The new order breaks from the old
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Brazil, Russia, India, China and South Africa, the so-called BRICS countries, are rewriting history. Earlier this week their top leaders held a summit in the South African city of Durban to approve the establishment of a new development bank and discuss t
The implications are far-reaching. The BRICS countries intend to set up a development bank that would rival the World Bank. They also want to create an institution similar to the International Monetary Fund (IMF). By doing so, the BRICS are creating a new global financial architecture that would rival the existing framework set up under the Bretton Woods system. After the Second World War, the allied countries, led by the United States and the United Kingdom, established the United Nations to set out a “new world order”, politically and militarily. At the same time, the World Bank and the IMF were formed to safeguard a new global financial system, with the US dollar emerging as the global currency reserve of choice.
After more than 60 years, the Bretton Woods system is about to crumble. In fact, the fixed exchange rate system, under which the dollar was pegged at US$35 to an ounce of gold, crashed in 1971. That was when US President Richard Nixon took the dollar off the gold standard. Ever since, the US Federal Reserve has been printing the US dollar, a purely fiat currency, out of thin air. The petro-dollar system was put in place in a hurry after the crash of the dollar-linked gold standard to ensure continuing demand for the US dollar and to protect the dollar’s global status.
The global financial system crashed again in 2008 after the fall of Lehman Brothers. The global economy and financial system have not yet recovered from that disaster. Instead of restructuring the banking system and their economies, the US, the UK, Europe and Japan have embarked on money printing to prop things up. This represents a global currency war. For this money printing has led to the appreciation of the currencies of the BRICS countries and of other emerging market economies, including the Thai baht.
The BRICS countries, particularly China, have felt all along that the current set-up of the global political and financial order serves only the interests of the advanced economies, most notably the US. So they have been contemplating for quite some time how to break away from the current global financial order, which is based purely on a fiat currency system – or paper money printed without any backup of hard assets.
The road ahead remains highly uncertain. The dollar will lose its global status if the BRICS succeed in putting in place a new order. Already China has been initiating bilateral currency sway arrangements with its trading partners. By doing so, it is walking away from using the dollar as a medium of transactions. China, Russia, India and other countries have been importing gold en masse in preparation for the collapse of the Bretton Woods system, now engulfed by money printing on a massive scale.
Money printing will lead to runaway inflation and eventually hyperinflation. When the timing is ripe, the BRICS countries will rely on gold reserves to back up their currencies. Other fiat currencies without hard-asset backup aren’t likely to gain the trust of investors or ordinary holders.
While the BRICS are moving away from the current order to create new order, there are growing signs of tension on the geopolitical fronts. North Korea has suspended its hotline communication with South Korea. It has also issued a warning that its missiles can now reach Guam and Hawaii. At the same time, South Korea and Japan, with backing from the US, have beefed up their military preparedness. The situation in Syria is getting worse as the Western powers seek a regime change. Cyprus is a test case for the European Union as to whether the continental construct will hold or crack.
The world is becoming more precarious as the new order seeks to break away from the old order. We are about to witness historic change.
