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There has been an online explosion of discourse surrounding several currency agreements signed by nations like Russia, China and India, with some even predicting the emergence of a gold-backed BRICS currency to rival the US dollar by the end of the year.
Is this actually possible though, and how likely are these five countries who have wildly different levels of interest, savings and inflation, to work together in the long term, or is this just Russia and China making political noise whilst still clinging to the stability of the US Dollar? Are we experiencing the beginning of 'The Death of the US Dollar?' or a masterclass on why it has maintained its primary position for so many decades now? We ask our panel of experts.
Episode Overview:
Part 1: When the Price is Right (3:59)
Vicky Pryce begins our conversation by noting the supremacy of the US Dollar in the international system, outpacing other currencies as the dominant foreign reserve holding in recent decades. Michael provides us with a quick overview of how currencies affect domestic economics.
Pryce goes onto explain why countries hold reserves of currencies that don't align with their major trading partners, and how the US Dollar as an open currency reduces transaction costs and the complexities of international trade.
We explore what China would gain from putting themselves forward as a potential replacement for the US Dollar, including both status and potential cost efficiencies for the Chinese economy.
We investigate calls to return to the gold standard, whereby the value of the US Dollar was backed by physical reserves of gold, in light of recent inflationary pressure and why it was abandoned in 1973.
Part 2: Debt and Detriment (29:26)
Maximilian Hess notes that international sanctions on Russia have created a trade war-like currency conflict in recent years, pointing out that during times of crisis the US Dollar often benefits and strengthens in such conditions.
Hess points out that US debt instruments largely create the structures required to support international trade markets, creating opportunities to move money swiftly in response to international events, and therefore securing the primacy of the US Dollar in that system.
We discuss the structural factors that holds back the BRICS nations from creating a currency to challenge the US Dollar, as it is hard to create a currency that is both attractive as a trade instrument and a financial instrument. We also discuss the problems that such a currency would have if it were backed by gold, as has been rumoured.
Cutting off countries from the US Dollar has had mixed results in recent years; relatively effective against Iran, less so against Russia. We explore what would happen if the US attempted a similar manoeuvre against China.
Part 3: Funding a Fiasco (53:53)
Anders Åslund commences our final section by observing the effects on the Russian economy from sudden de-Dollarisation, causing initial turbulence but recovering to a more stable position through strict and rapid fiscal and monetary policy. We also discuss the effects on Russian assets abroad.
We discuss what characteristics a BRICS currency would need to have to replace the US Dollar, noting that such a currency would lack the stability, exchangeability, and depth needed to pose a significant threat.
We note that in the last 20 years, there has been a diversification of reserve currencies, however those tend to be western economies with low inflation and that is fully exchangeable. The Ruble and Renminbi remain significantly behind these currencies.
Episode Guests:
Vicky Pryce
Economist and former Joint Head of the United Kingdom's Government Economic Service
Chief Economic Advisor for the Centre for Economics and Business Research in London
Former Partner and Chief Economist at KPMG
Maximilian Hess
Central Asia Fellow in the Eurasia Program at the Foreign Policy Research Institute
His research focuses on the relationship between trade, debt, international relations and foreign policy, as well the overlap between political and economic networks
Former Head of Political Risk at Hawthorn Advisors and Head of Research and Intelligence at AKE International
Anders Åslund
Swedish economist and former Senior Fellow at the Atlantic Council
Chairman of the International Advisory Council at the Centre for Social and Economic Research
His work focuses on economic transition from centrally planned to market economies
The Red Line's Foreign Currency Reading List:
We’ve compiled a list of further reading to better understand the geopolitics of foreign currencies and their role in international economics.
Books:
The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance Eswar Prasad
The Power of Money Paul Sheard
Women vs Capitalism
Vicky Pryce
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This episode is dedicated to our Patreon member Brendan Nelson-Weiss and Rhett Marchant.