Several clients have asked about the risk the Brics nations (Brazil, Russia, India, China, and South Africa) pose to the US dollar. There’s a fear that the USD is losing its grip as the world’s reserve currency, potentially impacting dollar-based investments.
It is true the Brics nations have discussed reducing reliance on the dollar. Their arguments for a new system include:
Reduced vulnerability: Brics members want more control over their economies and less dependence on US policies affecting their currencies.
Economic clout: Collectively, Brics represents a significant global market and economic power. A reserve currency could reflect this growing influence.
Diversification: Some argue a multi-currency system would be more stable than one dominated by the US dollar.
I’ve seen a number of articles about the dollar’s demise and some flowery pieces about the Brics. We had a Brics Summit here in Sandton late last year that some described as “the most dramatic redistribution of global economic power in 150 years as economic power has shifted seismically away from the West”.
I’d like to dig into this. Dramatic and epoch-defining transitions sell well, and the eloquent and rational sounding articles make a lot of sense.
I learnt during my days studying philosophy that just because something makes sense doesn’t mean it’s true. That’s why I prefer numbers.
Let’s have a look.
The image (from Visual Capitalist) shows the movement of wealthy individuals around the world in 2022. Take a moment to consider this — as the saying goes, “People vote with their feet.”
Here’s what the data tells us about millionaire movements and the Brics countries (in USD):
1 200 left Brazil;
3 000 left Russia;
6 500 left India;
13 500 left China; and
500 left South Africa.
So, US$24 700 millionaires left Brics countries in 2022. Does this sound like the world is rapidly shifting towards Brics?
I see a lot of green (indicating millionaires entering) in Western countries. Freedom of speech and association are valuable assets, and that’s something not readily available in every country.
This chart doesn’t surprise me.
Here’s another chart: it shows global central bank reserves and their currency breakdown. Sixty percent is in USD, and 80 percent is in euro and USD.
So, the wealthy are leaving Brics for the West. Eighty percent of all reserve currency is USD or euro-denominated. The only real contender to replace the dollar is the euro.
It’s not surprising. The US and EU have massive economies, deep financial markets, and high GDP per capita. This momentum is unlikely to disappear anytime soon.
Humans are wired to believe they’re witnessing history-changing events. Just because we’re here now doesn’t mean every news story signals a dramatic shift in the global order.
The Copernican Principle reminds us we’re not the centre of the universe. Our awareness doesn’t make us special, and this moment is probably not the beginning or end of a grand era.
The dollar’s dominance might seem shaky, but the hype is certainly overblown. The dollar is likely here to stay for a while longer. — Moneyweb
