In his legendary book The Art of War, Sun Tzu explains:
To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.
When Russian President Vladimir Putin declared economic war on America at the St. Petersburg International Economic Forum in early June, he targeted the most vulnerable part of the U.S. economy: the excess supply of dollars around the world. This excess supply is caused to a very large degree by waves of absolutely reckless monetary expansion by the Federal Reserve. These expansions, in turn, have been driven by an insatiable hunger for more spending on Capitol Hill.
Now, President Putin lets us know that he is going to exploit this vulnerability to deal a major blow to the American economy. Is anyone in Washington paying attention?
The 24th International Economic Forum in St Petersburg, Russia, marked the end of the beginning, so to speak, of the formation of a new block of economic power in the world. We know this block as BRICS, but it is likely going to assume another name in the future, as dozens of countries line up to join the organization.
In the plenary session opening the St Petersburg forum, a presentation was offered where the West, including America and Europe, are presented as imperialist thugs of the past. Colonialism was followed by dollar dependency, which—according to the presentation—was just a continuation of territorial colonialism.
Then the presentation shifts to Russia, portraying the country as a perennial bulwark over the past thousand years against Western colonization. Russia was also portrayed as a fountain of justice and mutual cooperation.
Without delving into the history of countries that have lived with Russian “justice” over the centuries, there is no doubt that this presentation is a thick slice of propaganda. Nevertheless, the message is clear: it is time for the world to reject the dollar and other Western currencies and join a new international club.
That club is rapidly emerging out of the current BRICS organization, and it is no longer just a cooperation structure for developing countries. It is morphing into an advanced, formal institution that eventually will be offering a new global trade currency as a challenge to the dollar.
This goal, which has been known for some time, is coming closer to fruition. In his opening speech at the St. Petersburg Forum, President Vladimir Putin explicitly referenced the BRICS trade currency, though without direct reference to BRICS. Putin explained that Russia needs to develop “a transport payment infrastructure” to let exporters and importers finance trade transactions without the involvement of the U.S. dollar. His motivation was blunt:
It is an open secret that the reliability and trust of the Western payment systems have been really undermined, indeed by the Western countries themselves. I would like to highlight that in the last year, the payments for Russian exports in the so-called toxic currencies of non-friendly states have halved.
The BRICS-based alternative to the dollar, the president pointed out, is currently being developed. Once it goes online, it will be a fully independent payment system “free from political pressure, abuse, and external sanctional interference.”
It would be foolish to assume that this new trade currency is not going to happen. The core of the BRICS countries—Brazil, Russia, India, China, and South Africa—have been working on this dollar alternative for some time now. With new bilateral trade deals being written independently of the dollar, and with Saudi Arabia ditching the petro dollar for its oil exports, there is a concerted, multi-point movement to remove the dollar from global trade.
This movement will, of course, never eliminate the dollar as a trade denomination currency, but it definitely has the potential to create a significant, parallel system for a large share of the world’s trade. As Putin pointed out, with its newest members, BRICS now covers 36% of global GDP. This means that all the trade between these countries—intra-BRICS, so to speak—will be denominated in the new trade currency. Since many of these countries are more dependent on foreign trade than, e.g., the United States, it is fair to assume that in the near future, the BRICS trade currency could come to apply to as much as 40% of global trade.
That is not to say the new trade currency will be a smooth one to roll out. To operate with reliability, exporters and importers need backup from the central bank of their country. If they get paid in a foreign currency, they need to be able to secure an exchange rate ahead of the transaction to make the trade deal financially predictable. Importers, who need to pay their foreign trading partner in their currency, also rely on predictable exchange rates.
A central bank can offer exchange rate predictability if its reserves of the currencies involved are solid enough that they can guarantee liquidity in the currency market. This is why central banks maintain a reserve of the foreign currencies that are most often used for trade across the nation’s borders. When global traders move away from a specific currency, the central bank has no reason to maintain that currency in the same quantities as it did before.
Right here, we have the main threat to the dollar. When central banks in the BRICS system sell their dollars to acquire another currency, they will flood the global market with greenbacks and thereby cause two things to happen. The first is a depreciation of the dollar, which weakens the U.S. currency’s purchasing power on the global market. If America at that time is not back to energy independence, fuel prices will rise—and likely at a brisk pace. Imports of other essential products, including food, clothes, and construction materials, will also become more expensive.
The second consequence of the BRICS dollar sell-off is that the supply of dollars on the global currency market will create an effective money-supply shock in the U.S. economy. Depending on the size of the BRICS community at the time this happens, the consequences could be anything from manageable to disastrous; if the central banks in the current BRICS members sold off all their dollars, it would equal an increase in U.S. money supply of approximately 8%.
This is not insignificant, but it is manageable for the U.S. economy. However, any increase from there and up would rather quickly create an inflation pulse, i.e., a rapid but usually transitory increase in the inflation rate. Depending on how strong that pulse is, it will cause anything from a moderate to a catastrophic inflationary shock in the economy. As we approach the worst end of the spectrum, the inflation rates we may see will be quite a bit higher than the 9% the U.S. economy experienced recently. With inflation well into the double digits, interest rates will rise—likely with shocking speed—which in turn will work as a shock on the U.S. economy.
However, the greatest threat to the stability and global value of the dollar comes when the BRICS countries decide to abandon the dollar in their financial systems. Russia took a small but symbolically important step in this direction on June 13th when the Moscow stock exchange halted all dollar-denominated trading. The move was forced by the U.S. government, which laid another layer of sanctions on Russia to target the financial side of the so-called “war economy.”
Financial transactions are large, fast, and can easily have destabilizing effects. A major de-dollarization of BRICS financial systems would flush dollars—again via central banks—out on the global market in such proportions that the consequences for the U.S. economy are even hard to predict.
If Russia and BRICS execute a de-dollarization plan with precision and purpose, they will inflict significant economic harm on America. This is why it is fair to classify Putin’s speech at the St. Petersburg International Economic Forum as a declaration of war on the American economy.
