August 11, 2023

If you’ve seen any of the films in the John Wick franchise, you’ve undoubtedly noticed something very different about the world that “Baba Yaga” inhabits.

This world-within-a-world has a unique economy that centers around the “members-only” Continental Hotels. Everything at or related to Continental business costs… one gold coin.

A bourbon at the hotel bar? One coin. 

A luxury suite in the hotel? One coin. 

Bulletproof Italian-cut suit? One coin.

Dead body removal? One coin (per)…

There’s a scene in the second installment in which Wick approaches Continental proprietor Winston Scott who is examining a shipment of newly minted coins. “Exquisite” Winston tells the agent. “Put them into circulation.”

Increasing the money supply… but everything is still one coin.

As a medium of exchange, these gold coins seem to fly in the face of all laws of economics. (I’m sure the Fed is green with envy…) So what makes this payment system work?

Is it the gold? Who knows.

Lately word has come out that a new gold-backed alternative to the dollar is about to be proposed in our global economy. And we dipped our toes into the topic of a gold-backed BRICS currency in your last issue. How might things change if this payment system were to take hold?

Let’s consider the possibilities…

A Mission to De-Dollarize the World

The BRIC countries were so named back in 2001 by Goldman Sachs economist Jim O’Neill who identified them as four rising economies (Brazil, Russia, India and China) whose economic growth, he believed, would eventually eclipse that of the west. (Since that time, South Africa has officially joined the club and made them plural.)

Originally identified as all-star individual emerging markets, today they’ve taken that status to become a consortium more like OPEC+ or NATO. 

But rather than joining ranks to regulate a major portion of the world’s oil supply or defending Europe against Soviet aggression, the BRICS have a major mission of their own: to create a “multi-polar world” by displacing the dollar as the global go-to currency. 

Or at least creating a viable alternative to it. 

As I explained in the article, this economic aggression toward the US hasn’t been entirely unwarranted. In fact, the US has pretty much brought the attitude on itself. They haven’t been the best economic actors they could be. (Again, we covered it all in depth here.)

Because of that, international trade in non-dollar currencies has been ramping up. Maybe “ramping up” isn’t the best way to put it. But it has started to take place — which, in a world that’s been dominated by dollar-denominated global trade for so long — is noteworthy. A couple of the more notable developments…

Back in late March, the Shanghai Petroleum and Natural Gas Exchange confirmed its first yuan-settled trade between China’s National Offshore Oil Corporation and France’s TotalEnergies for 65,000 metric tons of liquid natural gas out of the UAE.

Earlier in the year, the People’s Bank of China signed a memorandum of understanding with Brazil to create a yuan-based clearing system.

Xi Jinping has been courting Saudi Arabia in an attempt to strengthen economic ties with them since late last year.

And Russia has adopted China’s yuan as its new reserve currency since post-invasion sanctions were levied on them.

But now, with the weaponization of our currency in response to Russia’s invasion of Ukraine, it would appear, in the eyes of the global community at least, the US has crossed a bridge too far. 

This new, existential threat has made the push for a “multi-polar world currency” a very real goal. 

Let me say right up front, the chances of this effort significantly seriously disrupting the US’ dominance in the global economy any time soon are between slim and none. But that doesn’t mean these developments should be ignored. 

So let’s take a look at what their plans are and try to determine what the potential outcomes might be.

So Is This Plan For a Global Gold-Backed Currency Real?

In a word, yes.

Presently, the details are a little sketchy. But here are some highlights of what we know so far thanks to Alasdair Macleod, the Head of Research at Goldmoney.com…

The plan is the brainchild of Russian economist Sergei Glazyev and sparked by the US’ sanctioning response to Russia’s aggression in Ukraine cutting them out of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network. The boot from SWIFT essentially took Russia out of the global financial system. So they needed to ensure a means of international trade.

The basics of the program would involve creating a “new issuing central bank” or “NICB” and a new gold-based (digital) currency. The sole job of the bank would be to issue the new currency. According to Macleod the new currency would be designed to be “a fully trusted gold substitute, independent of existing fiat currency values.”

The currency would be redeemable in gold, but only between BRICS-member central banks. Member’s central banks would need to hold 40% of the value of their currency holdings in gold. So for a million units of gold (ounces, grams or whatever), the central bank could receive 2.5 million units of the new currency.

The gold backing a country’s BRICS currency wouldn’t need to be transported to a central depository but could be held in its own secure vaults. (Approved by the NICB of course.)

Beyond that, central banks would be allowed to deal in the new currency with commercial banks in their countries. (I won’t get too deep into the weeds on this part. )

Again, these are the points that make up the major framework. There are more details that deal with accounting requirements of member countries who might choose to deal in the new currency, but as this whole thing is still on the whiteboard, we’ll leave those for now.

Boiled all the way down, Macleod sums it up…

Besides a strict and simple set of rules, all it [the new currency plan] needs are two things: the establishment of an issuing entity, and physical gold. The first can be done in a flash, if it is not already established, and the gold will be allocated from the reserves of participating central banks.

And he further opines:

…it could be ready to use as soon as it is approved in August.

So the BRICS could be open for business by September? Apparently so. 

Of course an undertaking of this size would undoubtedly encounter speed bumps, potholes, hitches and glitches before it becomes a well-oiled international trading machine. So what might some of those be? And what might some consequences be should the plan gain traction? 

Let’s think about that…

What Might The New Reality Look Like?

There are a few threats and challenges we could speculate on considering that question… Let’s start with the currency itself.

In 1999 the “euro” was introduced as a monetary unit for the newly established European Union. In 2002 the official currency was issued, and member countries’ old currencies stopped being legal tender. 

Don’t expect anything like that where this new gold-backed currency goes. 

Membership in the BRICS alliance would ostensibly allow its member countries to settle international trade in the new gold-backed currency. 

And that being the case, it creates a potential challenge where countries’ local currencies are concerned (assuming that local currencies wouldn’t disappear like they did with the euro). 

If the new creation really is a gold-backed currency, you’d have to also take the “convertibility” factor into consideration. 

A currency that’s “good as gold” (like the dollar used to be) has to be convertible on demand. You hand over your currency, you get your equivalent amount of gold. “On demand” claims against gold stores — which would take gold out of the system — wouldn’t necessarily serve the ends these countries are trying to achieve — becoming a recognized global means of trade. Ideally more gold would enter the system increasing the amount of currency available to trade.

So if not that, the currency would likely be a proxy for using gold itself as a currency for international settlements. And that comes with its own set of challenges. Namely, it would likely have a huge devaluing effect on many countries’ fiat currencies pushing local prices of goods and services skyhigh. 

We’ll have to see how things play out in that regard. 

How big of an impact could this new currency start up have?  

Consider that there have been 187,000 metric tons of gold mined to date. At $2,000 an ounce that represents a little over $13 trillion in value.

The amount of gold reserves held by BRICS countries as of the first quarter of 2023 was only 5,452 tons. As a dollar value, that’s only around $348 billion (at $2,000 per ounce). Applying the 40% reserve rule, the total dollar value of that currency holding expands to around $870 billion. How could that affect global trade?

Well, according to the United Nations Conference on Trade and Development’s Global Trade Update, “Overall, the value of global trade reached a record level of $28.5 trillion in 2021.” (Most of which was traded in dollars.) The US alone did $5.3 trillion of trade in 2022.

The total amount of the new BRICS currency wouldn’t be able to account for much more than a fraction of the total. At least initially.

One of the real potential threats of this plan — and the main motivating factor behind the move — would be a loss of demand for the dollar which would be a serious problem for the US. Without the ability to spread our rapidly devaluing dollars around the world — along with the inflation we create — the effects would be felt back here in the US much more quickly — and severely. 

Future policy errors by the Fed would be entirely on us.

There’s a case to be made against any loss of dollar demand. It’s largely based on the premise that our dominance stems from the length of time we have been the world’s reserve currency (nearly a century). The dollar is simply too entrenched in the global economy.

That’s not untrue. But it’s worth noting…

Global central banks’ dollar holdings have been shrinking over the past 20 years — from 72% in 2001 to around 58% today. Incidentally, holdings of the Chinese yuan have doubled since 2016 reaching 2.8% of reserves in September 2022. (I realize that 2.8% might seem like a fly on the hind end of a water buffalo, but dismissing the overall shift this trend represents out of hand is probably not a good idea.)

Finally — and this may be the biggest challenge — there are member issues to take into account…

BRICS participants are mostly Asian, Middle Eastern and emerging markets. Outside of China, Russia and  the Saudi interest, most members and those interested are countries with relatively small economies. For instance, Reuters has reported that Argentina, Iran, the UAE, Cuba, the DRC, Comoros, Gabon, and Kazakhstan among others have expressed interest in joining.

Pulling together dozens of smaller countries, with their own histories, cultures and, more importantly, economies (especially monetary and fiscal policies) creates its own challenges in getting the members to “play nice.” It’s very possible that the larger countries could end up dominating the gold-backed trade and marginalizing their smaller members which, in turn, could lead to a lot of infighting within the organization. And where there’s infighting there’s always an underlying temptation to try and game the system. 

This is a very real challenge, the outcome of which is almost impossible to predict.

The reality is, with the exception of their grudge against US hegemony, these countries have no compelling reason to trust each other. And the rest of the world has no compelling reason to trust their currencies.

So as much as it will be a medium of exchange, these countries’ commitment to trading in gold is meant to bolster their credibility on the global stage and create a measure of trust between each other.

Which brings me back to John Wick…

What’s the Take Away?

This whole problem stems from the concept of fiat currency — currencies with no inherent value.

As they have no inherent value, they offer no basis for trust — when one country can manipulate the value of its currency at will. And that, unfortunately, is the world we’ve lived in for the past 50-plus years. When you’re the bank in charge of freewheeling money, it becomes easy to abuse that privilege. And the US has been guilty of that. 

In a recent interview with Kitco News, Willem Middelkoop, chief investment officer and founder of Commodity Discovery Fund, said “When the central bankers start to flee towards gold, that’s a very powerful sign that there’s a major distrust in the heart of the financial system” 

In the third installment of the series, our hero travels to Morocco and meets another Continental proprietor named Berrada in hopes of getting an audience with the High Table. Berrada points to one of the Continental coins he has on display and explains to John that it…

“…does not represent monetary value. It represents the commerce of relationships, a social contract in which you agree to partake. Order and rules.”

Maybe our global economy could take a lesson from John Wick’s world…

Humbly yours,

Tom Collins
Editor, Streetlight Confidential