Editorial — The Decline of the Petrodollar: How BRICS Challenges US Currency Dominance

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My editorial ran today in the Moscow-Pullman Daily News

I’m predicting the demise of the US dollar as the world’s reserve currency. 

This is a big deal. The US could never carry a $95 trillion debt (and another off-the-books $171 trillion in unfunded liabilities) if we were not the petrodollar. 

Let me know what you think. 

The “petrodollar” system, esta blished in the 1970s, made the US dollar the primary currency for oil transactions. Agreements between the US and major oil producers, particularly OPEC members, ensured oil sales are done exclusively in dollars in exchange for US support, military protection, and investments. Consequently, oil-importing countries needed to hold dollars to buy oil, reinforcing the dollar’s position as the world’s primary reserve currency.

In recent years, numerous countries have been striving to reduce their reliance on the US dollar. This is due to diminishing confidence in the greenback resulting from the US government’s excessive borrowing, spending, and printing money, as well as using the dollar as a foreign policy cudgel.

Currently, most global trade involves dollars through the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This system allows for standardized transactions between financial institutions to operate securely and efficiently.

SWIFT grants the US significant leverage over other nations:

  • In 2012 the US pressured SWIFT to disconnect Iranian banks over its nuclear program.
  • In 2014 and 2015 the US barred several Russian banks from SWIFT following its annexation of Crimea, and again in 2022 following the invasion of Ukraine.
  • In 2017 the US threatened to exclude China from SWIFT if it did not adhere to UN sanctions on North Korea.

In response to the US weaponizing the dollar in foreign policy, Brazil, Russia, India, China, and South Africa (BRICS) united to establish an alternative global reserve currency. Collectively, BRICS accounts for about 40% of the global population, 30% of the world’s land area, and 25% of global GDP.

In recent months, BRICS has intensified its dedollarization efforts:

  • China now has dollarless trade agreements with Russia, Pakistan, and Saudi Arabia.
  • India is conducting trade in rupees with 18 countries. Oil deals with Russia are now conducted in UAE dirham and Russian rubles.
  • Brazil is the largest Latin American economy, and China is its biggest trade partner. Brazil and China agreed to directly exchange yuan and reais instead of first converting to dollars.
  • In Russia, the yuan has surpassed the dollar as the most traded currency.
  • Iraq’s central bank has approved the use of yuan for transactions.
  • Iran has applied for BRICS membership, and many other nations have expressed interest in joining the bloc, including Saudi Arabia, UAE, Egypt, Algeria, Mexico, Argentina, and Nigeria.

The US dollar’s share of global foreign-exchange reserves fell to 58% at the end of 2022, extending a two-decade decline. As other nations anticipate coercion through dependence on the dollar, they have also diversified their financial reserves. Numerous central banks are accumulating gold in their reserves, and the proposed BRICS currency would be pegged to gold or alternatives involving other rare earth elements.

This puts the US government under significant pressure as it relies on global demand for its fiat currency to support its reckless borrowing and spending. The dollar’s status as the world’s reserve currency is what allows the massive budget deficits and growing national debt amid the international demand for dollars and US Treasuries, which absorbs the ongoing printing of money while maintaining the dollar’s strength. But as the demand for dollars diminishes in the face of the BRICS strategies, the situation will become drastically unbalanced.

The only reason the US can carry a $95 trillion total debt (federal, state, local governments, financial institutions, plus businesses and households) and an additional $171 trillion in off-the-books unfunded federal liabilities (Medicare A, B, and D; Social Security; military and civilian benefits; federal debt held by the public; etc.) is because we are the world’s reserve currency.

A decline in demand for dollars would lead to a rapid depreciation of the greenback’s value, resulting in higher inflation for Americans. In the most extreme scenario, it could even cause the complete collapse of the dollar.

A country cannot survive printing over ten times as much money as it produces. In the past, politicians have started wars to fix economic woes. It should make you pause to consider that our involvement in Chinese and Russian affairs could be a sign that the fight over the dollar is headed into international waters. To what lengths will Biden go to protect the dollar against foreign disinvestment, and at what point will it be too late?

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