US dollar is losing it position of a reserve currency: How the BRICS development bank can ensure the soft landing

Popov, Vladimir (2023): US dollar is losing it position of a reserve currency: How the BRICS development bank can ensure the soft landing.

Abstract

The current process of moving away from the US dollar as a reserve currency will cause the outflow of capital from the US, leading to the depreciation of the dollar and/or increase in the interest rates that will cause costly real restructuring – reallocation of resources from less competitive to more competitive export-oriented industries accompanied by an increase in unemployment. This paper makes parallels with the decline of the British pound after the Second World War, arguing that the loss of competitiveness and the stop-go policies in Britain in the 1950s-70s can well be an indicator of what is going to happen in the US.

One of the new features of the current situation, however, is the freezing of reserve assets of many developing countries (Syria, Libya, Iran, Venezuela, Afghanistan, Russia) and the danger of freezing assets of other countries (China and Saudi Arabia included) – this can make the run away from the US dollar an uncontrolled process. Whereas in the long term this process may be beneficial for the US and the world economy, short- and medium- term adjustment costs can be extremely high. To ensure a soft landing the New Development Bank of BRICS countries can issue bonds that would be sold to developing countries, whose assets have been frozen or may be frozen by the West, so that they can store their foreign exchange reserves in these bonds. The Bank will invest the proceeds from the sale of these bonds in the traditional financial instruments for storing foreign exchange reserves - US and EU treasury bills and bonds denominated in the same dollars and euros. Bonds of the Bank would be considered safe because the US and EU will not risk freezing the assets of the Bank, as this would mean a major conflict with all BRICS countries and the Global South.

For the Western countries, this option is not only acceptable, but also desirable: the new Bank will transfer the current direct holding of Western securities by developing countries into the holdings of the same Western financial instruments through the Bank, ensuring the soft landing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pound and dollar as reserve currencies, outflow of capital, accumulation of foreign exchange reserves (FOREX), BRICS, New Development Bank
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F6 - Economic Impacts of Globalization > F63 - Economic Development; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations > N14 - Europe: 1913-; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development ; Role of International Organizations

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