UAE and Saudi joining BRICS, what are your thoughts on the effects of this?
UAE and Saudi joining BRICS, what are your thoughts on the effects of this?
The United Arab Emirates (UAE), Kingdom of Saudi Arabia and Egypt are among six nations that have been invited to join the BRICS group of nations, and will join it in Janurary 2024
What do you guys think what effects it will have on the global economy?
So...the US dollar is the world's "reserve currency". Most international trade is actually conducted in USD, and central banks have to hold billions of USD in reserve as part of their basic operations.
This gives the US two massive geopolitical advantages:
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Because central banks like to hold their reserves in US Treasury bonds (which are considered safe but also pay interest) it artificially lowers the interest rate on those bonds. It's estimated this saves the US hundreds of billions of dollars annually in borrowing costs.
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Unless you want to use literal truckloads of cash, the only way to obtain and hold USD is through the global dollar-denominated banking system, which itself MUST comply with US sanctions. In practice this means that the US can "sanction" individuals, companies and countries - and thus nearly freeze them out of global trade and finance.
I think it's best to see BRICS as a direct response to that reality. The more these countries trade with each other in their own currencies, the more they weaken "dollar supremacy".
Over time, (20 years?) I personally would predict that the effectiveness of the US sanctions will degrade to the point of irrelevance. You can already see this (IMO) in the "chip wars" and Huawei's "escape". I think the proportion of global trade denominated in dollars will steadily decline, and borrowing costs will start to normalize to the rest of the world, and possibly spike.
So…the US dollar is the world’s “reserve currency”.
Correct. But it's not a binary thing, but a spectrum. Look at it in the prospective of the last, let's say, 30 years.
How much has USD declined from usage? How much have the trades in the local currencies increased?
How about the last 2 years in particular? Moreover, the counries of BRICS trade mainly in the local currencies.
I did a little research. It doesn't look like the scale of these efforts are large enough to show up in the graphs yet.
In other words, I think we are in the "hype" part of the adoption cycle of "dedolarization" - announcements and partnerships and symbolic gestures, but the hard work of actually accomplishing the change still lies ahead.
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Short term, it won’t be a huge deal economically. Long term, it might help with de-dollarization but you don’t conduct trade in the reserve currency for political reasons. It’s just the default. Contracts are written in dollars, shipping companies expect payment in dollars, they buy insurance with dollars, etc. etc. You can use other currencies now and nations do but it’s far harder and usually more expensive so countries (and, as important, companies) just don’t.
I do think eventually, we’ll have a “basket of currencies” situation where no single currency defines the adjustments that have to be made if the buying or selling country has unforeseen inflation. But I think that’ll take way longer than the political changes. Political change happens all the time. Since 1450, there have been 6 reserve currencies.
So, I think the economic changes will be symbolic and small while the political changes will be more meaningful.