World Geostrategic Insights interview with Chian Wen Chan on the reasons pushing toward de-dollarization, whether BRICS expansion to oil producers could accelerate the end of U.S. dollar dominance and the relevance of gold’s growth as a reserve asset instead of the dollar.
Chian Wen Chan is an engineer, scientist and certified energy auditor. He is an award-winning innovator in science and engineering, a geo-economic analyst of financial tools, energy-mineral and energy commodity supply chains, and a BRICS/BRICS+ macroeconomic observer. He is based in Sungai Buloh, Selangor, Malaysia.
Q1 – The U.S. dollar is the world’s leading reserve currency and is also the most widely used currency for trade and other international transactions. However, its hegemony is being challenged by global geopolitical upheavals. Moreover, discontent with the supremacy of the dollar is now quite widespread in Southeast Asia, the Middle East, Latin America, and Africa. Many countries have started to look for alternatives to the dollar in terms of trade billing, foreign exchange (forex) reserves, financial clearing agreements, debt issuance, etc., while the BRICS nations are trying to set up a new reserve and exchange currency backed by a basket consisting of the currencies of Brazil, Russia, India, China and South Africa. Many financial experts and economists argue that trade among the BRICS countries seems too weak to support the creation of a common currency, and regarding the possibility of the Yuan challenging the dollar, they believe that the Chinese currency is not sufficiently convertible and lacks deep capital markets, market transparency, central banks and independent financial institutions. What’s your view? Why do the BRICS countries want to establish a new currency? Do you think they may be successful in replacing the US dollar with the “R5″? What would be the benefits of a BRICS currency? In general terms, what progress has been made so far toward de-dollarization? Is the U.S. dollar really losing its dominant position?
A1 – In my view, those leading the de-dollarization process are Russia and China. Their motives are economic, while power is only an extension of economic goals. The motive of the West is the preservation of power when it interprets the de-dollarization motives of others, and thus projects its power desires onto its Sino-Russian counterparts, which is far from the truth. If the West’s motive in considering de-dollarization were based on economics rather than power, the West would not have adopted self-destructive economic policies for itself, others and non-Western counterparts.
De-dollarization was already in place before the Russia-Ukraine conflict, while the conflict only served as a catalyst for the movement. Entities on the West’s sanctions list still want to conduct global trade, where de-dollarization is only a means to an end rather than an end in itself. The freezing and potentially even seizure of non-Western assets further erodes confidence that Western institutions are trustworthy entities for asset management and preservation, beginning rather to garner a reputation as “thieves” and “robbers.” This accelerates de-dollarization.
De-dollarisation is also a function of how much US debt is getting out of control, the more out of control it becomes, the more urgent the modus operandi of de-dollarisation will be. US debt is at more than 120% debt to GDP, with increasing negative net international investment positions. The wars in Eastern Europe and West Asia are aggravating US debt problems. When US debt gets out of control, two things can happen:
1. As the supply of US treasuries exceeds the demand for treasuries, the supply-demand gap will be getting ever wider; the wider the gap, the higher the cost of US borrowing or yield on treasuries will need to be. This sucks up USD liquidity into the treasury market to fund US government profligacy. This strengthens the USD relative to other currencies (not commodities). Because other countries need access to commodities like food, they need to sell or print ever more of their currencies to purchase USD in order to use the USD to purchase necessities. This inevitably causes countries to run out of reserves and/or accelerate the debasement of their fiat currencies.
2. The Fed monetises US debt by buying US treasuries which effectively prints money into existence. The effect of monetising US debt is lower treasury yield and cost for the US government to borrow money. But the effect of such debt monetisation will increase the price of commodities, or as Alasdair Macleod aptly pointed out, it is not that commodities are getting more expensive, but rather the debasement of fiat USD. Because of fiat excesses, each currency unit purchases a lesser and lesser quantity of commodities. Again, other countries need USD to purchase commodities which means selling or printing ever more of their own fiat currencies to purchase more debasing USD to obtain commodities, ultimately devaluing their currencies too. The US can print money to buy necessities from global supply chains at a whim, other countries need years to grow their economies to generate enough USD revenue to purchase necessities from global supply chains….
Either direction is a bad outcome for other countries as US debt gets out of control. The only way is to de-dollarize trades amongst the global majority to obtain a certain degree of protection from the aforementioned outcomes. This allows their economies better fiscal manoeuvrability which can increase the options for these currencies to strengthen against USD to more easily pay off USD denominated debts too. Remember that the Fed would more likely monetise US debts than letting the value of treasuries deflate from spiking yields. Yuan-oil trade is merely a means to an end, not an end in itself.
Russia and many others appear to be following China’s approach of industrial capitalism, instead of Western approach of financial capitalism. Hence, it is not in the best interest of China, Russia, or BRICS to replace the USD in becoming the reserve currency as it will undermine industrial capitalism. Being the issuer of the reserve currency makes import cheaper than local productions, leading to de-industrialisation. Thus, USD will still be dominant, just not as ubiquitous as it used to be. As for BRICS currency, there is still uncertainty whether it will be a medium of exchange or trade-settlement, but I weigh trade-settlement currency as higher probability. The reason being that any countries in a bilateral trade that has surpluses can use a trade-settlement currency for trade outside of the bilateral relationship. This currency is likely gold-linked via blockchain technology due to the ongoing trend of gold purchases by central banks within BRICS and BRICS-friendly nations. Also, a trade-settlement currency still gives individual nations their own sovereign monetary autonomy.
Q2 – The recent expansion of the BRICS has included some of the world’s largest oil producers. In addition to Russia, which is the world’s 3ᵉ largest producer and exporter, Saudi Arabia, the United Arab Emirates and Egypt are now part of the bloc. Also Nigeria, another major oil exporter, is expected to join the group in its next expansion, which is expected to take place at the next 2024 summit in Russia. The BRICS therefore will essentially dominate the world’s energy supply. Given that the strength of the U.S. dollar is also based on the fact that this currency is the basis of oil trade, the so-called petrodollar, and that OPEC (Organization of the Petroleum Exporting Countries) members settle their accounts in U.S. dollars, could the BRICS expansion to the oil producers may accelerate a process of de-dollarization?
A2 – Energy underpins the global economy. BRICS expansion would accelerate the de-dollarization process, but the goal is not to undermine the U.S. petrodollar, but rather a byproduct. As mentioned above, phasing out the USD from oil trade serves to insulate oil trade from the coming dysfunction in the treasury market and/or copious money printing by the Fed. The global economy is in danger without sufficient isolation from USD-denominated oil trade, which will be even more volatile as the USD weakens exponentially.
There are concrete reasons to believe that USD debasement is at a much higher rate than officially announced inflation. Nations with a trade surplus stored in government bonds are losing the purchasing power of their bonds as inflation is higher than the yield on their bonds. Therefore, de-dollarization is also a more optimal savings strategy for nations with a trade surplus. The presence of U.S. military bases in West Asia could curb the de-dollarization process in that region, although the conflict in Palestine may force the U.S. to remove its military bases from West Asia, which will not be good news for dollarized oil trade.
Q3 – The majority of the world’s central banks expect gold to grow as a reserve asset in the face of a challenged U.S. dollar. What is your view? Could gold be the real beneficiary of a possible de-dollarization?
A3 – If the axiom holds true that customers are always right and that the future of consumption growth lies in the global majority, then gold will be the beneficiary, as it is liked by all cultures and has been for millennia. Moreover, physical gold is the only asset class that has no counterparty risk for central banks. The problem with bonds is that there is no infinite value once a bond is issued at face value; but gold, if issued in an ounce, for example, has infinite value based on the amount of money printing and debt creation that are potentially infinite for nation states. Since the global financial crisis of 07/08 and near-zero and/or negative interest rates, global debts have exploded. Binding the value of debt and currencies would require a much higher valuation than just $2230 per ounce at the time of writing.
In addition, to avoid a nuclear war between nuclear superpowers, an armed gold can be used to attack the current fiat system and avoid nuclear consequences. Fiat currencies would be dumped to buy gold-backed currencies, which could then be reinvested in those countries’ stock markets and companies. However, any trade surplus of states with gold-backed currencies could collapse as a result, as fiat currencies would be severely debased.
Chian Wen Chan – Engineer, scientist, certified energy auditor and geo-economic analyst.