Discover more from Peter St Onge, Ph.D.
How would a Gold-Backed Brics work?
Hype today, reality tomorrow.
With the Brics annual summit coming up in a couple weeks, we’re seeing speculation about the China-led bloc issuing a gold-backed currency to displace the US dollar.
Will they do it, and what would it look like?
First off, what’s Brics? It stands for Brazil, Russia, India, China, South Africa, and together the trade bloc accounts for about 40% of world population and growing. Economically, it accounts for about 32% of world GDP, also growing. And a slightly higher share of world trade, now higher than the G7 made up of the West and Japan.
The latest round of gold-backed Brics hype kicked off when the Russian Embassy in Kenya announced a gold-backed Brics is coming.
Of course, the Russian Embassy in Kenya is not the source you’d expect for a revolutionary transformation of the global monetary regime, so there was skepticism. Indeed, South Africa subsequently came out saying, no, a Brics currency is not on this year’s agenda.
Still, whether or not it happens this summit, for almost a decade both Russia and China hinted at a gold-backed currency to counter what they see as American hegemony over the global trade and financial systems.
Both Russia and China have certainly taken concrete steps, from forming the Brics grouping in the first place — which now allegedly has several dozen countries clamoring to join including long-standing US allies like Mexico or Saudi Arabia — to actually clearing major trades in the Chinese yuan, to bulking up their gold reserves to the point the 5 Brics countries now have roughly two-thirds as much gold as the US.
Indeed, they have enough gold to back a currency on the scale of, say, the Japanese yen.
How a Gold-Backed Brics Might Work
There are two very different versions of a gold-backed Brics. One would be a settlement token, simply another way for governments to make payments with each other. The other, much more revolutionary, would be a fully redeemable Brics where even companies or individuals could trade their paper Brics for gold.
This is the more likely of the two. Because it’s the simplest path to what China and Russia want: a dollar replacement that acts as a stable "rail” for international trade or financial flows.
The gold backing, in this case, cancels the problem that Brics countries have crappy currencies. Russia and Brazil have ongoing histories of hyperinflation, while Russia’s particularly desperate at the moment. China’s yuan is rigidly controlled, and India and South Africa have periodic bouts of political instability.
Toss in the dozens of countries allegedly applying to join Brics and you’ve got some shady operators both in terms of currency and in terms of governance.
If this settlement Brics does happen, it could accelerate the dollar’s loss of reserve status, but the difference would initially be small since trade between Brics countries makes up less than one fifth of their total trade, meaning less than 5% of global trade.
Still, by functionally restoring the pre-Nixon era of gold convertibility, it could over time soak up trillions in dollar share, starting with central bank reserves and trade between even non-Brics countries. Each step eroding the reserve currency status and its value, driving inflation in the US as imports get more expensive.
Fully Redeemable “Nuclear” Brics
The revolutionary change would be the “nuclear” Brics: a fully gold-redeemable currency, not just by countries but by companies or individuals.
Revolutionary because this could potentially soak up tens of trillions in currency demand since gold holds its value much better than the dollar. This could gut the US dollar, indeed, it could gut all fiat paper money.
Mechanically, a fully redeemable Brics currency might be denominated in gold — say, one centigram of gold, currently worth 70 cents. If a Chinese company sells a toaster to a Brazilian, it gets Brics in payment, and can keep them in the vault or park them at its local bank at interest, or they could exchange the Brics for gold at a Brics bank branch in their country.
The mere possibility of redemption prevents over-inflation of a gold-backed Brics: If, for example, they print 30% of new Brics — as the US did during Covid — while demand only went up 10%, the price would fall below a centrigram of gold and people would start withdrawing gold. At which point they’d have to buy back the new supply or lose their gold.
While exciting, I think a fully redeemable Brics is unlikely. Partly because the Chinese government is staffed by bureaucrats who are afraid of making big changes lest they get assigned to some random desert outpost. But mostly because China, too, uses a fiat currency to inflate and manipulate its economy.
After all, a worldwide gold-backed currency would kill not just the dollar, it would kill all fiat, ending all governments’ ability to inflate at will. It would be a unilateral government stand-down, returning great swathes of the world’s wealth and control to the people.
It would be pretty surprising for a government to do that, especially a totalitarian like China.
Still, it’s an interesting scenario specifically because it hits China’s nemesis the hardest, while China’s surveillance state could potentially ring-fence itself, keeping Chinese in paper yuan even as foreign fiat collapse. So I don’t think the incentives work for China today, but they could tomorrow.
What Comes Next?
Given the difficulty of herding the cats of Brics we may not get any kind of gold-backed Brics for a number of years — it could just be cheap talk from the Russian Embassy in Kenya.
And if we do get a “gold-backed” Brics, given China’s incentives I think it’ll be a settlement Brics, not a common use gold-backed money.
Still, the fact that you can replace the entire global fiat system with a single backed currency will eventually be exploited. This could be a country that isn’t inflation-dependent, like Dubai.
Or it could be a private gold currency, whether physical or blockchain-based.
Or it could be Bitcoin, which mimics gold’s supply dynamics with innate immunity to government control and, of course, no fears of killing fiat.
In fact, just this week Presidential Candidate Robert F Kennedy Jr floated backing the dollar with both gold and Bitcoin — backing is edging into the public conversation.
Whatever form it takes and whether Brics or not, for the first time in 50 years global inflation is driving the world towards some sort of backed currency. As it keeps going, fiat currencies, and the governments that depend on them, are living on borrowed time.
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