The BRICS nations of Brazil, Russia, India, China and South Africa, will score own-goals if they think they can use gold to back the planned BRICS currency, which is being designed to rival the US dollars. Here is an advantage of a gold-backed currency as advocates explain: “it provides more stability and certainty to its users and holders, as its value is determined by the market price of gold, which is relatively stable and predictable over time. A gold backed currency also reduces the risk of inflation or hyperinflation, as its supply cannot be increased arbitrarily by its issuer.”
I do not buy that and this has been my position. In our modern global economy, using gold to back any currency in a free mercantilist economy (you are better by increasing export and trade) is an illusion. Using the US which has data on everything, the nation has about 8,133 metric tons in gold reserves which comes down to about $500 billion. Simply, if you melt all the physical gold in America, it is not worth up to 25% of the value of Apple Inc. At a deeper level, markets have priced Apple more because it has more value!
Globally (including the BRICs nations), in all forms and nature including bullions, jewelry, derivatives, private placements, stocks, etc, the value of gold is about $13 trillion. The world economy is about $105 trillion; there is no way gold in all forms will back that economic size, even for the BRICS countries, unless we move to the imperial age.
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What that means is that gold cannot support the BRICS currency because of the asymmetrical imbalance where the GDP of China alone is larger than the value of known gold, in all forms, in the world.
More so, if they adopt a single currency, the flexibility which comes to the independent central banks will go, since that currency will have a supranational apex bank for its governance. That “ limits the flexibility and autonomy of its issuer to conduct monetary policy according to its economic needs and objectives. A gold backed currency cannot be adjusted in value through interest rate changes, quantitative easing, or exchange rate interventions.”
Russia will not like that because just last week, it used an interest rate hike to save its falling ruble. Under a BRICs currency, that interest rate tool would not be possible for Russia.
Good People, currency union is challenging when economies are heterogeneous in nature, and in BRICS, none seems similar, making welfare losses possible, and that is why BRICS currency will not happen in the near future. Rather, currency swaps will reign!
Ndubuisi Ekekwe served as a currency expert to the African Union Congress, helping on the impacts of a single currency. The ex-banker earned a doctorate in banking/finance with focus on global trade and currency.
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