by the IMF that are made up of a basket of commodities that could be used. Already many countries bypass the US dollar completely for some transactions.
Some people speculate the Chinese are just waiting for the right time to pull the rug out. And with the US so keen on helping Iran the Saudis may choose to sell oil in another currency as well as the US dollar.
Don’t think the world is going to go on funding massive US deficit’s forever. Additionally the war in Ukraine is not looking good for the US longer term as it will cause Europe to build up it’s military plus the weaponising of the payments system and confiscation of assets.
If the dollar is not the reserve currency I don’t think you should be concerned with China or India imploding.
Thanks for the tip. I am so excited to be able to know the world will depend on Russia, China, India, Brazil and South Africa, all of which have ranked below the world average for “government stability” for the past 20 years.
I can certainly I see why everybody would want to jump into this pool. Wheee!
I’d hardly see the USA as a stable country. Economically it is ‘hollowed out’ and has used its military to keep the petrodollar system in place. I sometimes think that the US marine corp. is a division of The Federal Reserve:
Like it or not the system is coming apart. I suspect that what we get after the dollar decline will be worse for us in the UK but it looks like happening.
And with the US so keen on helping Iran the Saudis may choose to sell oil in another currency as well as the US dollar.
I think that it’s just a threat at the moment but it will happen:
Yuan jumps after report Saudis consider its use in oil deals
The outbreak of the Ukraine war and the swath of sanctions imposed on Russia as a result has brought to the fore questions about alternatives to US currency-based markets.
At the moment the US gets a trillion dollars worth of goods from the rest of the world by printing debt. If the world decides it does not want dollars the USA will be poorer by this amount and the rest of the world better off!
At the moment the US gets a trillion dollars worth of goods from the rest of the world by printing debt. If the world decides it does not want dollars the USA will be poorer by this amount and the rest of the world better off!
Economics do not work that way. Those dollars are considered a loan. A loan that eventually needs to be spent in the US or on US goods.
Just because you have a stance does not make it rational economics.
Like many fiat currencies the dollar is a Ponzi scheme, these ‘loans’ will never get paid back, just rolled into bigger and bigger ‘loans’ until no one wants to lend anymore.
A loan that eventually needs to be spent in the US or on US goods.
That would have an interesting effect on US inflation!
Dollar replacement will happen when the center of the world economy shifts to Asia. The USA is still where roughly one quarter of global GDP is located. Add Europe and Japan and you have half the world economy. China remains a lesser player on a GDP basis. All that trade with the west remains dollar denominated, and all those trade surpluses need to be stored in dollar form. US Treasuries will continue to dominate.
All that trade with the west remains dollar denominated, and all those trade surpluses need to be stored in dollar form. US Treasuries will continue to dominate.
I do hope so. However, there is more and more ‘chatter’ about this, something that would have been unthinkable twenty or thirty years ago. The BofE’s Mark Carney at Jackson Hole in 2019:
World needs to end risky reliance on U.S. dollar: BoE’s Carney…
…Bank of England Governor Mark Carney took aim at the U.S. dollar’s “destabilizing” role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.