It is to be hoped that financial markets don’t take US President-elect Donald Trump at his word, otherwise the value of dollar and dollar-based assets ranging from stocks and bonds to physical commodities are in danger of going into serious decline.
Trump is in effect attempting to blackmail the BRICS nations, principally Brazil, Russia, India, China and South Africa, into continuing their use of the dollar, a demand more likely to speed up their already accelerating diversification from the greenback.
He has also floated the idea that the US government under his presidency might attempt to use bitcoin to pay off its debts of more than US$35 trillion, at a time when cryptocurrencies are not universally acceptable legal tender.
This would be highly advantageous to the US in view of the fact that the price of bitcoin recently surpassed $100,000, a week after clearing the six-figure threshold for the very first time. According to NBC News, “investors are betting on the next administration resetting the rules for an industry that has drawn scrutiny from regulators”.
Trump, who swiftly took credit for the bitcoin milestone, has named billionaire investor David Sacks as White House “crypto czar” and tapped crypto advocate Paul Atkins to lead the Securities and Exchange Commission.
Bitcoin for debt?
The president-elect’s remarks, made even before he assumes office on January 20, might at first sight be perceived as being bullish for the dollar, even though he has in the past argued in favour of weakening the currency in order to strengthen US international competitiveness.
But the remarks are more likely to have the opposite effect as governments and markets view with alarm his proposals, especially on repaying debt with bitcoin, and could accelerate official diversification from dollar reserves as well as provoke investors to shift further out of the greenback and dollar-denominated assets.
This risk is especially great where the BRICS nations are concerned. The group has expanded from the original five to include Egypt, Ethiopia, Iran and the United Arab Emirates. Other nations such as Thailand and Malaysia are also considering joining the group.
Together, the existing and potential members of BRICS account for some 45% of global gross domestic product and hold some 42% of global foreign exchange reserves, the majority of which are in dollars, according to a report by investment bank ING.
The group has been actively considering creation of a new currency for some time now but Trump has threatened to impose tariffs of as much as 100% on imports from member countries if they go ahead with such a move.
“There is no chance that the BRICS will replace the US dollar in international trade and any country that tries should wave goodbye to America,” Trump wrote on Truth Social, his social media platform.
The implications of all this could be dramatic and systemically devastating given the dollar’s dominant, albeit declining, role in the international financial system.
Steps taken already by the US to sanction Russia and other dollar holders have been described as “a bridge too far” by Harvard economist Paul Sheard, author of The Wall Street Journal best-selling book The Power of Money.
Trump clearly needs to watch his step more carefully if he is to avoid shooting himself – and his nation – in the foot.
