To date, the (BRICS) members have yet to arrive at a consensus of completely junking the US dollar in favor of an alternative reserve currency
Many countries are now aching to break away from the US-controlled financial institutions and openly manifesting their disgust and contempt by threatening to join the newly-formed financial bloc made up of Brazil, Russia, India, China and South Africa, or known as the BRICS.
In the recently concluded meeting of BRICS in Johannesburg last week, the bloc opted to admit 10 new members.
By 2023, BRICS will accept Saudi Arabia, Ethiopia, United Arab Emirates, Egypt and Argentina as added members.
The hotly contested issue in the formation of this international organization is the eagerness of the members to abandon the US dollar as the international reserve currency.
To date, the members have yet to arrive at a consensus of completely junking the US dollar in favor of an alternative reserve currency.
Some view the US dollar has been around for almost a century.
Yes, it has brought prosperity but has created an enormously wide gap between rich and poor nations.
Development has not been fast as expected, and, in that situation, the dominance of the US dollar resulted as the only recognized reserve currency, and underdeveloped countries have long suspected is being used to advance US interest principally through its various financial institutions like World Bank and the International Monetary Bank.
The Bretton Woods Agreement created the World Bank in 1944.
It was the first attempt to financially fix the value of the US dollar as an international reserve currency.
Under the Agreement, the US dollar was pegged at $32 per ounce of gold.
The US then stood as the most powerful nation on earth considering that it was the only nation to escape from the ravages of the Second World War and coming out as the leading industrialized country manufacturing nearly 70 percent of the world’s total manufactured goods.
The US managed to corner both the export and import of goods until it was awakened to realized that its economy was incurring huge trade deficit because of the unwinnable Vietnam War in the 70s.
The US never conceived it would incur deficit despite its involvement in the War.
It was its expenditure in the war that depleted much of its of income and resources.
President Nixon in 1973 decoupled the US dollar from the gold standard, meaning other countries will, from then on, be prohibited from buying and selling gold.
Instead, the US federal reserve will measure the value of the dollar on its aggregate GNP which many considered as rather unique because most countries based the value of their currency on their total productive output.
The very concept of just measuring the nation’s economy through its own GNP was, as some would say, totally flawed.
It exactly allowed the US to have an unlimited access to borrow from other countries by issuing treasury notes which the US guarantees as payable by its government.
As a result, the US today stands as the world’s biggest debtor.
The irony is the US borrows from countries it treated as unfriendly to it.
US is heavily indebted to China, Japan and Russia where it has imposed sanctions.
In fact, it has even banned Russia from SWIFT as when the US imposed trade embargo.
This ambivalent posturing of the US, viz in bolstering its own economy, has put instability to the US dollar.
This explains why many countries, mostly members of the BRICS, have been agitating to drop the dollar as the international reserve currency.
This is a tectonic shift in geopolitics. In fact, China and Japan sold 30 percent of their treasury bonds.
It was through this system of measuring the value of one’s currency that allowed the US to borrow from other countries.
In effect, it was the US that measured how much it can secure for their loans from other countries by the quick process of printing the dollar or “quantitative easing” to ease inflation.
Backed up by the formation of the International Monetary Fund, the World Bank and later by the creation of the Asian Development Bank, the US was able to finalize its stronghold of the world economy.
It was through these US-controlled financial institutions that made the adjustments and in the valuation of other countries’ currency.
It was through this system of perpetual indebtedness that financial institutions coined the concept being mired in a debt trap.
The US controlled the other countries’ currencies by adjusting their loans.
The easiest way which the US can do is to pressure states to make a drastic devaluation of their currency.
That way, indebted countries are forced to increase their cost of wage consequent to the decline in the value of their currency. These are mostly drawn by US banks.
The most blatant of this banking practice is the limited amount of currency which the client-states are forced to convert their reserve currency or limit the amount they need for their developmental plans.
More than anything else, why should we give the US treasury the freedom to choose the precious metal states should base?
To every twist of this change in valuation in currencies which China say is more of a unilateral practice has the shade of power hegemonism amounting to undue collection of fees.
This explains why many of our projects run short of funds, not to mention the practice of currency devaluation which eats up the bulk of the funds.
The US has been complaining that it cannot compete with China in trade and American economists argue that Chinese-made products are simply too cheap to be overwhelmed by US trade competition.
But American businessmen do realize they cannot compete under the rules of fair competition.
The Americans now suspect that China is resorting to unfair trade practices which summarily accuses that country of illegality.
The US completely forgot or ignores the fact that China produces more goods at a cheaper price at a greater volume.
For every stage of China’s manufacturing capability, Chinese factories come out with a better quality and much improved products.
Repeatedly, through the import and export of manufactured goods, China gains in terms of exports.
Its gains may not be measured in volume but more on the value of the goods China can deliver to countries patronizing its products.
This we can surmise because to every improvement China introduces into its products, added value are made into them.
Thus, from the time China opened up trade with the US, the US, as importers, cannot say that for the last 10 years that it has been importing the products from China that the latter had not introduced improvements on their products.
Even if we say that Chinese exports are based mostly on raw materials such as oil and natural gas, just the same the value of export will increase based on the system of an added system of refining the product, not to mention the increased valuation of the currency.
This explains why BRICS as a new international organization has gained clamor for the change of the US dollar as an international reserve currency.
Any decision by the members of the BRICS to fix the value of their reserve currency to yuan, rubble, rupees, or rand or to refer back to precious metals as in gold would greatly eliminate the US financial practice of “quantitative easing” or the printing of its money to ease inflation.
Observing these basic rules in trade, it thus becomes difficult for the US to impose the rules governing unfair trade competition without tangible support of its demand.
For as long as China observes the rules of fair competition, it would be much difficult for the US to accuse China of violating the same.
(rpkapunan@gmail.com)