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The Potential of a Gold-Backed BRICS Currency and Its Trust Challenges

Jul 22, 2023
scale situation of US and BRICS. Complex and dynamic relationship.

As the BRICS anti-dollar summit looms, discussions about the feasibility of a gold-backed BRICS currency have intensified. Economist Thorstein Pulley recently presented an intriguing scenario, wherein BRICS countries would deposit their sovereign gold in a central BRICS bank and receive interest in return. This gold would then be lent out in the form of paper bricks, each representing a nominated amount of essential grams of gold. Such a system would put these paper bricks into circulation, backed by the gold reserves held in the BRICS bank, enabling individuals to also deposit gold and receive interest.

The parallels with how the dollar used to function are striking, with gold reserves backing paper certificates, effectively lending dollars into existence. In this envisioned scenario, American importers could use these paper bricks to make purchases, while Chinese exporters might choose to retain the paper or deposit it back into the BRICS bank, earning interest on their gold reserves.

Three significant consequences are anticipated from this approach: first, a potential rise in the price of gold; second, a decline in the value of fiat currencies like the dollar, euro, or yen; and third, a considerable influx of gold into the BRICS bank.

However, a critical concern lies in trust, both among countries and individual depositors. Trusting that the BRICS bank will genuinely exchange paper bricks for physical gold is paramount, and a separate custodian entity, free from government control, seems to be the standard solution for this issue. But given the lack of mutual trust among BRICS countries, implementing this solution may prove challenging.

Addressing individual trust is equally problematic, as countries like China and Russia could potentially suspend gold conversion, leaving depositors with worthless paper. To mitigate this risk, a neutral and trusted third party could play a role in decision-making, similar to how Dubai overcame trust issues by hiring former British Supreme Court judges when becoming an international business hub. However, the stakes are much higher for BRICS redemption, making it difficult for countries like China and Russia to relinquish control, at least in the near term.

Considering the current climate, individual trust for deposits into the BRICS bank might remain elusive, leading the bank to focus on government gold and government redemption. As we approach the BRICS summit, more details will likely emerge, and an intergovernmental settling mechanism appears to be the most probable outcome. While not an immediate game-changer for the dollar, the notion of a gold-backed option poses a significant long-term threat to fiat currencies.

Though there may be doubts about China’s willingness to innovate due to internal concerns, the very existence of a gold-backed option could challenge the foundations of fiat currencies. The potential consequences of exploiting this gold backing could be substantial, leading to major shifts in the global financial landscape. The world is closely observing, as the day of reckoning for the 100 trillion Fiat Ponzi may eventually arrive. Until next time, we remain vigilant.

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