GemCap UK Non-Executive Chairman Jonny Fry on the future of the US$ and what might replace it.
For over 100 years the US$ has been the world reserve currency. Whilst its demise has been heralded many times, as with all things, at some time it will be replaced. But by what? Will Brazil, Russia, India, China and South Africa (BRICS) create their own digital unit of exchange or could we see the most pressing issue of our time – climate change – usher in a green-backed digital currency?
Back in January 1988, an article in the Economist was titled: “Get Ready for a World Currency”. Well, thirty-four years later it would seem that we are slowly witnessing the potential demise of the once mighty ‘greenback’ as a growing number of countries look to facilitate international trade without using the US$. The Wall Street Journal reports:
“Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales”
In 2009, Brazil, Russia, India, China (BRIC) had their first summit and in 2011, South Africa joined to create BRICS. BRICS members account for 40% of the world’s population and it is estimated that BRICS’s members now hold over 40% of the world’s foreign currency reserves. BRICS membership looks set to expand, with Saudia Arabia, Egypt and Turkey all expressing their desire to join – China and Russia would seem keen to see expansion of membership to a variety of other countries with China already inviting Argentina, Kazakhstan, UAE, Indonesia, Nigeria, Senegal and Thailand to join. Charles Robertson, Chief Economist at fund manager Renaissance Capital reports:
“BRICS are under-represented in the global financial architecture. Europe and the United States dominate institutions like the International Monetary Fund (IMF) and the World Bank….Russia and others in the BRICS would like to see larger power centres emerge to offer an alternative to that Western dominated construct.”
What will replace the mighty US$?
The US$ is currently the most widely used currency and, according the US Federal Reserve, in “an estimate of the U.S. dollar share of global trade invoices in the period 1999-2019, the US dollar accounted for 96 percent of trade invoicing in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world.” The most recent Triennial Central Bank Survey for 2019 from the Bank for International Settlements indicated that the US dollar was bought or sold in about 88 percent of global FX transactions. Of note, the only exception is Europe, where the euro is dominant.So, could we see BRICS members create an alternative currency, like Europe has, to allow them to trade without having to use the US$?
Share of export invoicing
Furthermore, if BRICS did, would it be a digital one? After all, China already has its own CBDC, India has just launched a CBDC project, Russia plans to have a digital rouble by 2024, and Brazil has plans for its own digital currency too. The infrastructure would already appear to be in place as, according to SWIFT (which already deals with over 11,500 financial institutions), “SWIFT has successfully shown that Central Bank Digital Currencies (CBDCs) and tokenised assets can move seamlessly on existing financial infrastructure – a major milestone towards enabling their smooth integration into the international financial ecosystem.” World reserve currencies have come and gone over the last 600+ years and, typically, imperialist nations have conquered and ruled many by military means. The US$ has been an exception, becoming the world reserve currency largely due to the devastation after WW1 and America’s sheer economic might and dominance.
The world reserve currencies historically
The US$ itself has been the reserve currency for 99 years, so has the time come for it to be replaced? After all, America’s currency replaced Britain’s, which replaced France’s, which replaced Holland’s, which replaced Spain’s, which had replaced Portugal’s currency back in the 15th century! So, over 540 years of history appears to indicate that the average tenure for a world currency is 94 years and the mighty Greenback has already exceeded this by some margin.
Meanwhile, if we look at inflation since as far back as 1790 we can see that it did not take off until the 1960s. However, it was the 1970s that we truly saw inflation rates rise. Interestingly, it was in 1971 when President Nixon cut the tie between the US$ and gold, so allowing the USA to print US$ with the backing of a “promise to pay” as opposed to any real asset behind the currency. During the recent COVID-19 pandemic the exuberance to print money took on a whole new league : almost 20% of all US$s ever printed was in 2020 alone! Resultant from this is the US Fed increasing interest rates in its attempt to get inflation rates under control – in turn leading to a notable spike in the value of the US$. Whilst a strong dollar is prodigious for both American tourists (cheaper holidays abroad) and for US corporations to buy competitors overseas, it does make US manufactured goods more expensive. Furthermore, rising interest rates is inauspicious for the US government, citizens and companies who have massive levels of debt. Similar to a candle that burns brightly before it runs out of wick, are we currently observing the last ‘hurrah’ for the once mighty greenback?
$500 in 1790 adjusted for inflation
So, what will replace the dollar? Could we really see the BRICS coalesce and agree to both create and use a common digital currency as a way to escape from the US$ and Uncle Sam’s influence? There is another possibility, and that is that the greenback is replaced by a currency backed by green assets. As the world increasingly becomes aware of climate change and countries’ ESG credentials come under more scrutiny, the preservation and importance of our rapidly dwindling natural landscape becomes a far more valuable entity.
Given the work that has been done around the digitisation of assets, it is now possible for millions of people to buy £10, 10Yen, €10, CHF10, $10, etc, of a green-backed digital currency. Green-backed? Yes, fiat money could be used to buy a definable portion of some of the most valuable natural carbon capture sites globally. According to McKinsey: “The vast majority of funding provided by carbon markets is allocated to so-called nature-based solutions (NBS). These are focused on the protection, restoration, and management of natural and modified ecosystems. On land, the most recognizable NBS is planting of trees to restore forests. There are also so-called blue carbon NBS, which are designed to protect or enhance ecosystems on coasts and in the oceans.” The blue carbon market is estimated to expand fifteenfold and be worth $50billion by 2030. A green-backed digital currency could invest in land and aquatic NBS, much of which is based in poorer countries. Ideally, the landowners would retain 51% control but in the short term be paid for their coasts, forests, peat bogs, etc, and the governments would have an incentive to look after their assets which are likely to be become more valuable as industry searches for more ways to offset their carbon emitting activities. The green-backed currency could generate a yield similar to an interest rate based on the carbon credits it earns, so rewarding the people who have bought the digital asset. The digital currency could then be used to pay for goods and services without being reliant on any one government.