Opinion | True lesson of US dollar privilege won’t be lost on expanded Brics

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In his challenging new book The Power of Money, former Harvard economist Paul Sheard boldly says that “government debt never has to be repaid” provided the debt is denominated in the issuer’s own currency and that the currency is a widely acceptable one.

It is an appealing idea for those governments in the Brics group – Brazil, Russia, India, China and South Africa – that are anxious to lessen their US dollar dependence. The United States derives considerable power from its ability to finance its expanding budget and external deficits.

This particular aspect of global power projection is not always considered in assessments of why Asian and other emerging economies such as China place great store by having their currencies achieve international status. It is not just a matter of prestige or trade and investment convenience.

Governments are in the business of financing not only things such as health, welfare, education and other domestic spending but also areas such as defence and military power projection, as well as international development spending on infrastructure and foreign aid of many different types. The ability to do this by means of borrowing – which, according to Sheard, never needs to be repaid – is a coveted privilege which might transform the global balance of economic and financial as well as political and strategic power if it becomes more widely available.

By the same token that he rejects the notion that debt ever has to be repaid, Sheard dismisses the idea that such debt represents a burden on future generations. Numerous high-profile international economists who have endorsed his book appear to agree.

Government debt, he argues, looks similar to corporate or household debt but is fundamentally different. The banking reserves created by a government running a budget deficit no more have to be repaid than do banknotes, provided the government can issue debt in its own currency.

Economist Paul Sheard speaks during the Boao Forum for Asia Annual Conference in Boao, Hainan province, on March 26, 2017. Photo: Xinhua

All governments can do this, provided the buyers of the debt are their own nationals. But when the debt is aimed at international investors, such as is the case with US government debt – of which around a third is held by foreign governments – dollar dominance is crucial.

This brings us back to China and the other members of the Brics, whose numbers are set to more than double from five to 11 in 2024 to include Saudi Arabia, the United Arab Emirates and Iran as well as Argentina, Egypt and Ethiopia.

Bringing three major oil producers into the fold might appear to be mainly a move by the grouping to ensure future energy security, but it is also about an evolving Brics financial and economic strategy.

As a group, member governments of the Brics-plus will be in a position to issue debt securities to friendly countries, including those with a wealth of “petrodollars” to invest, some of which have found their way into debt securities issued by the US Treasury.

From left, Brazilian President Luiz Inacio Lula da Silva, President Xi Jinping, South African President Cyril Ramaphosa, Indian Prime Minister Narendra Modi and Russian Foreign Minister Sergey Lavrov attend the closing day of the Brics summit in Johannesburg, South Africa, on August 24. Photo: Bloomberg

The wider the Brics membership becomes, the larger the potential market for members to issue government debt which, in theory at least, never needs to be repaid. More than 40 countries have reportedly shown interest in joining the grouping, and 22 of them have already applied for admission.

Brics members are emphasising the accelerated use of local currencies in cross-border payments among their ranks via the Brics interbank cooperation mechanism, which facilitates cross-border payments in local currencies among banks in the group, and Brics Pay, a digital payment platform in local currencies.

None of this is going to produce an overnight funding miracle for Brics governments, or any others for that matter. But as more nations realise that two can play the game of securing seemingly endless budget and current account deficit financing, the game will change.

Expanded Brics will continue to chip away at US dollar’s dominance

As I have noted in recent columns, the US has done itself no favours in recent years in terms of bolstering the international image of the US dollar and deterring others from seeking alternative currencies with constant squabbles in Congress over the federal government’s debt ceiling. As Atlantic Council fellow Hung Tran noted in a recent blog, there has been growing discontent in the rest of the world with the Fed’s conduct of monetary policy, which is seen to have eased too much for too long and then tightened too much for too long.

More countries are seeking to develop alternative cross-border payment mechanisms to reduce reliance on the US dollar. If they can also use these arrangements to expand the market for their government debt securities and thus gain a fiscal advantage, so much the better for them.

A foreign currency dealer in Peshawar, Pakistan, sorts US dollars at a money exchange company on August 15. More countries are seeking to develop alternative cross-border payment mechanisms to reduce their reliance on the US dollar. Photo: EPA-EFE

China is a prime mover behind what might be termed this long game of reducing US dominance of the international financial system while the US focuses on blunter instruments such as tariffs and other trade restraints such as bans on exports of technology to China.

The yuan has emerged as the most advanced in being used in bilateral cross-border payments. It has primarily been used in a bilateral setting between China and another country, but recently the yuan has also been used to pay a third party – for example by India to pay for oil imports from Russia, or by Argentina to pay off some of its borrowings from the International Monetary Fund.

Also, the central banks of mainland China, Hong Kong, Thailand and the UAE have collaborated in the project mBridge, sponsored by the Bank for International Settlements, to develop a multi-central bank digital currency platform to facilitate interoperability and connectivity. The world is coming to realise the power of money – and how to exercise it.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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Read More: Opinion | True lesson of US dollar privilege won’t be lost on expanded Brics

2023-09-02 22:15:13