Weekly Market Update by Retirement Lifestyle Advocates

          Last week, I commented on the deal to increase the debt ceiling, offering my take that the Federal Reserve will be forced to fund the majority of future deficit spending culminating at some point with an ugly economic reset.  Part of what I believe is eventually coming is the displacement of the US Dollar as the world’s reserve currency.  When that happens, it will greatly accelerate inflation.

          Past RLA Radio Program guest Jim Rickards wrote an interesting and insightful piece on this last week (Source:  https://dailyreckoning.com/rickards-drops-bombshell/).  I would encourage you to read the entire piece but I am offering you an excerpt here (I added emphasis):

The global desire to move away from the dollar as a medium of exchange for international trade in goods and services is hardly new. The difference today is that it’s gone from a discussion point to a novelty to a looming reality in a remarkably short period of time.

Dubai and China have recently concluded an arrangement whereby Dubai will accept Chinese yuan in payment for oil exports from Dubai. In turn, Dubai can use the yuan to buy semiconductors or manufactured goods from China.

Saudi Arabia and China have been discussing similar oil-for-yuan arrangements, but nothing definitive has yet been put in place. These discussions are made complicated by Saudi Arabia’s long-standing petrodollar deal with the U.S. Still, some progress along these lines is widely expected.

China and Brazil have recently reached a broad-based bilateral currency deal where each country accepts the currency of the other in trade. Meanwhile, there’s a growing strategic relationship between China and Russia as the two superpowers jointly confront the United States. In the trading relationship between the two nations, Russia can pay in rubles for Chinese manufactured goods and other exports while China pays in yuan for Russian energy, strategic metals, and weapons systems.

Yet all these arrangements may soon be superseded by a new BRICS+ currency, which will be announced in Durban, South Africa, at the annual BRICS Leaders’ Summit Conference on Aug. 22–24.

The currency will be pegged to a basket of commodities for use in trade among members. Initially, the BRICS+ commodity basket would include oil, wheat, copper and other essential goods traded globally in specified quantities.

In all likelihood, the new BRICS+ currency would not be available in the form of paper notes for use in everyday transactions. It would be a digital currency on a permissioned ledger maintained by a new BRICS+ financial institution with encrypted message traffic to record payments due or owing by participating parties. (This is not a cryptocurrency because it is not decentralized, not maintained on a blockchain, and not open to all parties without approval.)

The latest information from the BRICS working groups is that this basket valuation methodology is encountering the same problems that John Maynard Keynes encountered at the Bretton Woods meetings in 1944.

Keynes initially suggested a basket of commodities approach for a world currency he called the bancor. The difficulty is that global commodities included in any basket are not entirely fungible (there are over 70 grades of crude oil distinguished by viscosity and sulfur content among other attributes).

In the end, Keynes saw that a basket of commodities is not necessary and that a single commodity — gold — would better serve the purpose of anchoring a currency for reasons of convenience and uniformity.

Based on the impracticality of commodity baskets as uniform stores of value, it appears likely that the new BRICS+ currency will be linked to a weight of gold.

This plays to the strengths of BRICS members Russia and China, who are the two largest gold producers in the world and are ranked sixth and seventh, respectively, among the 100 nations with gold reserves.

These and related developments are frequently touted as the “end of the dollar as a reserve currency.” Such comments reveal a lack of understanding as to how the international monetary and currency systems actually work.

The key mistake in almost all such analyses is a failure to distinguish between the respective roles of a payment currency and a reserve currency. Payment currencies are used in trade for goods and services. Nations can trade in whatever payment currency they want — it doesn’t have to be dollars.

Reserve currencies (so-called) are different. They’re essentially the savings accounts of sovereign nations that have earned them through trade surpluses. These balances are not held in currency form but in the form of securities.

When analysts say the dollar is the leading reserve currency, what they actually mean is that countries hold their reserves in securities denominated in a specific currency. For 60% of global reserves, those holdings are U.S. Treasury securities denominated in dollars. The reserves are not actually in dollars; they’re in securities.

As a result, you cannot be a reserve currency without a large, well-developed sovereign bond market. No country in the world comes close to the U.S. Treasury market in terms of size, variety of maturities, liquidity, settlement, derivatives, and other necessary features.

So the real impediment to another currency as a reserve currency is the absence of a bond market where reserves are actually invested. That’s why it’s so difficult to displace Treasuries as reserve assets even if you wanted. Again, no country in the world can come close to the U.S. in that regard.

But here’s where it gets interesting and why the dollar could lose its leading reserve status much faster than previously thought.

That’s because the BRICS+ currency offers the opportunity to leapfrog the Treasury market and create a deep, liquid bond market that could challenge Treasuries on the world stage almost from thin air.

The key is to create a BRICS+ currency bond market in 20 or more countries at once, relying on retail investors in each country to buy the bonds.

The BRICS+ bonds would be offered through banks and postal offices, and other retail outlets. They would be denominated in BRICS+ currency, but investors could purchase them in local currency at market-based exchange rates.

Since the currency is gold-backed, it would offer an attractive store of value compared with inflation- or default-prone local instruments in countries like Brazil or Argentina. The Chinese, in particular, would find such investments attractive since they are largely banned from foreign markets and are overinvested in real estate and domestic stocks.

It will take time for such a market to appeal to institutional investors, but the sheer volume of retail investing in BRICS+-denominated instruments in India, China, Brazil and Russia, and other countries at the same time could absorb surpluses generated through world trade in the BRICS+ currency.

In short, the way to create an instant reserve currency is to create an instant bond market using your own citizens as willing buyers.

The U.S. did something similar in 1917. From 1790–1917, the U.S. bond market was for professionals only. There was no retail market. That changed during World War I when Woodrow Wilson authorized Liberty Bonds to help finance the war.

There were bond rallies and Liberty Bond parades in every major city. It became a patriotic duty to buy Liberty Bonds. The effort worked, and it also transformed finance. It was the beginning of a world where everyday Americans began to buy stocks, bonds, and securities as retail investors.

If the BRICS+ use a kind of Liberty Bond patriotic model, they may well be able to create international reserve assets denominated in the BRICS+ currency even in the absence of developed market support.

This entire turn of events — introduction of a new gold-backed currency, rapid adoption as a payment currency, and gradual use as a reserve asset currency — will begin on Aug. 22, 2023, after years of development.

Except for direct participants, the world has mostly ignored this prospect. The result will be an upheaval of the international monetary system coming in a matter of weeks.

            One of the elements of the Revenue Sourcing planning process is to ‘dollar diversify.’  As time passes, this may become increasingly important. 

          The radio program this week features an interview with author Simon Popple. 

          Simon and I discuss currency diversification strategies as well as the health of the world economy.

          You can listen to the interview now by clicking on the "Podcast" tab at the top of this page.

“Before you embark on a journey of revenge, dig two graves.”

                                           -Confucious