With inflation holding high at 6% and banks all around the world taking a hit. It seems that more and more developing countries around the world have had enough of the American way of money printing.
While many countries around the world had to work hard to earn the US dollar, all the US needs to do is print more money to maintain its power. However, since the pandemic, the US has lost a huge chunk of its wealth-power since the US Federal Reserve has printed 80% of all US dollars in existence. Just in 2020 alone, the country has printed over 3.3 trillion alone.
With inflation sticking over 6%, it only takes about 12 years for the dollar to lose half its value. Inflation is no longer the silent killer we all thought. For a company to make a profit, it would have to make more than 16% per year to maintain the S&P500 standard of annual 10% historical growth.
Now, a group of nations called BRICS consisting of Brazil, Russia, India, China, and Saudi Arabia have teamed up to combat the corrupt dollar and plans on overtaking it. It will be one of the largest impactful movements we will face in 2023.
What Started this Chain Reaction
It all started ever since the Russia-Ukraine war on 24th February 2022 when many countries around the world are forced to cut ties with Russia. During that time, a lot of political unrest started when a lot of resources were cut. Most notably, oil.
The Demand for Oil Spiked
The US took swift action right after the war started by cutting monetary circulation to Russia’s economy, the US imposed many new sanctions such as a ban on Russia’s export and the ceasing of all their asset. With the help of the NATO alliance, this action was done swiftly and it angered Putin greatly.
Countries like Germany and many parts of Europe were heavily affected by the sanction with Russia cutting supplies of gas to their country. Prices of oil begin to skyrocket to over $130 per barrel from just $75 in a week.
On September 2022, with winter coming and oil prices remaining unaffordable to many parts of Germany and Europe, it lead to other commodities spiking up in value such as limber to replace Russia’s gas for heating.
The Middle East was pressured to lower the cost of oil by the Biden administration but Saudi Arabia and UAE leaders were insistent to maintain prices to keep supply under control. The country leaders even went so far as to “decline calls with Biden’ on this issue.
With supply cost beginning to rise and demand steadily increasing. Money started to lose its value all over the world. Countries around the world begin to panic as the US Federal Reserve share their monthly inflation data to hit 8.5%. The UK had an inflation of 8.8%, Europe had 8.9%, and Germany was at 7.6%.
In July 2022, Sri Lanka was the first country to declare bankruptcy after defaulting on its debt and the country’s leader fled to Singapore.
While Sri Lanka may not be an important economy, it showed that countries that were heavily dependent on the US dollar were at the mercy of how the US wanted to play around with it by QE(quantitative easing) or QT(quantitative tightening). Countries begin to take notice.
The US Currency is not Stable as many people thought
As the FED(Federal Reserve) raise interest rates faster than its ever been, things around started breaking. Companies that took on heavy debt for growth begin to fall one after another.
Risky Assets Gone
Crypto firms such as 3 Arrow, Celcius, and Terra Luna all begin to collapse bringing its token to near zero in value. Their collapse leads to a worldwide panic in the crypto space. These three companies combined had a value of over $61 billion.
Soon after, in late November 2022, the second-largest crypto firm FTX went bankrupt as well. It had a peak value of $32 billion. This brings to almost $100 billion burnt in just one year.
Banks that took on these assets fall as well
Banks, the place thought to be the safest place to store wealth had begun to feel the heat. It started with Credit Suisse showing its horrendous quarterly earning with a net loss of $ 7.3 billion.
The raise of interest rates has now affected many banks around the world. As bond values aren’t able to keep up with inflation. In December 2022, UK’s pension funds begin to collapse and it shows that the raise of interest rates were starting to destroy banks.
The collapse of Silicon Valley Bank in early March is one of the largest bank failures in the United States since the global financial crisis. The bank’s vulnerability was the result of having a high proportion of uninsured deposits and a large proportion of deposits invested in hold-to-maturity securities.
Saudi Arabia Lose Confidence in the Dollar
Needless to say, countries around the world started losing faith in the FED. They begin to seek alternatives to preserve their wealth and grow their economy. That’s where China steps in.
On March 2023, Saudia Arabia’s leader announce they will switch to yuan which is seen as a symbolic effort for other countries to do the same.
What China has that the US doesn’t have
Right now in a turmoil economy, businesses are looking for one key factor to invest their money in; stability. China’s inflation rate can maintain at below 2% per annum; with current(January 2023) inflation now at 1%.
Contrary to the Western depiction of how the US can slow down China’s economic growth, the country probably has already overtaken much of the US’s important commodity market.
The gold standard is coming back
The gold standard prevents inflation as governments and banks are unable to manipulate the money supply (e.g., overissuing money). The gold standard also stabilizes prices and foreign exchange rates.
Throughout the Russia-Ukraine war, China was supportive enough to support Russia in buying and importing gold. China’s gold imports from Russia were up 67.3% in 2022 and the country has plans to revert the yuan to the gold standard.
Russia has the world’s second-largest gold mine deposits after Australia at an estimated 6,800 tons. China is eighth with about 2,000 tons. The United States has gold reserves estimated at 3,000 tons.
This means that China now has more gold than the US which shows the world the country has stability in maintaining its currency value.
China is bringing countries around the world together
The BRICS community plays a critical role in setting global economic policy and promoting financial stability, accounting for 17% of global trade and one-third of global GDP. With a higher potential for economic growth, these countries have huge future growth as compared to the US economy.
China is Taking Over and No one can Stop Them
The US economy is tied and is now unable to stop BRICS from taking over. In its last effort, the Biden administration try to stop Russia was providing Ukraine with $75 billion for humanitarian, financial, and military support.
The BRICS consists of 59% of the world’s population and controls 78% of the gross world product or $16.6 trillion. Therefore, this movement makes a lot of sense in bringing more power to these 5 nations.
With China raising to power, the next few years will be crucial for people to consider their alternatives to protect their wealth. Would you rise using the dollar knowing it loses value every 12 years(based on the rule of 72 and inflation of 6%)or the yuan which can hold its value for close to 72 years?
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