How could a new gold-backed BRICS currency hurt savers in the US?
Inflation, inflation, inflation…
One of the great privileges of controlling and printing a global reserve currency is the ability to export one's inflation to the rest of the globe. If every country on the planet needs your currency to transact, there is almost insatiable demand for it. The observed pattern of history is that reserve currency owners eventually decrease their production of manufactured or agricultural goods and instead transition to allowing other countries to provide all that for them in exchange for the currency they need. It works out pretty well for them, for a time.
But no reserve currency lasts forever. Reserve currency regimes crumble for various reasons, but there is one root problem: the temptations associated with the power of the monetary printing press are too great. That power is always eventually abused, leading to its downfall and a reorganization of the global economy. We've seen many abuses associated with the US dollar, and the weaponization of the dollar against Russia and others may be the final straw.
The BRICS bloc of countries (Brazil, Russia, India, China and South Africa) have announced official talks about setting up a new currency in August. There are indications it will be backed, at least partially, with gold. The backing and structure of the currency is just one challenge. There are other challenges, and not to say that this will be easy, otherwise it would have been a fait accompli by now. But the motivation for these countries is nothing short of existential.
It is fairly safe to say that if these countries can figure out a way to make a BRICS gold-backed currency happen, it eventually will. It may not dethrone the dollar completely, but many experts are saying it could split the global economy into a more bi-polar structure rather than a US dollar centric one.
Will it happen or not? That remains to be seen but the efforts are full speed ahead, so it is worthwhile to consider the implications for savers and retirees here in the US, and they could be quite serious.
- Price Inflation First and foremost, if the level of international demand for US dollars we are used to declines precipitously, but our politicians keep churning them out - or worse: accelerate the churn – they are likely to stay here and chase goods here at home, increasing prices.
- Dollar Repatriation Dollars already abroad could flow back to the US exacerbating the problem, chasing good here at home, increasing prices.
- Trade deficits widen There will be less incentive for the manufacturers of the world to produce goods for US dollars, leaving us with fewer imported goods to buy, which would likely increase prices
- Wage adjustment lag In theory, wages and yields are supposed to adjust with inflation, but it always lags and it never seems to keep up with rapidly increasing prices. This will impact retirees living on investment income, social security payments and other fixed income sources the most and they will have the least flexibility in devising alternate streams of income.
- Savings could quickly evaporate With all the price increases, savers could see their nest eggs quickly absorbed at the grocery stores, just paying for normal day-to-day items. Can you imagine $300 for a gallon of milk? $10,000 for your normal shopping cart of food? How long could anyone's savings hold out after significant price increases like that?
- Gold demand If there was an actual gold-backed currency again, gold prices might be one of the bright spots, and one of the only assets able to keep up with inflation and likely surpass. Gold would probably be one strong defensive holding that would greatly soften the blow during a chaotic adjustment period.
- Sovereign wealth transfer Real tangible wealth in the form of gold could begin to flow out of this country in exchange for consumable and depreciating goods. Over time, this could be devastating and extremely difficult to reverse. They would end up with all the gold, and we'd be left with broken down washing machines and obsolete computers to show for it.
Sound like a nightmare scenario? It could be, and that is why many experts, like Robert Kiyosaki, are jumping up and down sounding the alarm bells about this. Will the US look like a third world country in 20 years because of events unfolding today? Only time will tell, but owning precious metals now could be your best defense against these anti-dollar moves.