from Birch Gold Group:
The U.S. dollar has been the world standard for currency since the end of World War II – but there are legitimate contenders that could take that title away. Whether it’s the relatively new conglomerate of economic powerhouses with a BRICS currency, the Chinese yuan or even digital currencies like bitcoin, there are many options. The world could choose to step away from the dollar as its value continues to sink and the instability of American politics puts a strain on the once unstoppable greenback.
History tells us it’s really only a matter of time. Global reserve currencies don’t last forever. Portugal filled the role back in the 1400s and that only lasted 80 years. After that, Spain took up the mantle and held it for an impressive 110 years, and no country has beat their record since. While it might seem unchanging for the generation or two living with a particular reserve currency, if you take a look at the entire span of human history, global reserve currency turnovers happen about once a century.
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So the important questions are when will the U.S. dollar lose its preferred status? And what is the dollar’s most likely replacement?
A new BRICS currency
The nations of BRICS – Brazil, Russia, India, China, and South Africa – are gathering in August 2023 to make a strong argument for the replacement of the U.S. dollar. Each country involved has its own sizable economy; together, they represent 17% of the world’s trade and 43% of the world’s population. Combined, they have a greater GDP than the G7. In other words, the potential for BRICS to make a respectable attempt to unseat the dollar is real, and for countries like Russia and China in particular, dethroning the U.S. dollar is an important goal.
Should BRICS successfully launch their own currency, it would mean those countries would be less tied to the inflation-prone dollar, which has been contending with recurring debt ceiling crises and a reduced credit rating. For Russia, it would mean a way to conduct international trade without contending with sanctions incurred by the war in Ukraine. As the U.S. potentially loses the benefits of the dollar’s status as a global reserve currency, the strength of the U.S. as a world superpower will also diminish, which would be good news for China who is ready to fill the void.
Other countries may be joining BRICS too, with Saudi Arabia, Iran, Cuba and Argentina listed among 40 countries interested in becoming part of BRICS+. While BRICS currently represents a sizable GDP, more countries joining will only make it easier for a BRICS-led effort to replace the dollar.
That isn’t to say that launching a new currency would be easy for BRICS. New currencies have been launched before, of course, and the nearest similar concept would be the euro. For BRICS to come up with a successful currency model, it would need to establish an exchange rate outline for each country, a method of payment that could be used in each country, and have a stable financial market. After those hurdles are cleared, BRICS could potentially position its currency as the global standard – but the road ahead is clearly a long one. However, the 2023 Durban Accords and meeting between BRICS nations could be the first step in that process.
China’s push for the yuan’s dominance
Not all currencies contending for the throne have so many obstacles in their path. China has argued the yuan itself is a suitable replacement for the dollar, which it severely denounced as a fiat currency in a 2023 paper from the Ministry of Foreign Affairs. Along with referencing the global instability caused by the reliance on the dollar, the paper describes the U.S. as having an economic hegemony that it uses to coerce nations around the world.
While it may sound like standard talk from an economic rival, China’s anti-dollar campaign has some muscle behind it. China is the world’s second-largest economy and it has the capacity to overtake the U.S. as the first. China is able to conduct a significant amount of its trade with other nations using yuan rather than the dollar, leading Andrei Kostin, chairman of Russia’s VTB Bank, to say that the yuan could replace the dollar globally by 2033.
Others are more skeptical that the yuan would be capable of totally unseating the dollar, including economist Peter C. Earle. He sees the complete replacement of the dollar on the world stage as a near impossible situation based on the U.S.’s standing, instead envisioning that the dollar could simply be used less in the future. His argument is that the yuan is based in part on the dollar’s value, and it is only allowed to be traded within a 2% range (within a band determined daily by the Chinese government) A huge volume of international trading takes place each day. The liquidity required to enable global commerce doesn’t allow the kind of currency manipulation the People’s Bank of China rely on to limit the yuan’s volatility.
The euro as competitor for new world currency?
When the euro was first established in the 1990s, after ten years of deliberation, economists predicted that it could overtake the dollar by 2020 as the world’s new standard currency. Their supposition was based, in part, on the continuing decline of the dollar’s value – which has indeed been an ongoing trend.
The euro has its own problems, however, and in 2022 the euro lost parity with the dollar for the first time in 20 years. The war in Ukraine and ensuing economic stability has caused the euro to lose its standing, which led to its supporters losing faith in the euro’s ability to unseat the dollar. Some doubt that the European Central Bank can successfully manage a currency shared by spendthrift nations like Greece and Italy as well as models of fiscal prudence like Germany. In fact, 13 of the 27 member nations have debt-to-GDP ratios that exceed the EU membership agreement.
The euro is not currently a viable contender to replace the dollar. That may change in the future, of course, but for now, the euro is stuck in the back seat.
Despite wildly volatile swings in valuation, cryptocurrencies such as Bitcoin are increasingly being eyed as potential contenders for global standards. The benefits of the Bitcoin system include the lack of centralization, meaning Bitcoin can be used anywhere around the world it is accepted, and it is not tethered to calamities in any particular localized region.
Some countries such as El Salvador have gone all in with bitcoin, but they currently represent the minority rather than the norm. Around the world, countries are moving to position bitcoin and other cryptocurrencies as viable payment methods, but it is a process that takes time and careful regulation to establish correctly.
Once the U.S. establishes a cryptocurrency regulatory system, it is possible that cryptocurrencies will increase in value and become more attractive to investors looking to back up their dollar with hard currency – potentially paving the way toward worldwide acceptance for cryptocurrencies in general. At that point, particularly if the dollar continues to devalue, it’s possible for established coins such as bitcoin to edge in on the global standard.
A new gold-backed currency?
Perhaps one of the greatest threats to the U.S. dollar is a new gold-backed currency. By “gold-backed,” we mean freely redeemable for physical gold at a specific price. After all, there’s a reason the dollar itself was backed by (and freely redeemable for) physical gold coins, also known as cold, hard cash, from 1834-1933. The previous global reserve currency, the British pound sterling, was backed by gold (as was every previous global reserve currency!)