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The US Dollar (USD) has enjoyed a preeminent position on the world’s financial stage since the end of World War II. I discuss why in Escaping Oz: Navigating the Crisis. The dollar’s preeminence, however, is fading.  While it’s true that US government spending profligacy is making the nation a worse credit risk, that’s not the main reason for the dollar’s diminished status on the world’s stage. 

It’s incumbent on nations to accept USD for purposes of international trade. Those USD then find a home in interest bearing USD denominated government securities. The US government securities market is highly liquid and universally accepted. While these debt instruments are officially the owned property of whoever purchases them, the US government exercises their ultimate control through electronic ledgers.

In recent years, US government policy has used the USD as an anvil in relations with foreign nations. This led to the freezing of foreign-owned assets and in the Ukraine conflict, the seizure of Russian-owned US debt.  There’s even been discussion about selling these seized assets and using the proceeds to continue funding the Ukraine war. Whatever your view of the Russia-Ukraine war, once the government seizes foreign assets, the entire democratic notion of property rights is extinguished. Naturally, foreign governments, both friend and foe, respond by making themselves less vulnerable to that US foreign policy anvil.

The first step is via the creation of trading blocs where nations no longer use the USD as an intermediary. This step is challenging since it requires a suitable replacement. Since no other currency can readily occupy this role, the bloc must create something new that all members accept. The first iteration of such a bloc will be by the BRICS (Brazil, Russia, India, China, S. Africa) nations and their new currency/trading unit will no doubt feature commodity-based pegs (gold, silver, crude oil), and perhaps even crypto. 

The implementation could well involve a trade settlement every "x" days/weeks/months. Trade imbalances between nations would settle within that period using the established trading/currency unit. Currency/trading unit transfers would occur over a new communications network with transactions perhaps recorded on a new blockchain. If successful, the BRICS or BRICS+ trading bloc will no longer require the USD for trading among member nations. This will be no small hurdle, though technically quite feasible.

But that’s just one part of the equation to replace the USD. To fully replace the USD, the world would need to develop a new foreign reserve currency. A reserve currency must have an open, liquid market for debt instrument trading (think of the US treasury market). Contemporary reserve currency examples include the USD, Japanese Yen, Euro among others. 

Recently, I attended a presentation by a well-known economic strategist from an investment arm of a major bank. The strategist dismissed the BRICS effort noting that many of the parties have competing economic and international interests. While the assertion is undoubtedly true, that is the case with any nation — nations inherently act in their own best interest. Moreover, the nations in this emerging bloc are not financially subordinate to each other such that one nation's currency exerts dominion over another. How many of these nations were influential in establishing the USD as the world's reserve currency? The developing BRICS currency is for trading, not for the purposes of holding foreign reserves. 

While talk of the USD’s demise is premature, the world has taken its first step towards the disintermediation of the greenback. The longer-term consequences for the US consumer and the financing of federal debt will be profound.

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