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05/21/24 11:38 AM

#117 RE: gfp927z #116

>>> BRICS Making Good Progress On Their Golden Path


by Nathan Lewis

Jan 24, 2024

After tossing around a few bad ideas, the BRICS countries have settled on using gold as the basis for international exchange, a role previously taken by dollars and euros. This does not mean today’s floating fiat ruble, real, or rand is going anywhere soon. Rather, just as the US dollar was used alongside those domestic currencies in the past, today and in the future gold will be more commonly used.

There would not be very much trade in actual gold coins — just as there is not much trade in actual dollar bills. Indeed, gold doesn’t work very well for this hand-to-hand exchange at all, since even small coins tend to be of very high denomination, worth $200 or more. Rather, it means that people around the world will increasingly use various vehicles — such as bank accounts, bonds, loans and cryptocurrencies — denominated in gold, just as they use the very same set of tools today, but denominated in dollars.

Already, some BRICS members — including Russia and newcomer Iran — have been basically banned from the dollar system. They literally cannot hold a “dollar.” They have no dollar “wallet.” For example, they cannot have a bank account, with a bank in the Federal Reserve clearing system. Other countries, including China, are eager to set up alternative systems, because they suspect that what happened to Russia and Iran could be done to them too. More countries, seeing where this is going, are making sure they have a seat at the table, for business opportunities alone. This could include former US allies such as Saudi Arabia, which joined the BRICS in January.

The most fundamental international role that the USD (or EUR) takes today is as a “currency of currencies” in foreign exchange. For example, let’s say that someone in Peru wants to buy some wool from New Zealand. There is no “bilateral exchange” between the currencies of Peru and New Zealand. Rather, there is a market between Peruvian soles and USD; and USD and New Zealand dollars. The same thing is seen on cryptocurrency exchanges, where there is no direct market between DogecoinDOGE 0.0% and Shiba Inu. Rather, there is a DOGE/USD (or USDTUSDT 0.0%, or maybe BitcoinBTC 0.0%) market, and a SHIBSHIB 0.0%/USD market. On the stock market, it might be MSFT and NVDA. Obviously, if you are unable to hold and make payments in this intermediary currency, in this case the USD, then you can’t exchange your PEN and NZD; or DOGE and SHIB.

There have been some steps toward “bilateral exchanges,” for example between Russian rubles and the Indian rupee. However, with 25 currencies, you end up with (N)(N-1)/2 = 300 bilateral exchange markets. Basically, it is currency barter. Also, most markets would have very little liquidity. Someone wanting to exchange PEN and NZD would have to wait for someone else to who wants to exchange NZD and PEN; and in the same size. Not going to work.

Already, major Russian banks including Sberbank have taken steps to provide such a universal currency, based on gold. A Sberbank launched a cryptocurrency stablecoin based on gold in December 2022. A more promising development, to my mind, has been the introduction of “gold checking accounts” in Russia. You can send digital grams of gold to various accounts — accomplishing what GoldMoney set out to do in 2001. The advantage here is that banks already have all the necessary infrastructure for checking accounts; adding a gold denomination is a minor extra step.

The next step would be to set up a foreign exchange market — that is, bids, asks, and some way to transact — using these gold checking accounts as the central unit, the role the USD usually takes today. Instead of RUB/USD and USD/INR, you would have RUB/BGD (”BRICS Gold”), and BGD/INR, probably hosted by an institution like Sberbank, here taking the role that Coinbase performs for cryptos. It seems, however, that Russians, Indians and so forth are not very good at financial engineering. They are awesomely good at aerospace and defense engineering, but this seems to leave them stumbling and bewildered. But, it’s not really that hard. If Sam Bankman-Fried can do it, one of those ace Chinese, Indian or Russian engineers can manage to set up a simple currency exchange market.

This basic plumbing of payments serves as a foundation for more interesting developments. Around the world, major companies, and even governments, finance in USD and EUR. They issue USD and EUR bonds, for the simple reason that there are a lot of people that want to buy USD bonds, but not RUB bonds, or BRL bonds — even in Russia and Brazil. Major Russian companies like Gazprom and Mobile Telesystems issued billions of dollars of USD and EUR bonds. In 2Q23 alone, $615 billion of USD bonds, and 443 billion of EUR bonds, were issued by international issuers worldwide. Plus, bank loans in USD and EUR. If companies like these are unable to issue USD or EUR bonds in the future, how will they finance themselves?

The obvious solution is gold bonds. In 2023, the government of India began experimenting with gold-based government bonds. These would probably be very popular with investors worldwide. From the start of the Floating Fiat era in 1971, to the present, a gold bond paying 4% would have outperformed all stock and bond markets worldwide. That outperformance would probably only get larger going forward.

A gold bond of this sort might be administered in Indian Rupee. Basically, a bond for “100 kilograms” would be purchased for the INR equivalent of 100 kilograms of gold at the time of issue. Interest and principal would be paid in INR equivalents to gold at that time. Brazil issues such “dollar-linked bonds” today. But, it would be better just to use gold itself as the payments basis. Payments related to the bonds would be made using something like the “checking accounts in gold” described earlier.

I would guess that not until long after a system of the “international use of gold” has been established, for example including gold-bond-based financing in large size, would we see movements toward getting rid of today’s floating fiat domestic currencies. Once a company, or government, is liable to pay bonds in gold, it makes sense to also denominate revenue in gold, or there could be a disastrous liabilities mismatch. Then, we might see a broad movement to organize all BRICS currencies on gold, much as the United States organized at Bretton Woods in 1944.

A lot of progress has been made down this path since the beginning of 2022. But, it has been clumsy, halting and hesitant. These things are not really that hard; and the benefits are great. There doesn’t seem to be much “financial engineering” talent in China or Russia. But, if they took some of those exemplary aerospace or electronics engineers, and applied them to the task, I think they would figure it out pretty quickly

Nathan Lewis

Fellow of the Wealth and Poverty program at the Discovery Institute.