The Transition Away from the USD
Why American Capital Markets Are Not the Constraint
In a recent essay, I explored the possible implications of the US imposing 100% tariffs on BRICS nations, as threatened in a social media message from US President Donald Trump. He has since doubled down on the threat, claiming that BRICS is “dead” because of it.
In the previous essay, I assumed that BRICS nations would retaliate to 100% tariffs resulting in a 90% reduction in trade between the US and BRICS. In response, I argued that BRICS nations would adjust and the loss of the US market could be fully compensated within 4 years, and shorter for some, on the basis of organic trade growth. Indeed, with fiscal support, more effective coordination and streamlining trade relations via bilateral and other such agreements, it is possible for BRICS nations to hasten the adjustment to less than 2.5 years. The essay touched on the fact that a cessation of trade with the US would reduce demand for US dollars (USD) and necessitate the use of non-US currencies as means of payment. It noted that institutional reforms such as the BRICS Clear initiative could also play a critical role in enabling the adjustments to take place.
That essay did not explore in detail questions related to capital flows, the role of the USD in global trade and circuits of capital accumulation and the risks to USD denominated financial assets markets. In response to the original essay, some have reacted by claiming that the adjustment cannot happen quickly because BRICS nations (or indeed, the nations of the global south generally) do not have capital markets with sufficient depth and breath to replace the US trade deficit. This argument is premised on the claim that the US trade deficit is financed by America’s capital markets.
This essay picks up on where the last essay left off, and takes as its launch point the issue of the role of the US capital markets in global circuits of capital accumulation. The transition away from the USD and the US market generally speaking is not fundamentally constrained by the depth or breadth of American capital markets, as these do not finance the US trade deficit. Capital markets emerge as a result of monetary flows, including those generated by trade deficits, rather than as a means of financing them. To argue otherwise confuses cause and effect (see Godley and Lavoie, 2007). The shift is driven by the complementary economies of BRICS nations and the global south, alongside the diminishing demand for USD-denominated fictitious capital assets. By exploring the mechanisms of USD issuance, the risks of holding USD-denominated assets, and the potential for a non-USD based cross-border payments system, this essay argues that the global financial system can transition to a more equitable and resilient order underpinned by trade in real goods and services with a diminished role for (USD denominated) fictitious capital.
The Myth of American Capital Markets Financing the US Trade Deficit
Understanding the US Trade Deficit and Capital Markets
The US trade deficit is often misunderstood as being financed by American capital markets. In reality, the deficit is financed through the issuance of USD, a sovereign currency of the United States Government and a prescribed number of banking institutions.
There are two mechanisms by which new USD comes into existence and enters circulation. Firstly, the US government injects money capital into the economy through Treasury expenditure initiated by Congressional appropriations, underpinned by Constitutional authorities. The federal deficit is the balance sheet counterpart of new money credited to the U.S. Treasury. This process expands the money supply unless counteracted by bond issuance or Federal Reserve actions. The overall effect is an increase in both government liabilities (debt) and private sector assets (money and bonds). Secondly, USD enters circulation by way of commercial bank credit, enabling firms to access the money capital they need to finance purchases. So-called chartered institutions have a legal charter to operate and participate in the money-creation process. These institutions are granted the authority to accept deposits, issue credit, and function within the U.S. banking system under federal and state regulations.
Foreign entities accept USD in exchange for goods and services because they can cycle surplus dollars into US-denominated assets, such as stocks, bonds, and real estate and other assets. Open capital flows and limited constraints on foreign ownership of assorted assets has made receiving US dollars an acceptable form of state-sanctioned IOU. This cycle creates a willingness to accept USD that is not directly tied to the real economy, but rather to markets for financialised assets that dominate the US political economy.
The US trade deficit occurs when the value of goods and services imported into the US exceeds the value of its exports. This deficit has been a persistent feature of the US economy for decades, and as noted, it is often misunderstood as being financed by inflows of foreign capital into American capital markets. The argument goes like this: foreign entities, such as governments, corporations, and individuals, purchase US Treasury bonds, stocks, and other financial assets, thereby providing the US with the capital needed to fund its trade deficit.
However, this narrative conflates cause and effect. The US trade deficit is not financed by foreign capital inflows into American capital markets; rather, it is enabled by the fact that the USD is the sovereign currency of the United States. The ability of the US to run persistent trade deficits stems from its capacity to issue USD, which is accepted globally as a unit of account and a means of payment. It can be said that the USD, as a means of payment, is an IOU backed by legislative fiat. Hyman Minsky once said that anyone can make their own money; the trick is to get others to accept it. That the USD has historically been accepted globally has made it a reserve currency, and as a reserve currency, it has been more or less an unconditionally acceptable state-backed IOU.
The misconception that American capital markets finance the US trade deficit arises from a misunderstanding of the relationship between capital flows and trade imbalances. While it is true that foreign entities purchase US financial assets, these purchases are a consequence of the US trade deficit, not its cause. The US trade deficit is enabled by the issuance of USD, which foreign entities are willing to accept.
In contrast, other countries that run trade deficits must finance them by borrowing in foreign currencies or depleting their foreign exchange reserves. This makes them vulnerable to external shocks and limits their ability to sustain large or persistent deficits. The US, by contrast, faces no such constraints because it issues its own currency, which is accepted globally.
Why Foreign Entities Accept USD
Foreign entities accept USD not because they are financing the US trade deficit, but because the USD can be exchanged for other assets. Foreign entities that accumulate USD through trade surpluses have several options for recycling these dollars:
Holding USD as Reserves: Central banks and corporations may hold USD as cash reserves or deposits. These assets are money capital.
Investing in US Financial Assets: Foreign entities can purchase US Treasury bonds, corporate bonds, stocks, or other financial instruments. These can broadly be described as fictitious capital.
Acquiring Real Assets: USD can be used to purchase real estate, commodities, or stakes in US enterprises through mergers and acquisitions. These are means of production, commodities or industrial capital.
The ability to recycle dollars into US assets sustains the willingness of exporters to accept the currency. In turn, this allows the US to run persistent trade deficits without facing the same constraints as other countries. In saying so, however, it must be emphasised that it is not the capital markets that finance the trade deficit but the financing of the trade deficit that creates the need for the capital markets.
The Role and Effects of Fictitious Capital
Fictitious capital refers to financial assets, such as stocks, bonds, derivatives, and other instruments, whose value is derived from expected future income streams rather than tangible assets or real economic activity involving the creation and consumption of use values. The global financial system is characterised by a significant imbalance between the stock of USD and USD-denominated fictitious capital assets on the one hand, and the capacity of the US real economy to valorise these assets on the other. In abstract terms, there is simply too much ‘exchange value’ compared to ‘use value’ at any given time (see Durand, 2017 on the growth of fictitious capital as the prelude to the 2008 financial crisis).
The USD-denominated markets for fictitious capital dwarf the dollar value of trade in real goods and services. The global derivatives market is estimated to be worth over $600 trillion, far exceeding the value of global GDP ($100 trillion) or global trade ($25 trillion). The US stock market capitalisation is over $40 trillion, while the value of US goods and services traded internationally is a fraction of that.
This imbalance highlights the disconnect between the US’ financialised economy and the real economy. The vast majority of USD in circulation is tied up in financial markets rather than being used to facilitate trade in real goods and services. Fictitious capital markets have exploded over the past 40 years, as the US economy accelerated financialisation and the accompanying hollowing out of its manufacturing sector in particular. The speed and cost at which fictitious capital can be created and traded, enabling rapid monetisation of profits through speculative activity, has seen markets for fictitious capital balloon at the expense of commitments of money capital to the processes of fixed capital formation. This latter process takes longer and is riskier.
The expansion of fictitious capital markets has significant distributional implications as well. Over the past four decades, income inequality in the US has widened and capital asset ownership has become heavily concentrated. According to data from the Fed, approximately 93% of stock market value is held by 10% of Americans, and half of this is held by the top 1% of wealthy Americans. Treasury bonds are largely purchased by institutional investors and the wealthy; cycling USD from external sources contributes to liquidity in these markets. More generally, According to the Federal Reserve’s Survey of Consumer Finances (SCF) the top 10% of households own ~70-80% of all financial assets (stocks, bonds, deposits); the top 1% alone own ~30-40% of financial assets, and the bottom 50% own less than 2% of financial wealth.
The Weaponisation of the USD and Its Consequences
The weaponisation of the USD, through sanctions and other financial tools, has increased the risk of holding USD and USD-denominated assets. Countries like Russia, China, and Iran have already begun to reduce their reliance on the USD, opting instead for bilateral and multilateral trade agreements using national currencies. This trend is likely to accelerate as more countries seek to protect themselves from the geopolitical risks associated with the USD. The BRICS nations, in particular, have been at the forefront of efforts to create alternative payment systems, such as the BRICS Clear project, which aims to establish a non-national unit of account for cross-border trade.
The Increasing Risk of Holding USD and USD-Denominated Assets
The USD’s dominance as the global reserve currency has historically been underpinned by its stability, liquidity, and the depth of US financial markets. However, in recent years, the US has increasingly weaponised the USD and its financial infrastructure to achieve geopolitical objectives. This weaponisation has taken several forms:
Economic Sanctions: The US has imposed sanctions on countries, entities, and individuals, restricting their access to USD and the global financial system. Notable examples include sanctions on Russia, Iran, Venezuela, and North Korea.
Exclusion from SWIFT: The US has leveraged its control over the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to exclude targeted entities from the global payments system. For instance, Iranian banks were cut off from SWIFT as part of US sanctions.
Secondary Sanctions: The US has extended its sanctions regime to non-US entities that engage with sanctioned countries, effectively forcing foreign companies and financial institutions to comply with US policies or risk losing access to USD and US markets.
These measures have significantly increased the perceived risk of holding USD and USD-denominated assets. Foreign governments, corporations, and individuals now face the possibility of having their USD assets frozen or seized, or being cut off from the global financial system, if they fall afoul of US policies. This has eroded trust in the USD as a neutral and reliable medium of exchange and store of value.
Historical Examples of USD Weaponisation
The weaponisation of the USD is not a new phenomenon, but its scale and frequency have increased in recent years. Some notable examples include:
Iran: The US has imposed extensive sanctions on Iran, targeting its oil exports, financial institutions, and key sectors of its economy. These sanctions have severely constrained Iran's ability to engage in international trade and access global financial markets.
Russia: Following Russia’s annexation of Crimea in 2014 and its invasion of Ukraine in 2022, the US and its allies imposed sweeping sanctions on Russia, including restrictions on its access to USD and the SWIFT system. These measures have prompted Russia to accelerate its efforts to reduce its reliance on the USD. It has done so successfully, which is indicative of the fact that should a pressing need arise then rapid adaptation is possible.
Venezuela: The US has imposed sanctions on Venezuela’s oil sector and financial institutions, aiming to pressure the government of Nicolás Maduro. These sanctions have exacerbated Venezuela’s economic crisis and forced it to seek alternative trading partners and payment mechanisms.
These examples illustrate how the US has used the USD as a tool of economic coercion, with significant consequences for the targeted countries. However, the unintended consequence of this strategy has been to undermine confidence in the USD and accelerate the trend towards dedollarisation.
The Accelerating Trend of Dedollarisation
The weaponisation of the USD has prompted countries around the world to seek alternatives to the USD in international trade and finance. This dedollarisation trend is driven by several factors:
Reducing Vulnerability to US Sanctions: Countries that are potential targets of US sanctions, such as China, Russia, and Iran, have been at the forefront of efforts to reduce their reliance on the USD. For example, China and Russia have increased their use of national currencies in bilateral trade, while Iran has explored alternative payment systems.
Promoting Financial Sovereignty: Many countries view dedollarisation as a means of asserting greater control over their financial systems and reducing their dependence on US-dominated financial infrastructure.
Diversifying Reserves: Central banks around the world have been diversifying their foreign exchange reserves, reducing their holdings of USD and increasing their holdings of other currencies, such as the euro, yuan, and gold.
The BRICS nations have been particularly active in promoting dedollarisation. For example:
China has been promoting the international use of the yuan (RMB) through initiatives such as the Belt and Road Initiative (BRI) and the establishment of RMB-denominated clearing banks in key financial centers.
Russia has significantly reduced its holdings of USD assets and increased its use of national currencies in trade with partners such as China and India.
The BRICS nations have explored the creation of alternative financial infrastructure, such as the BRICS Clear project, which aims to establish a non-USD-based cross-border payments system.
The Role of Bilateral and Multilateral Trade Agreements
One of the key strategies for reducing reliance on the USD has been the negotiation of bilateral and multilateral trade agreements that bypass the USD. For example:
China and Russia have increased their use of national currencies in bilateral trade, with a significant portion of their trade now settled in yuan and rubles.
India and Russia have explored the use of national currencies and alternative payment mechanisms, such as the rupee-ruble trade arrangement, to facilitate trade in the face of US sanctions on Russia.
Regional organisations such as the Eurasian Economic Union (EAEU) and the Shanghai Cooperation Organization (SCO) have promoted the use of national currencies in trade among member states.
These agreements reduce the need for USD in international trade and provide a buffer against the impact of US sanctions. They also contribute to the broader trend of dedollarisation by creating alternative channels for trade and investment.
The Impact on Global Trust in the USD
The weaponisation of the USD has had a profound impact on global trust in the currency. While the USD remains the dominant global reserve currency, its perceived reliability and neutrality have been called into question. This has led to a growing recognition of the risks associated with over-reliance on the USD and a search for alternatives.
The weaponisation of the USD has increased the risks associated with holding USD and USD-denominated assets, accelerating the trend towards dedollarisation. Countries around the world, particularly those targeted by US sanctions, have sought to reduce their reliance on the USD by promoting the use of national currencies, diversifying their reserves, and creating alternative financial infrastructure. The BRICS nations have been at the forefront of these efforts, exploring initiatives such as the BRICS Clear project and negotiating bilateral and multilateral trade agreements that bypass the USD. While the USD remains the dominant global reserve currency, its weaponisation has undermined global trust in the currency and set the stage for a more multipolar financial system.
The Transition to a Non-USD Based Cross-Border Payments System
The Need for a Non-USD Based System
The dominance of the USD in global trade and finance has long been a source of vulnerability for countries outside the US, particularly those targeted by US sanctions or those seeking greater financial sovereignty. The weaponisation of the USD, as discussed above, has accelerated the need for alternative payment systems that reduce reliance on the USD and the US-controlled financial infrastructure, such as SWIFT. A non-USD-based cross-border payments system would offer several advantages:
Reduced Vulnerability to US Sanctions: By bypassing the USD and US financial infrastructure, countries can protect themselves from the economic and geopolitical risks associated with US sanctions.
Greater Financial Sovereignty: A non-USD-based system would allow countries to assert greater control over their financial systems and reduce their dependence on US-dominated institutions.
Enhanced Economic Integration: A new payments system could facilitate greater economic integration among participating countries, particularly in the global south, by reducing transaction costs and barriers to trade.
The BRICS Clear Project and Non-National Units of Account
The BRICS nations (Brazil, Russia, India, China, and South Africa and the expanded membership) have been at the forefront of efforts to create a non-USD-based cross-border payments system. One of the most promising initiatives in this regard is the BRICS Clear project, which aims to establish a non-national unit of account for cross-border trade and investment. This concept draws inspiration from historical proposals, such as John Maynard Keynes' Bancor, which envisioned a global reserve currency not tied to any single national currency.
The BRICS Clear project represents a significant step towards creating a non-USD based cross-border payments system. By establishing a non-national unit of account, similar to Keynes' Bancor proposal, BRICS nations can reduce their reliance on the USD and create a more stable and resilient financial system. Capital controls will play a crucial role in managing liquidity during the transition, ensuring that the new system is not destabilized by sudden capital flows. While there are technical and logistical challenges to overcome, the potential benefits of reduced vulnerability to US sanctions and increased financial sovereignty make this transition a worthwhile endeavor.
Key Features of the BRICS Clear Project
The BRICS Clear project has a number of important features:
Non-National Unit of Account: Unlike traditional reserve currencies, which are tied to a specific country (e.g., the USD or the euro), the BRICS Clear system would use a non-national unit of account. This unit could be based on a basket of currencies, commodities, or other assets, or be simply backed by state-fiat, providing a more stable and neutral medium of exchange.
Decentralized Infrastructure: The BRICS Clear system would likely operate on a decentralized platform, such as blockchain or distributed ledger technology (DLT), to ensure transparency, security, and resilience against external interference. The experiences of the mBridge blockchain-based cross border payments project is suggestive of key design parameters of the BRICS Clear platform.
Settlement in Local Currencies: The system would enable participating countries to settle transactions in their local currencies, reducing the need for USD intermediation. For example, a Brazilian importer could pay a Russian exporter in reais, with the system automatically converting the payment into rubles at an agreed-upon exchange rate.
The use of a non-national unit of account, rather than replacing the USD with another national currency (e.g., the Chinese yuan), offers several advantages. A non-national unit of account would not be tied to the economic or geopolitical interests of any single country, making it more acceptable to a broader range of participants. By basing the unit of account on a basket of currencies or assets, or supporting it through fiat, the system would be less vulnerable to fluctuations in the value of any single currency. Lastly, a non-national unit of account could be more easily adopted by countries outside the BRICS bloc, facilitating greater global participation and integration.
The Role of Capital Controls in Managing Liquidity
The transition to a non-USD-based payments system would require careful management of liquidity to prevent destabilising capital flows and ensure the smooth functioning of the new system. Capital controls, which regulate the flow of capital into and out of a country, would play a crucial role in this process. These measures restrict the inflow of foreign capital to prevent excessive appreciation of the local currency and asset bubbles. For example, a country might impose taxes or quotas on foreign investments in its financial markets. Similarly, measures to limit the outflow of capital to prevent destabilising capital flight during periods of economic uncertainty may also be appropriate. For example, a country might restrict the amount of foreign currency that residents can purchase or transfer abroad.
While capital controls can help manage liquidity during the transition, their implementation poses several challenges. Effective capital controls require coordination among participating countries to prevent regulatory arbitrage, where capital flows to jurisdictions with looser controls. Capital controls also must strike a balance between maintaining financial stability and allowing sufficient flexibility for trade and investment. Lastly, excessive reliance on capital controls can discourage foreign investment and hinder economic growth, so they must be used judiciously.
The creation of a non-USD-based payments system involves significant technical and logistical challenges. Building a decentralized payments platform that can handle large volumes of transactions securely and efficiently is a complex task. This requires significant investment in technology and expertise. For the system to gain widespread adoption, participants must trust its stability, security, and neutrality. This requires robust governance mechanisms and transparency. The new system must be compatible with existing financial infrastructure, such as central bank systems and commercial banking networks, to ensure seamless operation.
Geopolitical Implications
The transition to a non-USD-based payments system has significant geopolitical implications, particularly for the US and its allies. The creation of an alternative system would reduce the leverage that the US derives from the USD's dominance and challenge its position at the center of the global financial system. This could lead to increased geopolitical competition as the US seeks to defend its interests and other countries seek to assert greater autonomy.
The transition to a non-USD-based payments system presents significant opportunities for the global south. By reducing their reliance on the USD, countries in the global south can protect themselves from the economic and geopolitical risks associated with US sanctions and monetary policy. A new payments system could facilitate greater economic integration among countries in the global south, promoting trade, investment, and development. The creation of a non-USD-based system would allow countries in the global south to assert greater control over their financial systems and reduce their dependence on US-dominated institutions.
Implications for the Valuation of Fictitious Capital Assets
As demand for USD diminishes, the valuation of USD-denominated fictitious capital assets is likely to be significantly impacted. The global revaluation of financial assets could lead to asset bubbles and financial instability, but it also presents an opportunity for a more balanced global economy. The shift towards real assets, such as commodities and real estate, reflects a growing preference for tangible value forms over financialised assets. BRICS nations, with their abundant natural resources and real assets, are well-positioned to lead this shift and create a more sustainable economic order.
The Diminishing Demand for USD and Its Impact on Fictitious Capital
As the global financial system transitions away from the USD, with this evolution accelerated by barriers to trade with the US such as the threatened 100% tariffs on BRICS nations, the demand for USD-denominated fictitious capital and other assets is likely to decline. Trade in real goods and services ultimately impacts on the circuits of fictitious capital. The United States issues USD to finance its trade deficits. Consequently, foreign nations accumulate USD reserves. Foreign nations then invest USD surpluses into U.S. financial markets, leading to the expansion of U.S. capital markets enabling further financialisation. More USD is issued as the US needs to pay for imports, thereby reinforcing the cycle. This cycle has sustained U.S. financial dominance for decades, but it is fundamentally dependent on the necessity of USD in trade.
Fictitious capital markets have monetised lives of their own, but their foundations are found in the relationship between fictitious capital (rights to future value) and the sources of use value in the real economy. While the volume of trade in fictitious capital markets dwarfs that of the world of trade in goods and services, without the latter the former loses its grounding.
This shift away from USD denominated trade with the US in relative (and perhaps in absolute) terms, will have profound implications for the valuation of fictitious capital assets, which derive their value from expected future income streams realised through speculative trading.
The over-accumulation of fictitious capital in USD-denominated markets has created a significant imbalance between the financialised US economy and the real economy. This imbalance poses several risks as the transition away from the USD accelerates. The dominance of the USD has led to the overvaluation of USD-denominated assets, as investors have flocked to these assets in search of safety and liquidity. Changes in the S&P 500 track the growth in USD supply (M2) as do their trajectories. Increased USD into the economic system tends to drive asset prices, particularly in relatively liquid asset markets such as those of fictitious capital and real estate. However, as demand for the USD declines, these assets may experience sharp price corrections, leading to the bursting of asset bubbles. The bursting of asset bubbles in USD-denominated markets could have spillover effects on other asset classes and financial markets, leading to broader financial instability.
As countries and investors reduce their reliance on the USD, there will be less USD circulating through the circuits of trade for goods and services. Consequently, demand from historically surplus exporters for USD-denominated assets, such as US Treasury bonds, corporate bonds, and equities, will decline. This could lead to an impairment in the traded value of these assets, resulting in capital losses for holders. Additionally, a rapid decline in demand for USD-denominated assets could lead to a liquidity crunch in global financial markets, as investors struggle to sell these assets or find alternative buyers. This could exacerbate price declines and increase market volatility.
The transition away from the USD is likely to be accompanied by increased market volatility, as investors adjust their portfolios and reassess the value of financial assets. This volatility could be exacerbated by speculative behavior and herd mentality. The interconnectedness of global financial markets means that disruptions in one market can quickly spread to others. A crisis in USD-denominated markets could trigger contagion effects, leading to widespread financial instability.
The Shift Towards Real Assets
As the risks associated with holding fictitious capital assets increase, investors are likely to shift their focus towards real assets, which are anchored in use value and are less vulnerable to financial market fluctuations, which are driven by speculative trading in fictitious capital. Real assets include tangible commodities, such as gold, oil, and agricultural products, as well as physical infrastructure and real estate. Real assets have use and exchange value based on their utility and availability. Real assets, particularly commodities, are often seen as a hedge against inflation, which could become a concern as the global financial system transitions away from the USD. Investing in real assets provides diversification benefits, reducing the overall risk of an investment portfolio.
As investors shift towards real assets, demand for commodities such as gold, oil, and agricultural products is likely to increase. This could drive up prices and create new opportunities for commodity-exporting countries. This is particularly relevant to BRICS. The focus on real assets could also lead to increased investment in physical infrastructure, such as transportation, energy, and telecommunications networks. This could support economic growth and development, particularly in the global south.
The BRICS nations, with their abundant natural resources and large real economies, are well-positioned to benefit from the shift towards real assets with use value. These countries could play a key role in the revaluation of assets as the global financial system transitions away from the USD. BRICS nations such as Russia, Brazil, and South Africa are major exporters of commodities, including oil, gas, metals, and agricultural products. Increased demand for these commodities could boost their economies and strengthen their currencies. BRICS nations could also build strategic reserves of key commodities, enhancing their economic resilience and bargaining power in global markets.
The BRICS nations have significant infrastructure needs, particularly in transportation, energy, and telecommunications. Increased investment in these areas could support economic growth and create new opportunities for trade and investment. Infrastructure development could also facilitate greater regional integration among BRICS nations and other countries in the global south, promoting economic cooperation and reducing dependency on the USD.
The transition away from the USD and the revaluation of fictitious capital assets have broader implications for the global financial system. The shift towards real assets with use value and away from fictitious capital could lead to a more balanced global economy, with greater emphasis on real economic activity and less reliance on financial speculation. A focus on real assets and infrastructure investment could support sustainable economic growth, particularly in developing countries. The decline of the USD's dominance could reduce the geopolitical influence of the US, as other countries and regions assert greater autonomy and control over their financial systems. The transition to a non-USD-based financial system could contribute to the emergence of a more multipolar world, with multiple currencies and financial centers playing significant roles.
Conclusion
Donald Trump accuses BRICS of wanting to “play games with the dollar”. He responded with threats of 100% tariffs, claiming that these threats have effectively killed off BRICS. Neither claim holds water. BRICS isn’t playing games; it is responding to the evolution of trans-national trade contours, and ensuring that they manage risks and costs associated with burgeoning intra-BRICS trade. The weaponisation of the USD, and the emerging weaponisation of trade policy, only accelerates these real economy trends. As for killing off BRICS, as I have shown in the previous essay and in this one, efforts to stymie BRICS’ development is likely to spur on its development. The transition away from the USD is part of this ongoing evolution.
The transition away from the USD is not constrained by the depth or breadth of American capital markets, as these do not finance the US trade deficit. Instead, the shift is driven by the complementary economies of BRICS nations and the global south, alongside the diminishing demand for USD-denominated fictitious capital assets. That many entities and nations have exposure to USD assets is a constraint on these entities or nations wilfully and with undue haste undermining US capital markets. But these concerns are countered by growing weaponisation of the USD and USD assets, as well as threatened moves by the new US administration to erect significant barriers to trade with the US. The constraint is that foreign holders of USD and USD-denominated fictitious capital assets would be reluctant to rapidly diminish the exchange value of these holdings. If forced, however, due to US government punitive economic measures and intensified weaponisation of the USD and associated financial assets, then it is possible for BRICS nations to achieve a successful compensatory transition within a relatively short period of time. This does not imply that such a transition would not be disruptive or cost-free; it simply says, it can be achieved.
The creation of a non-national unit of account, such as the BRICS Clear project, and the implementation of capital controls will be crucial in managing this transition. While there are challenges to overcome, the potential benefits of reduced vulnerability to US sanctions and increased financial sovereignty make this transition a necessary and achievable goal. In the next essay of this three part series, I will go into the BRICS Clear project in more detail.