The Rise of BRICS: A Threat to Global Order?

It’s a question I’ve often been asked, and a question which I’ve never had a good answer to. How are currencies valued? Every day, on most main-stream news networks we are enlightened on exchange fluctuations for the day. How the AUD compares to the USD, GBP, and EUR are the favourites. But we rarely, if ever, get a good reason as to why exchange rates have shifted. Let’s delve into the why.

At its most basic level, currency valuations are a product of supply and demand, wherein increased demand appreciates values, and vice-versa. The general economic health of an economy is what influences the demand and supply of a currency. Factors such as inflation, money supply and trade are often intertwined when it comes to currency valuation. The decline of the Venezuelan Bolivar is a staggering recent case study into the affect that macro-economic events can have on exchange rates.

The Venezuelan economy is largely dependent on oil, with over 90% of the country’s export revenue generated through the commodity. A decline in the demand for the commodity worldwide saw the price of crude oil drop from $105 in June 2014, to just $34 in January 2016. These events, which saw export revenue drop dramatically, in conjunction with extreme social spending programs, and money printing resulted in hyperinflation, estimated at 80,000% in 2018. The result… 1kg of tomatoes = 5,000,000 bolivars. Ouch.

But what about closer to home? What about our biggest western ally, the US. The USD has been the world’s main reserve currency since the end of World War II, and currently holds 59% of global foreign exchange reserves, commonly in the form of treasury bonds. Along with dominant financial markets, the US is the world’s biggest importer, equal to $3.2trillion in 2022. In essence, the USD is the world’s prominent reserve currency due to the global demand for US safe-haven debt, trade, and market size.

So, this brings us to our next line of questioning. Is this structure of foreign exchange perpetual in nature, or will an alternative currency like BRICS arise as a real threat to the global order?

At present, the collapse of the USD is highly unlikely, because the US is too important to trade partners, like China, Japan, Germany, etc. Additionally, the US economy is resilient to harsh macro-environments, like those presented with inflation recently, as shown by the growth in the S&P500, up 16% in the past year. This is where BRICS comes into the equation, a five-nation group with plans to create an international reserve currency, backed by gold, to challenge the USD. Combined, the countries account for 31.5% of global GDP. The plan is simple, BRICS nations trading amongst themselves, with the new gold backed currency, completely independent of the US. This has the potential to severely shift the world order. As the USD becomes less vital, foreign investors may pull their reserves, leading to a decline in dollar value, and a major uptick in purchasing power for US citizens (too much cash in circulation = inflation). To combat this, the US central bank would have to increase rates, slowing economic growth, to avoid hyperinflation. And with a $33 trillion debt, coupled with a decline in exports revenue, the US government may struggle to meet its debt commitments.

While the implementation of a currency like BRICS is mostly considered far away, it is interesting to unpack what affects it may have on the status quo. The power of one nation is frowned upon by adversarial powers, like Russia and China, who seek to grasp some power from our Western leader. Bilateral trade agreements, separate from the United States would further fragment foreign relations with enemy states, but resultantly strengthen ties with allies. It is safe to say that BRICS is a potential threat to the global order, yet an interesting topic for further discussion.