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--:-- John Bickley: Brazil and China have made a deal to ditch the U.S. dollar when paying each other for traded goods. The move is only the latest victory for Beijing in its effort to establish the yuan as the dominant international currency. The deal comes on the heels of similar bargains with other countries such as Russia, India, and Saudi Arabia.
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--:-- John Bickley: It's Saturday, April 8th, and this is an extra edition of Morning Wire. According to a recent poll, 62 percent of Americans who think about their own death a lot don't have a will. That's kind of like being afraid your house will burn down but not having homeowner's insurance. Don't put it off any longer for just $119, and in as little as five minutes, Epic Will can help you create your last will and testament, living will, and even health care power of attorney. Their step-by-step online form makes it incredibly easy. All you have to do is fill in the blanks. Go to Epicwill.com slash wire to save 10% off your complete will package. That's Epicwill.com slash wire.
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--:-- John Bickley: Joining us to discuss is John Rubino, author of multiple books on the economy and investing and creator of Rubino Substack. Hi, John.
--:-- John Rubino: Hi, thanks for having me on.
--:-- John Bickley: So several nations have recently announced that they will no longer be using the US dollar for trade deals. Instead, they're moving toward the Chinese yuan. What effect will that have on the US?
--:-- John Rubino: Well, it's potentially a very big deal, definitely long-term, maybe short-term. And the background for this is that the U.S. has been the most financially and militarily and economically powerful country in the world for a really long time. And that power has gone to our head. We've become a bully in the world. If somebody crosses the official line of the American empire, we hit them with sanctions or we kick them out of the swift international banking system or we seize their assets or we send the CIA in to destabilize them or we just invade them. You know, we've done all of those things within recent memory, and the rest of the world knows this.
--:-- John Bickley: So they've been looking for ways to get themselves out from under what a lot of them call dollar hegemony. They've been cutting trade deals with each other, and they've been buying a lot of gold and stuff like that as a way of bypassing having to use the dollar. But it never really came to much until this year. And all of a sudden, the floodgates have just kind of opened.
--:-- John Rubino: There's this loose organization called the BRICS countries, which is Brazil, Russia, India, China, and South Africa, who have been talking a good game about setting up a monetary union and bypassing the dollar and becoming independent of the U.S. But they never really did much. But all of a sudden, things are starting to happen. A bunch of other countries now want to join the BRICS. And among those countries are Argentina, Indonesia, Saudi Arabia, Iran, Mexico, Turkey.
--:-- John Bickley: And it's Saudi Arabia and Mexico that are the very important parts of that equation because Saudi Arabia is the biggest oil exporter in the world. And the fact that for most of the last 50 years, they only took U.S. dollars in return for oil, and that guaranteed that the dollar was the preeminent currency in the world. So if they decide, and they have decided apparently, to start taking other currencies in return from their oil, that automatically makes the dollar a lot less necessary and a lot less powerful in world trade.
--:-- John Rubino: And then you have Mexico, which is basically America's manufacturing platform right here in North America. And for them to join, and I'm not even sure how this would happen, but for them to join what is a kind of sort of anti-dollar monetary union, it's a very big deal. I don't know how that plays out, but it just seems like a really unlikely thing to happen. But apparently they want it to happen.
--:-- John Bickley: So all of that stuff together means that it's possible that a lot of trade deals are going to happen in local currencies and not the dollar going forward. And a lot of other countries are going to want to hold those local currencies to make it possible to trade back and forth, which means the dollar is not as necessary as a reserve asset.
--:-- John Rubino: All right, so this potentially devalues the U.S. dollar. Can you explain a little bit more for us how that would work?
--:-- John Bickley: Yeah, lots of other countries rely on dollars as their safe haven asset. In other words, their central bank will hold a lot of dollars as a way of propping up the value of their local currency because the dollar is seen as the world's safe haven risk-free asset. But if they're trading in their own currency and a bunch of other countries' currencies, which apparently is what is happening here, they don't need to hold as many dollars, which means they're going to dump those dollars for other currencies.
--:-- John Rubino: And there's maybe 10 or 15 trillion dollars sloshing around out in the world, and all of them won't come home. But even if, you know, a third of those dollars are dumped by their current owners and come back to the U.S., that puts downward pressure on the value of the dollar, and it raises our interest rates. In other words, kind of like what has happened recently. You know, we've had inflation and that would continue. It would be exacerbated by people not wanting to hold as many dollars anymore. And our interest rates have gone up because of that inflation.
--:-- John Bickley: Well, that process would be turbocharged if the rest of the world decided instead of 60% dollars in their foreign exchange reserves, they only need 30% dollars. And again, that's the kind of thing that all of a sudden, just this year, went from, you know, a fantasy, an anti-American fantasy, to something that is actually real and actually in progress.
--:-- John Rubino: So this was a very big year. I think Lenin said that there are decades when nothing happens, and then there are months when decades happen. And we're kind of in that latter category right now. An awful lot is happening. And if it continues, it will be very consequential and problematic for the U.S.
--:-- John Bickley: How rapidly could we see this taking effect? How quickly can these countries actually get on board and start switching over from the U.S. dollar to more local currencies?
--:-- John Rubino: Well, that's the question. It's easy to say, oh, yeah, I want to join this currency union, but it's actually kind of hard logistically to make it happen. And these are not traditionally countries that are joining the BRICS coalition right now. They're not traditionally allies or they haven't traditionally had good working relationships. For instance, Iran and Saudi Arabia have been bitter enemies until just like last month when China brokered a peace deal between the two of them.
--:-- John Bickley: So it's not clear that would hold, and it's not clear how they would function together if it didn't hold. But what it looks like now is that there's a decent chance that lots of new trade deals get cut that bypass the dollar, and a lot of reserve asset decisions are made that involves selling dollars to buy yuan or rubles or rupees or whatever.
--:-- John Rubino: So it could be the kind of thing that's in the news for a while. And if it works, you know, if these early-stage deals work, then it could be the kind of thing that accelerates in coming years with really big effects. Now, the dollar won't go away. It'll still be a reserve currency, but it might end up being one of several, which is a huge deal for the U.S. Because, you know, in getting from here to there, that's going to be really inflationary. It's going to be destabilizing. And, you know, it's not clear how we handle with all the debt that we've got another couple of years of double-digit inflation.
--:-- John Bickley: I think that would be totally destabilizing. And it could be what we would be looking at if it plays out that way with the BRICS countries.
--:-- John Rubino: What kind of moves could the U.S. make to counteract this trend?
--:-- John Bickley: Well, I mean, what they could do is to become a really nice, warm, cuddly international player who respects other countries' opinions and doesn't interfere with their elections, etc., etc. And that's just not our style. You know, we've lost the ability, I think, to play nice with other countries because we've been so powerful for so long.
--:-- John Rubino: So the things that might work are things that are probably beyond our ability. And more likely, we'll go back to what we've been doing lately, which is just try to impose our will, you know, hit them with sanctions or kick them out of the banking system for international settlement. But that's going to be kind of hard to do with literally half the world on the verge of joining a coalition where I guess they would be obligated to respond if we pick on one of those countries.
--:-- John Bickley: So it's not likely we have anything easy to do.
--:-- John Rubino: One extremely important development here.
--:-- John Bickley: John, thanks for coming on.
--:-- John Rubino: Thanks, John.
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--:-- John Bickley: That was author John Rubino, creator of the Rubino newsletter at Substack.
