Will The BRICS Currency Use A Gold Standard?

By Mish Shedlock of MishTalk
Wednesday, July 10, 2024 4:00 PM EST


I was asked to comment on this Tweet and said OK.

BRICS Claim

The Brics will go on a gold standard. By every definition of the word this person can think of. For key commodity regional international trade. The gold standard will likely be 40% backed at minimum physically. It will also possibly be backed up to 60% based on the future weightings of gold in each members nation’s submitted currency to the BRICS unit basket.

This has implications and has set in motion everything going on today: from sanctions, to tariffs , to supply chains of non-gold goods, to chains creation of value chains, to Fed policy changes and so on.

Related Article

I missed it at first, but here is the article: Founders: The BRICS Will Use a Gold Standard. It’s paywalled.

Redeemability

Let’s start here: “The Brics will go on a gold standard. By every definition of the word this person can think of.“

Really? What about redeemability? How can something backed by 40 percent gold or “perhaps 60 percent” be redeemable for gold?

It can’t. It is impossible to “back” something with 60 percent of something else.

Also, there is no explanation of whether the currency floats, how the currency comes into existence or any other details about how anything works. There is never anything but speculative hype.

July 7, 2023 Flashback: Supposedly, It’s Official!

Gold Standard Could be Back

Note the date, July 7, 2023. The summit offered nothing about a gold-backed currency. Heck, it offered nothing about a BRICS currency at all.

This has been going on since 2009.

BRICS Nations

On 1 January 2024, BRICS – the intergovernmental organization comprising Brazil, Russia, India, China and South Africa – admitted four new members: Egypt, Ethiopia, Iran and the United Arab Emirates.

The more nations the BRICS add, the more unwieldy the group will become. The EU and UN are prime examples.

27 nations in the EU each with veto power makes nearly impossible to get anything done.

It took the EU over two decades to work out a trade agreement with Canada because two small nations had veto power and used it.

Magic Wand

Despite the obvious BS nature of the “backed by gold” Tweet, I am going to wave my magic wand, answer key questions, and make some assumptions.

The name of the currency will be the BRICK.

Magic Wand Assumptions

  • The BRICK floats
  • It will be “backed” (whatever that means) by 60 percent gold. Let’s assume with 100 percent confidence the gold is there. However, you don’t have access to it.
  • There will be no friction between Brazil, Russia, India, China , South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates over BRICKs administration (whatever administration means) of the currency.
  • The three largest players, China, India, and Russia will set the rules and everyone will be happy with those rules.

Investor Questions

If you are an investor, would you buy BRICKs or would you rather buy gold, silver, or Bitcoin?

Let’s assume you really want to buy BRICKs. What would you do with them? Where is your balance kept? How is your balance kept? Has there been any discussion of any of this?

So, let’s make another assumption. All BRICKs transactions are on blockchain. Hooray?!

Is Blockchain untraceable? Let’s assume so for BRICK transactions.

The question still remains: If you are an investor, would you buy BRICKs or would you rather buy gold, silver, or Bitcoin?

Trade Between Nations?!

But Mish, this is not for investors, BRICKs are for trade between nations!

OK let’s march down that path with more questions. This time let’s assume you are a Brazilian farmer (BF) who sells soybeans to a Chinese merchant (CM).

CM offers BF BRICKs for soybeans.

Why would BF want BRICKs? Can BF buy fertilizer with BRICKs? Farm equipment from John Deere? Pay rent?

What possible use does BF have for BRICKs? And why would CM have BRICKs to offer in the first place?

Logical Answers

BF has no need for BRICKs. He needs the Brazilian Real or US dollars to pay his bills or buy things he needs.

Similarly, CM has no reason to hold BRICKs because his expenses are in Yuan, the official currency in China.

Think of BF as any person. Think of CM as any other person. Why would anyone, anywhere, want to trade in BRICKs?

Trade is Not Between Nations

The whole idea of a “trading currency” between nations is absurd because trade is between individuals, not nations.

Trade deficits or surpluses are the result of millions of transactions by individuals.

People who think trade is between nations ask silly questions and make silly proclamations.

Here’s a Real Lula

Flashback May 30, 2023: Reuters reports Brazil’s Lula Says he Favors Stopping Use of Dollars in Trade.

Brazilian President Luiz Inacio Lula da Silva said on Tuesday he defends the idea that countries cannot keep trading in dollars, restating his proposal for creating a common currency for the BRICS group of leading emerging economies.

“Why can’t the BRICS create a single currency? Why are we obliged to buy dollars to make trade,” he asked reporters during a press conference following a meeting with South American leaders.

A Word on Obligations

No one is “obliged” to do anything.

CM can demand yuan or BRICKs if he wants. But how easy is it for BF to get BRICKs? Does CM even want BRICKs? Why?

The US dollar is the most liquid currency in the world. All of the CMs in China, and counterparts in Japan and Europe accept us dollars because dollars are easily converted into something else or are used straight up as is.

If Brazil mandated the use of BRICKs it would be giving up control of its currency, the Real. There is no obligation. Dollars are practical.

Even if BRICKs were to be 60 percent gold-backed (whatever that means), who would use it?

I repeat: Think of BF as any person. Think of CM as any other person. Why would anyone, anywhere, want to trade in BRICKs? (Answer below but first let’s trash other bit of silliness).

Percent of the World

I constantly see hype that the BRICS nations are some huge percent of the world.

So what? India and China are nearly all of it. How does adding Egypt, Ethiopia, Iran and the United Arab Emirates do anything?

Heck, assume every nation in Africa will become a BRICS member nation. How does that do anything?

Does the Ethiopian BF or CM counterpart have any reason to trade in BRICKs?

The answer is no because Ethiopians need their local currency (the Birr) or US dollars or Euros to do anything.

The Ethiopian BF needs the Birr to pay taxes and buy goods and services locally. If there is a black market in Ethiopia, it’s in US dollars not BRICKs.

To force a trade in BRICKs, some nation will have to demand taxes be paid in BRICKs. Who will step up to the plate on that? Brazil? Russia? India? China?

For further discussion, please see BRICS+ Is Forecast to Dominate the World’s GDP, But What Does That Mean?

Sanctions

The only practical use for a BRICKs currency is sanction avoidance.

Individuals who are heavily sanctioned cannot easily conduct US dollar transactions or transactions in Euros that also go through US clearing processes.

Sanctioned individuals would welcome any currency that would be untraceable to US authorities.

Wish granted.

But in my Brazil example, that still requires BF get BRICKs to pay the sanctioned CM and the sanctioned CM then needs to convert those BRICKs to something locally usable.

Wish granted. I now assume BRICKs are as nearly as liquid as US dollars.

Wishes Granted Synopsis Revised List

  • The BRICK floats
  • It will be “backed” (whatever that means) by 60 percent gold but it won’t be redeemable because something cannot be backed by 60 percent of something else. By the way, even if BRICKs were 100% gold-backed, it would not be redeemable, for the obvious reason, an immediate run on the currency.
  • Everyone will accept on faith, or by audits, the gold exists.
  • There will be no friction between the BRICS nations on how BRICKs are administered.
  • BRICKs will be very liquid.
  • There will be no fear of holding BRICKs.
  • China accepts BRICKs and will freely trade yuan to local merchants who receive BRICKs in trade with BRICS nations.

Assuming all the kinks are ironed out and all the above assumptions are met, sanction avoidance still remains the only practical use for BRICKs.

That’s because trade is between individuals not nations and individuals never have any expenses or taxes in BRICKs because the BRICK will not be the official currency of any nation.

Anything Else?

Yes, nations accumulate US dollars because the US constantly runs trade deficits with nearly every nation.

This is what makes the US dollar a reserve currency. China supports export mercantilism and accumulates US dollars as a result, The latest report that China is dumping US dollars is highly likely false for mathematical reasons alone.

Regardless, China runs a trade surplus with most of the world except for oil nations. If China freely accepted BRICKs (one of my added assumptions) what the heck would the Bank of China do with them?

Here’s the scenario: The local CM accepts BRICKs but has expenses in yuan and dollars and taxes in yuan.

So the CM exchanges the BRICKs to the Chinese central bank for Yuan. And what does the Bank of China do with them? Answer please!

The same question applies to Brazil. If the BF accepted BRICKs and traded them to the Brazilian central bank for Real, what the hell does the Brazilian central bank do with the BRICKs?

Note that China can buy planes and other items for its SOEs with dollars. So can the Brazilian government.

China and Brazil also collect interest on US Treasuries. Where’s the global bond market on BRICKs? Answer Please!

The Bricks Challenge

Here is a similar discussion: How Real is the BRICS Challenge to Reshuffle the World?

“It only makes sense to trade in national currencies (not freely convertible) if the trade balance between the countries is more or less equal. Russia, for example, recently sold lots of oil to India, dealing in rupees. But because India exports much less to Russia than it imports, Moscow now sits with rupees it cannot spend or convert — except to buy goods from India. China’s renminbi isn’t sufficiently convertible and lacks the deep capital markets, market transparency, independent central banks and supporting financial institutions of Western banks,” argues Jakkie Cilliers, head of African Futures and Innovation at the Institute for Security Studies in Pretoria.

BRICS has offered nothing fundamentally different in terms of alternatives. “At formulation, the BRICS idea had a lot of economic and political potential because we saw it as a challenge to the unipolar world that was been dominated by the United States of America. However, due to several reasons, including the coming into power of right-wing President in Brazil, we didn’t see a lot of progress in the organization in the past few years. We also doubt whether BRICS can challenge the US hegemony now that it has admitted countries like Saudi Arabia, United Arab Emirates and others,” says Wachira. In a similar vein, MacEbong believes that usually coalitions like BRICS are bound by either geography or some shared ideology but nothing of the sort is in operation here. “The current — expanded — BRICS will have countries with a history of tensions, like India/China and Saudi Arabia/Iran. Getting everyone on the same page will be difficult,” he added.  

What Would it Take for a BRIC-Based Currency to Succeed?

Note that I waved away the cooperation issue and freely floated the BRICK. Neither changed anything.

I have discussed much of this before (See What Would it Take for a BRIC-Based Currency to Succeed?)

I like my explanation using BF and CM as examples much better today. And I made every reasonable assumption this time trying to make it all fit.

I do like my conclusion from before.

What Constitutes Success?

If we change the definition of success from a meaningful percentage of global transactions to a meaningful way of avoiding US sanctions, the Brick has a potential to be a big success.

Iran and Russia, not Brazil or China may easily be the biggest BRICS success stories.

Notably, both Trump and Biden are overly reliant on tariffs and sanctions. But the US will not be able to enforce sanctions and track transactions that it cannot see.

This would not result in a new world order as hyped, but it could put an end to US setting sanction policy for the entire world. Retaliation is coming as sanction avoidance, not as the end of US dollar dominance in trade.

Lead Question Revisited

So, to answer the lead question, “Will the BRICS Currency Use a Gold Standard?”

The answer is no, but the question is moot.

It would not matter even if that happened because the only practical use for BRICKs is sanction avoidance. Gold, since it will not be redeemable, adds nothing to that.

Let’s make one more major assumption. BRICS are to be 100 percent convertible to gold. There would be an immediate run on any country that tries that.

Yet, the hype with no details continues. There won’t be any believable details either, for all the reasons stated.

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