Quite surprised so many countries peg their currencies:

 And I'm not sure about all the conclusions herein, but some of it is very interesting:

Dollarization: Do Stats Reveal a Threat from BRICS Economies?

The US dollar is losing its influence. Many countries are ready to embrace a multi-currency global future.

Zviad Khorguashvili

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November 13, 2024

In recent years, global politics have undergone considerable shifts. The COVID-19 pandemic, coupled with Russia’s war in Ukraine, has intensified the polarization of nations across the globe. Once seen by Western countries as a difficult yet possible partner, Russia’s standing drastically changed after Putin’s decision to invade a sovereign nation—first Georgia in 2008, then the annexation of Ukraine’s Crimea in 2014, and finally the full-scale invasion of Ukraine in 2022, which continues to this day. The last invasion marked the boldest attempt to alter European borders since World War II, cementing Russia, alongside China, as a principal and immediate geopolitical adversary to the West.

This growing polarization, worsened by mismanaged Western sanctions and delayed aid to Ukraine, has prolonged the conflict. Meanwhile, BRICS and potential members, many of whom are authoritarian regimes, have been strengthening alliances between each other. While Egypt and the UAE are US allies, most BRICS members see Western nations as adversaries.

What is going on global market:

Currently, the US dollar makes up 58 percent of global currency reserves and 54 percent of export invoicing. Together, the US and EU dominate over 80 percent of global reserves. Since the war in Ukraine, however, the renminbi has overtaken the dollar as Russia’s most traded currency, and Russia now holds renminbi and gold as its primary reserve assets. In the past two years, China and Russia have expanded currency swaps to boost trade, and Russia increasingly relies on CIPS (China’s Cross-Border Interbank System) after being cut off from SWIFT.

US dollar and Euro Share of Global Foreign Exchange Reserves, %. 2016-2024

(Source: International Monetary Fund)

Since the 1990s, China’s economic expansion has been nothing short of extraordinary. By 2001, it had overtaken Japan, which had long held the position of the second-largest economy. China’s growth didn’t stop there; in 2017, it surpassed the United States when measured by purchasing power parity (PPP), a significant milestone that underscored its rapid rise on the global stage. Although the US economy is still 54 percent larger when measured in nominal terms, evaluating economies through the lens of PPP also provides a good comparison of their size and standard of living for the population. This method adjusts for differences in price levels between countries, offering a more realistic perspective on what the two economies can produce and afford. Consequently, while the US maintains its nominal lead, China’s position in terms of PPP highlights its significant global influence and the shifting balance of economic power.  

China – new global power?  

GDP of China, United States, European Union, Russian Federation and Japan. PPP (Constant International $), billions. 1990-2023

(Source: World Bank)

It is true that nominal GDP reflects a country’s ability to buy goods internationally and we should also look at those GDP statistics. But it also shows that if the current trend continues, the US will lose the first place to China in the near future.

GDP of China, United States, European Union, Russian Federation and Japan (Current US$), billions. 1990-2023

Recent sanctions from The United States and western allies highlighted the vital role of gold as the most secure and stable asset a country can maintain in its reserves. When Western nations imposed sanctions on Russia, freezing assets like foreign currency reserves and restricting access to global financial systems, gold emerged as the one resource they couldn’t confiscate or block Russia from using. This emphasized gold’s unique position as a safeguard against sanctions and geopolitical uncertainty, offering protection in times of increased global tension.

As a result, many authoritarian regimes, particularly within BRICS nations, have been boosting their gold reserves as part of a broader effort to shield their economies from potential external threats. This trend reflects the growing understanding that, in an era where economic sanctions are frequently employed as geopolitical leverage, holding large gold reserves ensures a degree of economic independence. Consequently, these countries are focusing on gold as a way to reduce their reliance on the US dollar-based financial system and secure their financial resilience against future sanctions or global market upheavals.

Does the future lie in gold?

Gold Holdings. 2018=100
(Source: Atlantic Council, World Gold Council)

The shift toward gold and de-dollarization appears more plausible if we exclude countries that lack independent monetary policies and are interested in joining BRICS. Currently, only 35 percent of countries have an autonomous monetary policy. Most other nations have currencies that are either fully pegged to, or managed in relation to, major global currencies like the US dollar, euro, or Swiss franc. This indicates that many countries might be inclined to peg their currency to the renminbi, gold, or even adopt a new BRICS single currency if they aim to join BRICS and reduce their economic dependence on Western nations. Currency pegging though, has several advantages. It gives a country an exchange rate stability, that reduces currency fluctuation and is good for international trade and investment. Second, inflation is much lower, because developed countries and strong currency in general have much less inflation than developing countries who have independent monetary policy. The third benefit of the currency peg is investor confidence, because it excludes uncertainty factors in economy and business.  

Currency Regimes for BRICS members and countries that expressed interest or officially applied for joining the Alliance.  

(Source: International Monetary Fund. (2023). Annual Report on Exchange Arrangements and Exchange Restrictions)

BRICS and its potential size:

So, who are the countries who expressed their interest or officially applied to join BRICS? There are 43 countries from the Middle East, Asia, Africa and South America 

To see this chart properly click on the article heading (in blue) to go to the website

Countries that expressed interest or officially applied for joining into BRICS

#	Expressed Interest	Region	#	Officially Applied	Region
1	Angola	Africa	25	Algeria	Africa
2	Cameroon	Africa	26	Senegal	Africa
3	Central African Republic	Africa	27	Zimbabwe	Africa
4	Congo	Africa	28	Bolivia	Americas
5	DR Congo	Africa	29	Cuba	Americas
6	Ghana	Africa	30	Venezuela	Americas
7	Libya	Africa	31	Azerbaijan	Asia
8	Nigeria	Africa	32	Bahrain	Asia
9	South Sudan	Africa	33	Bangladesh	Asia
10	Sudan	Africa	34	Kazakhstan	Asia
11	Tunisia	Africa	35	Kuwait	Asia
12	Uganda	Africa	36	Malaysia	Asia
13	Colombia	Americas	37	Pakistan	Asia
14	El Salvador	Americas	38	Palestine	Asia
15	Nicaragua	Americas	39	Saudi Arabia	Asia
16	Peru	Americas	40	Turkey	Asia
17	Afghanistan	Asia	41	Thailand	Asia
18	Indonesia	Asia	42	Yemen	Asia
19	Iraq	Asia	43	Belarus	Europe
20	Laos	Asia
21	Myanmar	Asia
22	Sri Lanka	Asia
23	Syria	Asia
24	Vietnam	Asia

(Source: European Parliament. (2024). Briefing. Expansion of BRICS: A quest for greater global influence?) 

How large are the current and potential BRICS? If all the proposed nations were to join BRICS today, it would become the largest political and economic bloc globally. This expanded BRICS group would account for over 50 percent of global GDP based on purchasing power parity (PPP, International $) and represent roughly 71 percent of the world’s population.

GDP Current US dollars and GDP PPP Current International dollars, Trillion. BRICS, US & Allies (Canada, UK, EU, Japan, Korea Rep., Australia), Potential BRICS (Countries that expressed interest or officially applied for joining into BRICS). 2023.
(Source: World Bank. (2024). World Bank Data)

What kind of future does the world have?

Are advanced democratic nations losing their global influence? Could this decline be attributed to years of accommodating authoritarian regimes, coupled with domestic welfare and monetary policies that have stifled wealth creation? Are demographic challenges, such as falling birth rates, aging populations, and growing migration issues, further exacerbating this shift? Is the world, as a result, moving toward a new bipolar dynamic — not between capitalism and socialism, but democracies and authoritarian governments or their semi-democratic allies. One we know for sure, is that US dollar is losing its influence, and this is aligned with US global political power also. The data indicate that while the US dollar faces challenges, countries not typically aligned with Western allies are actively contributing not only to de-dollarization but also to expanding their influence in the global economic and political arena. Will a multipolar future emerge soon?  

(Map created by the author)

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Zviad Khorguashvili

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Modern Monetary Theory (MMT) debunked

Modern Monetary Theory was mentioned in a recent CPD event, so some schools will be looking at it. It is extension material, rather than required reading, although the more basic points are elements you will recognise from our lessons on inflation and crowding out. There is a very nice, accessible explanation of the issues associated with using the printing press to fund government investment at the end, worth reading to help explain this particular issue. For those of you interested in how the future will develop you might like to remember (and keep an eye on) the term "AOC" - it is included in a lot of economic and political discussion taking place in America, and thus will affect developments elsewhere. You might want to look at Amazon's decision NOT to build a new HQ in NY as well. Slightly bigger issue than Honda leaving Swindon...

MMT Is Even More Dubious Than AOC's Green New Deal

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48 COMMENTS

TAGS Big GovernmentMoney and BanksOther Schools of Thought

• LEA ESTO EN ESPAÑOL

02/25/2019Robert P. Murphy

One of the most interesting aspects of the “Green New Deal” is that its progressive proponents hardly mention taxes at all—even as some Republican economists continue to champion a carbon tax. Faced with the political defeat of the Waxman-Markey “cap and trade” bill, as well as the failed carbon tax initiatives in Washington State, it seems that Rep. Alexandria Ocasio-Cortez and the other Green New Deal supporters are just going to accentuate the positive. In other words, they are going to focus on all the goodies contained in their proposals—such as a trillion dollars in spending projects—while downplaying taxes and regulations.

Indeed, some of the Green New Deal proponents have turned this liability into an apparent asset. When asked, “How are you going to pay for this?!” they flip the question around, by bringing up “Modern Monetary Theory,” or “MMT” for short. This is a relatively new economic school of thought that ostensibly overturns much of the conventional wisdom about government finance, in the age of fiat money. By directing the skeptics to MMT gurus like Prof. Stephanie Kelton—who served as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee, before advising Bernie Sanders’ campaign—the Green New Dealers can dodge awkward questions and come out looking quite sophisticated.

In previous IER articles — one, two, and three — I have directly criticized the Green New Deal. In the present post, I will focus on its relationship to MMT, and then I will explain why MMT is even more dubious than the Green New Deal itself.

Using MMT to Defend the Green New Deal

There is a growing link between the Green New Deal and MMT on social media, but here let me link to an article from Forbes.com that spells out the connection. Author Robert Hockett explains how Ocasio-Cortez has deflected criticism by relying on the new financial framework:

Representative Alexandria Ocasio-Cortez’s announcement of an ambitious new Green New Deal Initiative in Congress has brought predictable – and predictably silly – callouts from conservative pundits and scared politicians. ‘How will we pay for it?,’ they ask with pretend-incredulity, and ‘what about debt?’ ‘Won’t we have to raise taxes, and will that not crowd-out the job creators?’

Representative Ocasio-Cortez already has given the best answer possible to such queries, most of which seem to be raised in bad faith. Why is it, she retorts, that these questions arise only in connection with useful ideas, not wasteful ideas? Where were the ‘pay-fors’ for Bush’s $5 trillion wars and tax cuts, or for last year’s $2 trillion tax giveaway to billionaires? Why wasn’t financing those massive throwaways as scary as financing the rescue of our planet and middle class now seems to be to these naysayers?

The short answer to ‘how we will pay for’ the Green New Deal is easy. We’ll pay for it just as we pay for all else: Congress will authorize necessary spending, and Treasury will spend. This is how we do it – always has been, always will be.

The money that’s spent, for its part, is never ‘raised’ first. To the contrary, federal spending is what brings that money into existence.

Although Hockett doesn’t use the term “MMT” directly in the article, he is clearly referring to the framework. (Ocasio-Cortez herself has explicitly endorsed MMT.) And so we see the clever rhetorical move: The critics of the Green New Deal who focus on its price tag are cast as Neanderthals—and hypocrites to boot—who don’t understand that Uncle Sam can “pay for” anything he wants.

Indeed, given the shot in the arm from Ocasio-Cortez, MMT is becoming such a hot topic that even Paul Krugman has been moved to gently critique it. (Incidentally, when Paul Krugman warns that your economic philosophy downplays the dangers of government spending, it’s time to reevaluate your life choices.) In the same spirit, then, in the rest of this post I’ll explain why the “insights” of MMT don’t mean what its proponents seem to think.

The U.S. Government Never Needs to Default

Perhaps the single biggest “insight” of the MMT camp is that the United States government, as an issuer of an unbacked fiat currency and an entity that doesn’t carry significant foreign debts, can never become legally insolvent. In short, no matter how many Treasury securities outsiders hold, ultimately the Federal Reserve can simply create more dollars in order to pay them off. Under a gold standard this would not be true, but ever since 1971, the U.S. government has had no official constraints on its spending.

This is why MMTers think it so old-fashioned when the critics ask, “How will you pay for the Green New Deal?”—or Medicare For All, a Universal Basic Income, etc. To ask, “How will you pay for it?” implies that there is a budget, where the federal government must first raise revenue and then spend it. But as the MMT gurus like Warren Mosler explain, under a fiat currency a government first spends the money in order to bring it into existence, and only then is it even possible to tax it back from the citizens. (This MMT mindset is quite clear in Mosler’s interview with me on my podcast.)

I hate to break it to the MMTers, but fuddy-duddy economists already knew this. Indeed, among free-market economists it is a standard pedagogical device to tell the audience that the government has three ways of financing its spending, namely (1) taxes, (2) borrowing, or (3) inflation. So this notion that only the MMTers perceive the possibility of the printing press as a means of “paying for” government programs is silly.

For proof, consider the following excerpt from Austrian economist Murray Rothbard’s economics treatise, Man, Economy, and State, published in 1962:

Many “right-wing” opponents of public borrowing, on the other hand, have greatly exaggerated the dangers of the public debt and have raised persistent alarms about imminent “bankruptcy.” It is obvious that the government cannot become “insolvent” like private individuals—for it can always obtain money by coercion, while private citizens cannot. (Rothbard, p. 1028, bold added.)

Here is another example, this one from Ludwig von Mises, speaking in 1951 on wartime finance:

What is needed in wartime is to divert production and consumption from peacetime channels toward military goals. In order to achieve this, it is necessary for the government to tax the citizens…

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Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can do the job for a limited time. But it is the most expensive method of financing a war; it is socially disruptive and should be avoided. 

There is no need to dwell upon the disastrous consequences of inflation. All people agree in this regard. But inflation is a very convenient makeshift for those in power. It is a handy means to divert the resentment of the people from the government. In the eyes of the masses, big business, the “profiteers,” the merchants, not the Administration, appear responsible for the rise in prices and the ensuing need to restrict consumption.

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A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably. But it is much more agreeable for a government to present only a part of the bill to the people and to resort to inflation for the rest of its expenditures. What a triumph if they can say: Everybody’s income is rising, everybody has now more money in his pocket, business is booming. (Mises, bold added.)

For a third and final example, here is Henry Hazlitt, writing in his classic book Economics in One Lesson, which came out way back in 1946:

It is because inflation confuses everything that it is so consistently resorted to by our modern “planned economy” governments. We saw in chapter four, to take but one example, that the belief that public works necessarily create new jobs is false. If the money was raised by taxation, we saw, then for every dollar that the government spent on public works one less dollar was spent by the taxpayers to meet their own wants, and for every public job created one private job was destroyed.

But suppose the public works are not paid for from the proceeds of taxation? Suppose they are paid for by deficit financing—that is, from the proceeds of government borrowing or from resort to the printing press? Then the result just described does not seem to take place. The public works seem to be created out of “new” purchasing power. You cannot say that the purchasing power has been taken away from the taxpayers. For the moment the nation seems to have got something for nothing. (Hazlitt, bold added.)

As the above examples illustrate, there is nothing new under the sun. Free-market economists have long understood that modern governments have the legal ability to resort to the printing press to finance their expenditures. The problem is, creating green slips of paper—or electronic bank reserves—doesn’t generate more labor-hours or acres of farmland. The problem of scarcity isn’t banished simply because we’ve gotten rid of the pesky gold standard.

Moving the Discussion From Revenue to Inflation

Now to be fair, the more responsible MMT proponents do not say, “Deficits don’t matter.” (Though see these examples from Bill Mitchell where he does say just that, notwithstanding the other MMTers’ willful refusal to admit as such.) Rather, people like Warren Mosler and Stephanie Kelton merely point out that insolvency is never an issue. In other words, we don’t need to worry that Uncle Sam will “go broke” or be unable to pay the bills, but we might worry that too much spending will lead to undesirably high price inflation.

But if this is the essential MMT insight, then it’s old news. Again, the three examples from the previous section show that classically liberal, free-market economists have known this all along. What those economists recognized, however, is that financing government spending through taxation (and to a lesser extent, borrowing) is more “honest” in the sense that the public can better understand the actual costs involved.

Consider a simple example: Suppose the Green New Deal contains a proposal to spend $24.8 billion on electric vehicle mass transit options in certain cities. If the proposal were financed by a flat $100 tax on every adult American (of which there are about 248 million), then it would be obvious what “the cost” of the proposal was. Every adult American would have $100 less to spend on private investment or consumption, and the government would devote the $24.8 billion in funds to the “green” infrastructure projects.

But what if, instead, the Treasury floated $24.8 billion in additional bonds—thus increasing the federal budget deficit—and the Federal Reserve kept interest rates from rising by creating $24.8 billion in new money with which it bought $24.8 billion in Treasuries from the bond market? This would be a convoluted way of having the Fed effectively “pay for” the projects using the (electronic) printing press.

The political benefit of this method of finance is that no American is apparently “down” any money, and yet the lucky cities get their infrastructure projects, with all of the spillover effects (in terms of construction jobs, etc.) they entail. It seems that inflationary finance is all gain, no pain.

But of course, in reality real resources are still being diverted from the private sector into the channels dictated by the political process. The construction workers who move to the cities in question are now no longer able to work on private buildings or houses. The rubber, cement, steel, glass, lumber, and other materials devoted to the new projects are not available for use in other possible projects elsewhere in the economy.

When all is said and done, the average American still “pays for” the new government spending, but via higher prices. In other words, rather than the average American’s income dropping by $100, instead the prices of other goods and services rise slightly, so that the original income no longer fetches as much stuff in the market.

However, the two methods are not equivalent. Most obvious, the source of the (real) income drain is harder to detect under inflation. If a family can’t make ends meet because of taxes, then it knows to blame the government. But if a family sees prices rising at the store faster than the paychecks from work, it might blame greedy capitalists or trade unions or OPEC; it might not realize the Federal Reserve is the true culprit.

Conclusion

The MMTers are “right” in the sense that yes, modern governments that issue fiat currency need never default on their bonds. But they are wrong if they think this observation absolves Alexandria Ocasio-Cortez from explaining how she will pay for the Green New Deal. The printing press doesn’t create real resources, it only obscures the method by which the government siphons them away from the private sector.

To be sure, MMTers would respond that the economy currently suffers from excess capacity, and then we could safely accommodate large deficit finance without pushing up the CPI. Yet we have now moved beyond accounting tautologies and into competing theories of how the economy works. I am happy to have that debate as well, but much of the existing discussion involves MMTers acting as if they alone understand that the government can buy stuff by printing money. Yes, free-market economists have understood that all along, and have explained in elementary detail why it is such a dangerous option.

Originally published at the Institute for Energy Research

Robert P. Murphy is a Senior Fellow with the Mises Institute and Research Assistant Professor with the Free Market Institute at Texas Tech University. He is the author of many books. His latest is Contra Krugman: Smashing the Errors of America's Most Famous Keynesian. His other words include Chaos Theory, Lessons for the Young Economist, and Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) which is a modern distillation of the essentials of Mises's thought for the layperson. Murphy is co-host, with Tom Woods, of the popular podcast Contra Krugman, which is a weekly refutation of Paul Krugman's New York Times column. He is also host of The Bob Murphy Show.

A data-rich source for A2s to dip into

Things that make you go hmmm... last edition

You don't have to read it all - and indeed, some of it is only really of interest to me - but take the time to try and absorb some of the information it contains, particularly re the following:

Credit and debt (particularly re China & EMs)

Gold and central banks adjusting reserves using gold

Japan and Abenomics

Many useful charts showing some interesting changes underway.

If this does not give you a sense of impending major structural changes you should not be studying economics...