Chief Economist Eugenio J. Alemán discusses current economic conditions.
Watching coverage of the BRICS (Brazil, Russia, India, China and South Africa) summit in South Africa this week made us wonder why the members of the BRICS decided to name the section, in which Vladimir Putin was addressing the conference by video conference, “BRICS BUSINESS FORUM,” in English, yes? Of course, the French would have argued to use French as the official language of the conference because they still believe that French is the ”universal language” of the world. Of course, they may even want everybody to use the French franc as the ”universal currency” of the world. Wait, but not even the French use the French Franc. The currency of choice is determined by what the global economy wants, not what its leaders say they want. It is what their constituents do that matters.
Of course, skeptics would tell us that English is the official language of South Africa, the host country. However, they could have used their other official languages, Afrikaans, Zulu, Venda, Southern Sotho, Swati, Tswana, Northern Sotho, South African Sign, Xhosa, Tsonga, or Ndebele. But no, they chose English. If you are even more skeptical, you would say: “Well, they chose English because English is also an official language of India.” However, they could have used Hindi because that is also an official language of India. But no, they used English. Granted, they probably used English because if you were to make a ”Venn Diagram” between the official languages spoken in these countries, you will see that the only common language that produces an intersection, i.e., something in common between these countries, is between South Africa and India. That is, they both have English as their official language.
But the truth is that they probably chose English because, despite what my French friends would have wanted, English is the ‘current’ universal language. And yes, this may change in the future and, perhaps we will all be speaking Mandarin or Cantonese, but the future is still not here; so, they all use the current universal language, English. Coincidently, the U.S. dollar is the ‘current’ universal currency. Not because the U.S. government says so. In fact, as we indicated in our Weekly Economics Thoughts of the Week for April 5, 2023) and in our white paper on the Central Bank Digital Currency on July 20, 2023, the U.S. dollar is “legal tender for all debts, public and private” in the U.S. and its territories, not in the rest of the world. The fact that it is also a trusted currency and accepted in the rest of the world is a testament to the trust behind the policies followed by U.S. institutions that protect the value of the U.S. dollar, period. This trust is second to none. And until this changes, the U.S. dollar will remain the most trusted currency in the world.
Backing a BRICS currency with gold? No way Jose
Only those who are trying to sell gold at any cost (i.e., at any price!) would argue that the BRICS countries could be contemplating backing a presumed BRICS currency with gold. The math is very simple (even though we are not going to use math for our explanation), if the BRICS countries try to back their presumed currency with gold, they have to stand ready to sell all the gold they possess at whatever exchange rate, or price, they set their currency to be against gold. This means that they give up their ability to conduct monetary and even fiscal policy if, as they normally do, they monetize their fiscal deficits. That is, this is something that the Chinese government, the Brazilian government, the Russian government, the Indian government, and the South African government typically do so there is probably no chance that they will engage in this process.
Do we really believe that the Chinese, or the Russians, who are some of the most interested in controlling what they do with their economies, will be okay if markets determine the value of their currency? Of course, the Chinese could, theoretically argue that they will buy lots and lots of gold in order to intervene in the market for gold, i.e., buy or sell gold, to keep the value of their BRICS currency stable.