Currencies: Kazoo, Kazan!
Developments in monies, currencies and international finance for the upcoming BRICS Heads of State meeting.
Published: 2024-09-27
A Roving Reporter Reports
Pepe Escobar has been reporting from southeast and central Asia for well over two decades. He is curious of other cultures, their histories and languages, rather than being superior or judgmental. He is multi-lingual himself, speaking several languages fluently. His respect for and interest in other cultures, along with his intelligence and study, has allowed him to develop friendships with many influential figures across Eurasia. It is through these sources and experiences that he has been able to provide both insightful commentary on the geopolitics of Asia and also provide details of developing projects.
He has been the key source in the English language media for the work which the leaders of BRICS and the SCO (Shanghai Cooperation Organisation), namely Russia and China with close consultation with other powerful members of these groups, including India and Iran, have been undertaking to establish long lasting, international, financial structures to facilitate their trade outside of the US constructed financial system. That system is often known as the 'Bretton Woods' system, named after the location of the meeting before the end of WWII in 1944 which established it.
Escobar's most recent report provides further hints of what financial instrumentation is likely to be revealed at the upcoming BRICS Heads of States meeting in Kazan, Russia, from the 22nd to 24th of October.
I am not an economist or financier. I am, nonetheless, an amateur student of history and economics. To understand the root of the challenge which is being presented to the US financial system, one needs understand what money is, and particularly, fiat currency. To this, "digital currencies" and the Central Bank version need to be added. Apologies in advance for this simplistic summary of these concepts.
Money-101
Money is an abstraction of value. Currency is an officially produced physical representation of the abstraction.
The simplest financial system, and the oldest, is the barter system in which no currency is required. However, it is rather inconvenient. How many loaves of bread are required for a young female cow? If the price is agreed at 200 loaves, then assuming the traders both live close, that might be resolved as a fresh loaf of bread each day for half a year. As this goes on, the recording of debts (IOUs) builds. What if one runs out of flour because the miller's mill is broken? Hence, currency. It enables the transaction to be completed rapidly via the exchange of the official representation of the values of a loaf of bread and the heifer.
The oldest and probably most useful of currencies are based on precious metals. They represent both something which is rare and agreed to have a universally high value. They are also not too difficult to smelt (low melting points) and thus stamp. The stamping is by an authority (King, Nation State, etc.) and is for the purpose of certifying the purity of the metal. Rarity preserves value (and makes life more difficult for forgers, the bane of currency authorities).
In 1971 the US dollar was removed from the "gold standard". Before this, one could exchange one's dollar for an agreed amount of gold. The reasons for the change are beyond the scope of this article, though are a fascinating topic of historical study. The change is intrinsically linked with the “Petro-dollar”. When the dollar was decoupled from gold, the US dollar became a "fiat" currency. Then and since, it has no fixed exchange rate to a precious commodity. For the last half a century the US dollar has been maintained as the default currency for international commerce, even without this binding to a rare (value preserving) commodity. The key to that preservation was the commitment by all of the major oil traders to trade in US dollars, hence the “Petro-dollar”. That trade happened in US markets in US dollars through US banks.
The value of the US dollar is that people want and use it. There is no other value. The same is true of the Euro and many other "modern" fiat currencies.
Digital Currencies
Bitcoin (and many variants too) is a crypto-currency. Its manufacture is via the expense of electric power to solve mathematical puzzles which become harder as each new 'coin' is 'mined'. There is a fixed limit on the total number of 'coins'. This emulates the 'rarity' property of precious metals.
Bitcoin is, nonetheless, a fiat currency -- there is no fixed exchange rate to a precious commodity. Bitcoin is not just a currency. It incorporates a transaction system. The transaction system is an append-only, cryptographically signed ledger of *all* transactions in Bitcoin, called the 'block-chain'. There is no Bitcoin without the Block-chain ledger. The ledger is public and distributed. To use a unit of a crypto-currency which is bound to a ledger the actors representing transacting parties require both access to the ledger and to update it.
The technology of the block-chain can easily by used for recording things other than Bitcoin transactions. Its core properties are that it is append-only and that it cannot be changed, except for the addition of each new record (transaction). This technology has uses in banking -- a tamper-proof transaction ledger. Banks have been working on their own versions of 'bitcoin' (aka digital currencies). These use the tamper-proof ledger but the banks control the generation of coins (as opposed to 'mining' using electric power to solve maths puzzles). Access to the ledger, and the ability to update it are certain to be modified, reduced to 'authorized parties'.
The "Bank of Central Banks", the Bank of International Settlements (BIS), has been working with the central banks of nations with major economies for years to devise a workable solution for digital currencies for central banks. These are known as Central Bank Digital Currencies (CDBCs). How they differ from Bitcoin likely involve both the unit of currency generation mechanism, and the level of availability of the ledger and ability to update it (thus, limiting who or what can transact). A CDBC is not a crypto-currency. It is a national "digital" currency which involves the use of the ledger technology.
China and the BIS established a pilot project to trial a CDBC. The project is called mBridge.
Synthetic "Currencies"
Currency basket money is a synthetic money which is composed of other other monies at a fixed percentage. Those monies are almost always national currencies (monies which have a physical representation). As such, currency basket monies are usually called basket currencies. This is a misnomer. They are never printed (minted).
This merger of the term money and currency is ubiquitous, and annoying to pedants. It helps, however. What is a 'digital currency'? This phrase makes no sense, as a currency is by necessity a physical thing. It must have a 'cash'.
I propose that 'digital currency' means modern 'fiat' currency as recorded in the digital systems (asset ledgers) of banks and central banks. The correct term is digital money. The terms of money and currency are being merged as a slight of hand due to the fiat nature of modern national monies -- they are not connected to anything physical. The brilliance of the Bitcoin cryptographic digital money was that it exposed the fiat nature of national digital monies by providing an alternative.
Returning to "currency" baskets, a fictitious currency basket money could be a 'Babble' with one Babble being worth 50% of a US dollar (50 cents) and 50% of a Great British Pound (50 pence).
The International Monetary Fund has a currency basket called the SDR (Special Drawing Rights) which is defined as a fixed percentage of US dollars, Pounds, Euros and other currencies. This IMF synthetic asset is issued to central banks, and only central banks. It is a limited distribution, synthetic, central bank value abstraction (money).
Sorry for all that. If, community, you see any glaring errors in the above, please point them out below. I will assess all error reports and update the article accordingly. References to provide a foundation for your corrections are greatly appreciated.
Now on to the Escobar article.
BRICS Woods
The financial instruments which are potentially going to be created by BRICS are:
1. A new currency, probably to be called The Unit, which is a hybrid currency backed by 40% gold and 60% a basket currency composed of the national currencies of the leading BRICS member states. This is not new information from Escobar, but a confirmation of intention. One presumes that amount of gold (in weight) for one Unit would need to be fixed, as will the exact ratios of the member national currencies in the basket.
This proposal would make the Unit a new thing; a merger of a rare commodity backed money and a "currency" basket. The core purpose of the Unit is to be traded between national monies and itself. It is to join the asset pools which central banks keep to balance (hedge) the value of their pool. It is also to be used in international trade. But to what level, and it what way and by which class of authorized parties? The devil is always in the detail.
We do know one thing. Something has to issue The Unit, and that is almost certain to be the New Development Bank. It situated in Shanghai. It's president is appointed by BRICS. The NDB was created a decade ago (2015) and has issued very few loans (development projects) compared to the size of its assets. It is nowhere near as active in loan issuance as the IMF.
It has been like a Rook on a chess board, a powerful piece, waiting in the corner.
2. BRICS Bridge is likely to be a variant of mBridge which will be an international payment processor with a block-chain type ledger for settling transactions in member state Central Bank Digital Currencies. BRICS Bridge will process national CDBCs, which is to say, they must already exist.
This institution, if created, will be the victory for Central Bank Digital Currencies on which the Bank of International Settlements has been working. Once this is done, the central banking world will have passed a door through which it will never return.
This is the most controversial of all of the instruments.
The transition to CDBCs is inevitable. Various people are very concerned about this. Your author's concern is in a different direction -- the eradication of cash. I see the CDBC revolution as a component of that far more dangerous objective. In this we return to anonymity. CDBCs, like all crypto-currency transactions, require the metadata of the transacting parties. Cash does not. It also does not require a network and power. This topic, of CDBCs and the "war on cash" warrants a far more detailed discussion.
3. BRICS Pay looks like an equivalent of the Bridge but for non-CDBC (i.e current) member state currency transaction settlements. It is not controversial in terms of changes in monies and currencies, but is a serious threat to the US financial system, as outlined below.
There are 3 additional items: an insurance agency, a ratings agency and a 'settlement depository'. (I have no idea what the last is). One presumes that the insurance agency will be an initial offering to spur a market in insurance of various financial components of this new architecture. The ratings agency seems similar; an initial offering.
From the article, towards its end, two statements stand out:
The new deal could place the NDB as leverage for a reform of the IMF, rather than an alternative to it.
And from that perspective, as one of the analysts note, “The UNIT and all other similar projects may be presented as complementary risk management tools hedging against reckless monetary policies and Global Financial Crisis-2 risks.”
These two statements stand opposed to other quotes imploring action. One can understand that the bankers and asset managers feel cautious. They are taking on a behemoth in the US dollar, IMF, insurance companies, ratings agencies and more. One senses a tepid approach. Small steps, to be trialed with risks limited as much as possible.
Nonetheless, there is real desire to have an operational alternative to the "dollar system" even if it is only "small". If one looks at the reckless geopolitical strategy (if one could use such a term) being displayed by the US, its financial system is itself under threat. The cynical may propose that all the the thousands of now largely ineffective sanctions which the US has issued are themselves designed to manufacture the circumstances for the emergence of the CDBC world. Statistically, incompetence is far more likely to be the explanation for repeated stupidity than a successfully organised conspiracy. This does not rule out the all too common case of "not letting a disaster go to waste".
Financial systems, like currencies, require confidence in them. They are an inverse chicken and egg problem; the system does not exist until confidence in it exists. The solution for the BRICS member states, and thus the likely action, is to establish the minimal core of the system and let it run.
There is plenty of plumbing already built underneath this nascent financial system. Both Russia and China have established their own inter-bank messaging systems (to replace "SWIFT" which the US has been denying to various banks in its sanctions). A precursor to BRICS Pay exists with Russia's Mir credit-card being operable in China and Turkey. China has also established an equivalent credit-card.
What is at stake?
Ignoring the CDBC controversy, the following challenges are being issued.
Obviously, this system is designed to be immune to US sanctions. This is only a minor problem for the US. US sanctions haven't had their desired effect for years, as demonstrated by the spectacular failure of the sanctions armies launched at Russia. Additionally, the US far prefers to coup governments and control the financial behaviour of national businesses from the inside, by law. I cite Venezuela as a prime example.
A bigger issue is trade volume. The core BRICS members already transact the majority of their bilateral trade in their own currencies. This leaks trade from the US system. The further construction of this new financial system will do the same; continue to leach trade from the US institutions.
This undermines the significance and importance of the US fiat-dollar. Its significance is its use, its necessity. A reduction in use and requirement leads to nervousness. Central Banks might reduce the volume of US Treasury securities in which they have been "investing". They might even wish for some of their share of the US debt be repaid, expecting that the value of the dollar might fall. Once that starts, the whole house of cards falls.
As mentioned, The Unit is slated to be hybrid with a 40% precious metal component. That component holds its value, even if some of the currencies in the basket are under threat. The US dollar has none of this protection. There is a three-legged stool balance/imbalance component in the attack. One leg is the fiat currencies of the member states against the fiat US dollar. The next is the new precious metal backed currency basket. The last is the CDBC exchange, the Bridge. Each leg is more novel than the previous. Imagine a stool, the legs of which are of different lengths. Here, US, sit on that.
There is also an information threat. Because the majority of international trade occurs in the US dollar, the US gets to watch, to know about, all of this trade. When trade occurs outside of the US dollar system, the US is blind to it. It loses the detail of its overview of international trade. How significant this future loss of 'trade intelligence' would be, one cannot know. It seems safe to assume it will be consequential.
The last threat is that the new system could, once gently trialed, accelerate exponentially. Once its operation is stable, confidence in it may grow so rapidly that the US would not be able to slow it. Thus, the US needs to be able to destabilize whatever BRICS builds, on demand. This US threat is slowing the construction, and we're back to the chicken and egg problem.
But, the threat to the dollar system is real. The exorbitant use of unilateral, punitive, economic sanctions by the US has forced the development of the response. Financiers who wish to preserve the dollar system need to have prepared responses to destabilize whatever BRICS builds, or be happy to transition into some state between the old and new systems. Their choices will determine the future of the flow of international trade.
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Sources
Will a BRICS Bretton Woods Take Place in Kazan?, Pepe Escobar, The Unz Review, 2024-09-23
Birthing an Eurasian Security Architecture, YesXorNo, 2024-07-12
Project mBridge reaches minimum viable product stage and invites further international participation, Bank of International Settlements, 2024-06-05
Leaving the Dollar-Based System for Good: What are the Digital Ruble and BRICS Bridge?, Ekaterina Blinova, Sputnik International, 2024-09-16
Goodbye Greenback: BRICS Says Group’s Use of National Currencies Leaving Dollar in Dust, (no author), Sputnik International, 2024-09-20
Collaboration Among BRICS Cities Key to Tackling Global South’s Challenges, Says Forum Chair, (no author), Sputnik International, 2024-09-19
New Development Bank, Wikipedia
About, New Development Bank
Pepe Escobar - From BRICS to war; How the US Underestimates Russia [S37ApcClqfc], Napolitano interviews Escobar, Judging Freedom, 2024-09-26
For 7 minutes from 00:13:23 to 00:20:18 Escobar presents a summary of his understanding of the likely upcoming actions. The summary is "not much". The currency is not ready, the Bridge even less so. But, there is considerable interest (159 countries) in the Pay. This, being the least contraversial, is the most likely to receive political support at Kazan.
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