Government Spending, Part 1: Military Spending Over Decades

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a few columns analyzing how the U.S. government spends its/our/our grandchildren's money.

 A visual from Wikipedia of all places on where the U.S. federal
 government spends its money. Note the "massive military buildup"
of the 1980's under Ronald Reagan.

With a budget deal finally reached between Joe Biden and Kevin McCarthy a lot of commentary has been going back and forth about government revenues and outlays, both in the press and on the Internet's comment boards.

The Economics Correspondent wants to start with a focus on military spending, but first would like to state up front that he’s not naïve enough to believe every dollar of the defense budget is being spent wisely or that the Pentagon doesn’t overpay for maintenance or weapons systems. He merely wishes to place the size of the military budget in context with that of other spending programs.

So not only today, but for decades going back as far as the Correspondent can remember the political left has made defense spending the target to solve all of Washington, DC’s fiscal and deficit ills. “Cut the military budget and we wouldn’t have a deficit” we hear, along with “all those expensive aircraft carriers and weapons we buy drive the national debt.”

He’s even seen “Half of all your taxes go to war” taped to his San Francisco apartment building’s front door.

But instead let’s go back a bit in time and compare how the size of defense spending has changed over the decades against that of other major federal spending programs.

It turns out such data are easily found on the White House’s budget website. Historical statistics have been available and consistent throughout the George W Bush, Obama, Trump, and Biden administrations, with budget data going back to 1940.

To make sure we avoid tripping up one year with unusual military spending for a major war (like Korea or Vietnam) let’s look at budgets by superfunction in 1955, 1980, 1990, 2000, 2010 and 2023 and then as a percentage of total federal outlays (in parentheses).

1955
Total spending: $68.4B
Defense including veterans: $47.4B (69.3%)
Healthcare: $291M (4.2%)
Social Security and Unemployment: $9.50B (13.9%)
Education and job training: $445M (6.5%)

1980
Total spending: $590B
Defense including veterans: $155.2B (26.4%)
Healthcare and Medicare: $55.3B (9.4%)
Social Security and Unemployment: $205.1B (34.8%)
Education and job training: $31.8B (5.4%)

1990
Total spending: $1.253T
Defense including veterans: $328.4B (26.2%)
Healthcare and Medicare: $155.8B (12.4%)
Social Security and Unemployment: $397.4B (31.7%)
Education and job training: $37.2B (3.0%)

2000
Total spending: $1.789T
Defense including veterans: $341.4B (19.0%)
Healthcare and Medicare: $351.6B (19.6%)
Social Security and Unemployment: $663.1B (37.1%)
Education and job training: $53.8B (3.0%)

2010
Total spending: $3.457T
Defense including veterans: $802.0B (23.2%)
Healthcare and Medicare: $820.7B (23.7%)
Social Security and Unemployment: $1.329T (38.4%)
Education and job training: $128.6B (3.7%)

2023 (est.)
Total spending: $6.372T
Defense including veterans: $1.120T (17.6%)
Healthcare and Medicare: $1.722T (27.0%)
Social Security and Unemployment: $2.144T (33.6%)
Education and job training: $269.0B (4.2%)

The final tally as a share of total federal spending?

Military vs "Human Resources"

1955: 69.3% vs 24.6%
1980: 26.4% vs 49.6%
1990: 26.2% vs 47.1%
2000: 19.0% vs 59.7%
2010: 23.2% vs 65.8%
2023: 17.6% vs 64.8% (est.)

The long-term trend is clear: Back in 1955, two years after the end of the Korean War, military spending including veterans affairs constituted 69.3% of federal spending whereas “human resources” was about 21.8%.

Today military spending is 17.6% and human resources is 64.8%, the two nearly completely switching places.

Clearly since the days of Eisenhower the federal government’s role has changed from primarily protecting the country to instead paying out medical and retirement benefits. Military spending as a % of GDP has also fallen from 10.5% of GDP to 3.1%. 

In fact, if the federal government continued paying for veterans affairs but drew the entire defense budget down to zero, leaving the U.S. completely defenseless to attack along with many of its allies and throwing all military personnel out of work, the 2023 savings would be $814 billion. 

But given the CBO projects a 2023 federal deficit of $1.5 trillion, there would still be nearly a $700 billion deficit.

The fiscal deficit has also been greater than the entire military budget for twelve of the last fifteen years, in some cases much greater such as the first four years of the Obama administration when a collective $5.1 trillion was added to the debt but a total of $2.7 trillion was spent on the military (incidentally $8.8 trillion was spent on payments to individuals during the same period).

And these figures don’t include state and local government spending, virtually none of which goes towards defense but a great deal of which is added atop healthcare, pensions, education, and other human resources at the non-federal level.

Incidentally you can pull all the tables yourself at:

https://www.whitehouse.gov/wp-content/uploads/2023/03/hist03z1_fy2024.xlsx

Or if you forget the link just search on “White House budget tables,” select "Historical Tables | OMB," and scroll down to “3.1-Outlays by Superfunction and Function: 1940-2028.” They’ve been there for years and will probably stay there for many years more.

In the next column we’ll take a slightly more detailed look at how defense spending is broken down and we’ll also recalculate these figures accounting for state and local government spending.

ps. Even though military and human resources spending don’t add up to 100% of all spending in 2023, only 82.4%, a growing part of the difference is interest on the debt (2023: 10.4%) plus a little for smaller items like transportation, crime and justice, international affairs, and the environment (5.8%).

Rising Monetary Velocity Continues to Frustrate the Fed

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Another inflation update from the Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff

“From Q1 to Q4 velocity increased from 1.14 to 1.226 or up 7.5% which, when annualized, translates to an even worse yearly inflation rate of 10.1%.”

-CO Economics Correspondent
 February, 2023

Well Cautious Rockers the latest M2 velocity numbers are out, confirming the Fed’s policy efforts continue to be frustrated by the higher pace of spending.

In the last four quarters M2 velocity has risen from 1.145 to 1.259 or +10%—meaning if the Fed kept the money supply perfectly flat and GDP was breakeven prices would still rise by 10% a year.

As a reminder the formula for calculating inflation is p = mv/y where p = the price level, m = money supply, v = monetary velocity, and y = nominal dollar value of all goods and services purchased or GDP.

This is why, despite a Fed contraction of the money supply that is unprecedented going back to the 1930’s, inflation stubbornly persists.

(See chart: M2 in red is falling while velocity in blue approaches its highest level in the last half-century)

This sticky inflation, as the press calls it, is being caused by what Fed officials have fretted over for a year now: inflation expectations. As U.S. consumers and businesses expect more inflation in the future they shift their purchases forward to spend their money now before it loses any more value.

Since rising velocity itself can spur further price increases, “inflation expectations” can create a vicious cycle where Americans spend faster, their spending acceleration forces prices up faster, Americans adjust again by spending even faster, and on and on.

The last time inflation expectations generated this level of price pressure was the stagflation era of the 1970’s, and it took a huge dose of Paul Volcker’s 20% interest rates and a painful recession to finally end it.

The Economics Correspondent believes the Fed will have to continue to crack down hard on the money supply to stamp out the velocity problem—although he still doesn’t think the resulting recession will be as bad as 1981-1982 (peak 11% unemployment) *unless*  the Fed creates a major financial crisis along the way.

But it will probably be bad enough.

Preview of Upcoming Columns on Government Spending

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a preview of his next series of articles. Share of the United States' 2023 projected $9.55 trillion in federal, state, and local government spending by superfunction.

Future Prospects for the Global Reserve Dollar, Part 4: Longer Term for the Dollar and the RMB

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff closes out recent events surrounding the global reserve dollar with a few words on its longer term prospects and China’s counter strategy.

With stress in the U.S. banking system, federal spending and debt reaching new records, and inflation still lingering like a dark cloud over the economy several headlines have hit the media in recent weeks predicting the imminent collapse of the U.S. dollar’s reserve currency status, soon to be replaced by the Chinese RMB (aka yuan) or a new BRICS gold-backed reserve currency.

The Economics Correspondent is skeptical about these gloom and doom scenarios although he sees a tiny sliver of a chance that the BRICS concept might pose a real challenge to the reserve dollar in the next several years.

To read the Correspondent’s recently posted case for the dollar keeping its leading reserve status for the near-to-mid future check out links in the comments section.

However, all while defending the dollar's chances for remaining the world’s leading reserve currency for a while longer the Economics Correspondent has consistently said that over the longer term the dollar’s share of global reserve holdings and international payments will continue on a slow, steady path of decline that began as far back as the 1960’s. Hence the dollar won’t dominate the international currency reserves and payments stage forever, but the process will be gradual.

For those who know what precursors must exist for a currency to be selected by world central banks and governments to serve as a global reserve this forecast might seem self-evident.

One of the many key traits currencies must exhibit to serve as a global reserve is they must be usable in a large economic zone. Swiss francs might have a laudable reputation, but with Switzerland's GDP at about $800 billion the world’s central banks won’t be willing to hold trillions of dollars in francs that they can’t really use (collectively they hold about $6.5 trillion in dollars today).

Thus it’s no surprise that the dollar has been number one since the end of World War II since the United States has been the world's largest economy going back to the 1880’s.

Even today, when comparing national GDPs on the more meaningful nominal basis (not purchasing power parity or PPP) the USA still generates the world’s largest GDP even as China slowly closes in.

USA est. nominal GDP: $26.8 trillion (2023)
China est. nominal GDP: $19.4 trillion (2023)
Eurozone est. nominal GDP: $17.82 trillion (2023)
Source: IMF

However, just having the world’s largest economic zone isn’t good enough. The issuing country’s GDP must not be so much the largest as much as "large enough" on an absolute basis for its currency to support global trade.

Today that’s not a problem as international reserve dollar holdings are estimated at $6.5 trillion for a $26.8 trillion U.S. economy.

The longer-term problem for the dollar is the trend of the last few decades has clearly been one of many other countries’ economies growing faster than the United States—particularly India and China. Or more succinctly, U.S. GDP as a share of world GDP is on a steady path of decline even as the U.S. economy itself continues to grow.

In 1960 U.S. GDP enjoyed a 40% share of world output.
By 1985 it was 34%.
By 2000 it was 31%.
For 2023 the IMF estimates nominal U.S. GDP will represent 25.4% of world output.

Over those sixty-plus years the U.S. economy has been growing. In real terms it’s 6.2 times larger than in 1960. But over that same period the rest of the world has been growing even faster.

As the growth rate of the rest of the world’s economies continues to outpace that of the United States, the dollar’s ability to support the planet’s trade needs will inevitably be eroded. This mathematical reality has been reflected in the dollar’s slow decline as a share of international reserve holdings for some time: from 83% in 1970 to 71% in 2000 to 60% today.

And the Economics Correspondent doesn’t see that trend reversing.

As for what will fill the gap left by the dollar’s shrinking role, that’s been the subject of debate among international monetary  economists for quite some time with no real consensus winner. Probably the largest opinion bloc believes a basket of global currencies will serve as the global reserve—a combination of dollars, euros, yen, francs, SDR’s, possibly an unanticipated emerging economy, and/or a new BRICS regional currency.

Another faction of economists has called for John Maynard Keynes’ plan for a supranational currency, the old bancor proposal from the 1944 Bretton Woods monetary conference, to be resurrected and for the bancor to take on a leading role in settling international transactions.

An even smaller group of economists suggests returning to gold to settle balance of trade payments although their proposal probably stands the least chance of success for political reasons.

And what of China? According to many media headlines of late the Chinese yuan is in position to catapult to world's leading reserve currency any moment now.

The Economics Correspondent has written repeatedly that, despite China’s large GDP, its autocratic political system makes the yuan unsuitable to serve as a global reserve currency. Some of the yuan’s many problems include the immaturity and opaqueness of Chinese securities markets, the CCP’s regular imposition of capital controls, its manipulation of currency exchange rates, its insistence on running constant trade surpluses, the arbitrary power of its government and shaky confidence in its commitment to rule of law and property rights, and questions about the Chinese Navy’s ability and willingness to keep merchant sea lanes open for all nations.

Not only do world central banks not want to hold large balances of Chinese RMB in reserve, but the CCP itself knows the yuan has little chance of dethroning the dollar and holds no such global reserve ambitions.

However China’s geopolitical goals don’t require the yuan to take away the dollar's number one spot. And even though the CCP would certainly like to weaken the dollar’s share of reserve holdings, that’s not their primary objective either.

China’s goal, first and foremost, is to insulate its own import/export and investment activities from the dollar as much as possible so that it can achieve its geopolitical ambitions without worrying about U.S. dollar-imposed punishments.

Beijing has seen the economic pain the U.S. has been able to inflict on Russia for the invasion of Ukraine–cutting it off from the international dollar network and kneecapping much of its import, export, and financial business. The PRC worries that if one day it decides to invade Taiwan, the USA’s dollar leverage will allow Washington to impose similar pain on the Chinese economy. And Chinese officials fear any economic decline that might stir unrest among its own population, a problem that has brought down many dynasties throughout history long before the CCP dynasty.

So although China would love for the yuan to replace the dollar, something it knows is unlikely, it would still accept its own import and export business being conducted in some other currency so long as it's issued by a country that isn’t likely to punish Beijing for bad behavior... or which at least can be intimidated into abstaining.

Obviously convincing trading partners to use RMB would be ideal since Beijing controls its own currency. But even settling with its trading partners in rubles, rupees, or the recently proposed BRICS currency would be acceptable since, if one day the CCP decides to behave very badly on the world stage, the effects of a US-imposed dollar retaliation would be greatly reduced.

Thus China is working to wean itself—not necessarily the whole world, just itself—off the dollar as much as possible. Beijing couldn’t care less if the dollar retained its current 60% share of global reserve holdings and 50% share of all international transactions, so long as China itself isn't part of those numbers.

For all those reasons, the Economics Correspondent believes Chinese officials will be patient about invading Taiwan and not move until they feel enough of China's international trade is safely conducted in non-dollar currencies. Beijing will probably also first divest more of its dollar-denominated assets like U.S. Treasury bonds.

The Correspondent doesn’t guarantee China will take its time, but exercising patience while moving away from the dollar first is its most logical preparatory move if planning for a military action that could provoke a negative response from the U.S.

Revisit This Quote in a Year: Paul Krugman Says Recession Fear Overblown, "The economy is actually looking remarkably strong."

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A news flash from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Well Cautious Rockers it's official. The most reliable economic predictor known to man is now pointing to 100% chance of recession.

"Those recession calls were clearly a false alarm, and the economy is actually looking remarkably strong."

-Paul Krugman

Read "Here's why the US economy is in much better shape than people think, according to top economist Paul Krugman" at:

https://finance.yahoo.com/news/heres-why-us-economy-much-011530195.html

Now California's Projected Budget Deficit up to $32 Billion

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff reminds non-Californians that Governor Gavin Newsom's previous deficit forecast was $22 billion.

That was less than four months ago.

California also already has the highest taxes in the country with a top income tax rate of 13.3% and the middle class paying marginal rates of 9.3%.

Adding insult to injury, the recessionary effects of the Federal Reserve's recent rapid interest rate hikes haven't yet taken full effect on the national economy. While the USA technically entered a very shallow recession in the first half of 2022, the Economics Correspondent believes the real recession has yet to come at which point California's deficits will widen further.

Read "California's Newsom Sees Budget Deficit Deepening to $32 Billion" at:

https://finance.yahoo.com/news/california-newsom-sees-budget-deficit-171307372.html

Future Prospects for the Global Reserve Dollar, Part 3: A Gold-Backed BRICS Currency

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff examines the complexities of the much talked-about proposition for a gold-backed BRICS reserve currency.

With bad news rolling in for the dollar as of late, predictions of global reserve dollar collapse have been all over the Internet and even in the conservative media.

One of the most-trumpeted challengers eyed to dethrone the dollar’s eighty years of global dominance is the recently proposed but not yet real “BRICS currency” which is in early-stage discussions between Brazil, Russia, India, China, and South Africa.

Adding fireworks to the BRICS story are reports that its member countries are considering gold-backing for the reserve currency, thereby making it an upstart capable of threatening the US dollar’s reserve status practically overnight.

How would such a reserve currency work?

BRICS countries would all trade with another, and they also hope with non-BRICS countries, using a new reserve currency which we’ll call the “bric” or “brics” for plural—not to be confused with the all-capitalized “BRICS” meaning the five countries themselves.

BRICS domestic economies would still operate on local yuan, rubles, rupees, etc… but brics would be convertible into those domestic currencies at a floating exchange rate.

Even if brics turn out accepted only by BRICS countries for use only between BRICS countries, the belief is the sheer volume of BRICS-only trade might still pose a serious challenge to the dollar’s share of international payments and central bank reserve holdings. After all, the BRICS countries themselves represent 31.5% of world GDP which is larger than the G7’s 30%.

And since the bric would in theory be gold-backed—ie. convertible into a fixed unit weight of gold on demand—the supply of brics would grow slowly thereby instilling confidence that its value can’t be easily inflated away.

So given everything in concept going for the bric what are its prospects for replacing or dethroning the dollar?

EASIER SAID...

If the bric took precisely the form just described here, the Economics Correspondent believes it could be the most formidable challenge to the dollar since 1944 and that it would stand a good chance, over time, of eroding real share from the dollar’s acceptance in global trade.

But that’s a big if. 

Because the Economics Correspondent sees the prospects of the bric really coming together as perfectly as promised being pretty slim. The reasons are many, but before we get into a list, first some historical background.

The idea of a supranational alternative to the reserve dollar, traded among nations but not used domestically for purchase or investment, is nothing new.

Special Drawing Rights (SDR’s), based on a basket of currencies, have been around since 1969. In over half a century the SDR’s global share of reserve holdings stands at about 2% compared to 60% for the dollar, due largely to the fact that central banks with large SDR holdings can’t buy or invest in anything with SDR’s—only with domestic currencies.

As UC Berkeley professor and international monetary systems scholar Barry Eichengreen writes, “a reserve currency isn’t much good if you can’t do anything with it.”

Also during the 1944 Bretton Woods monetary conference, when the dollar was selected to serve as the primary world reserve currency, British economist John Maynard Keynes proposed an alternative supranational gold-backed currency he named “bancor” (literally “bank gold” in French) which would be issued by a multinational committee known as the International Clearing Union or ICU.

The ICU would vote on how much to inflate the bancor and which countries would be forced to forfeit a small percentage of their ICU-held bancor balances every year (surplus countries such as the United States in 1944) and which countries would automatically gain bancors (uncoincidentally, deficit countries like Great Britain in 1944). The United States would be given a vote but naturally the ICU structure was designed for deficit countries to outvote the USA.

The bancor proposal was rejected in favor of the dollar which was redeemable in gold at $35/oz. But US domestic inflation quickly brought the credibility of the dollar’s gold redemption pledge into doubt as early as 1960 and the USA reneged completely in 1971.

In the 21st century countries like China, left-leaning academics, and even the IMF have called for a “new Bretton Woods” and the revival of the supranational bancor concept to replace the dollar.

LOTS OF PROBLEMS

So with that historical context, here are some of the challenges a new gold-backed bric will have gaining worldwide acceptance:

1) There have been many proposals over the years for a gold-backed currency, and none have ever materialized. CO readers may recall widely hailed proposals for a Russo-Chinese gold-backed currency in 2008, leveraging the dollar's vulnerability during the great financial crisis and Federal Reserve’s multiple QE's.

Despite lots of headlines and predictions by goldbugs—and the Correspondent considers himself a goldbug too—of a glorious Russo-Chinese gold-based currency to knock off the dollar, nothing ever happened. Those two countries couldn’t agree on a mutual framework and for good reason.

2) Even going back to pre-1971, when the global reserve dollar was redeemable in gold at $35/oz, no government has enacted an honest gold-standard in nearly a century and the Correspondent doesn't think they're about to start now.

Even the 1944 reserve-dollar was only redeemable in gold for foreign central banks, not private citizens, but it's still referred to somewhat incorrectly as "the gold standard." And within just a few years of Bretton Woods’ ratification the USA began inflating the dollar enough to bring even its limited gold convertibility credibility into question. France famously lost confidence in the dollar and bailed out, redeeming its dollar holdings in 1965.

In 2023, nearly a century removed from any honest gold standard, the Economics Correspondent believes the odds of the BRICS countries proposing one are nearly zero.

3) The bancor framework, which some BRICS countries are citing as a model for a future supranational currency, was lauded as a gold-backed currency too, but it was hardly a genuine gold standard either.

Under Keynes’ plan, countries low on bancors could buy more by selling their gold reserves to the ICU. However the ICU would never buy bancors back with gold, making the bancor effectively irredeemable.

This smoke-and-mirrors misrepresentation of gold-backing, a promise to buy gold at a certain price but never to sell it, is similar to Russia’s “gold ruble” that was announced in the spring of 2022. Less informed observers, many with an innate hostility to the United States, naively hailed it as a genuine gold-standard ruble, but nothing could be further from the truth. Just like Keynes’ bancor, a currency that can only be bought with gold but never redeemed for gold in return is not truly gold-backed.

Just one year later the much-hyped "gold ruble" has come to nothing.

Incidentally Keynes’ plan would also have had the convenient effect of sucking up world gold and hoarding it at the ICU, thereby reducing the quantity of gold available to world governments and making any return to a genuine gold standard impossible. Keynes was a staunch opponent of the gold standard which he called “that barbarous relic,” but the Correspondent is sure his plan’s framework was just a coincidence.

4) The 1944 gold-reserve dollar failed, the victim of Uncle Sam’s unrelenting desire for inflation, despite being administered by a single, democratic government with a better-than-average reputation for trustworthiness.

Any proposed gold-bric pledge will have to be upheld by two dictatorships (China and Russia) and at least two precarious democracies (Brazil and South Africa). The prospect of five countries with a myriad of conflicting interests and squabbles maintaining a more credible gold-backed bric currency than the failed Bretton Woods dollar are very low.

5) Despite all the talk of the BRICS countries representing 30.5% of world GDP, the reality is China is over 70% of combined BRICS output making the BRIC really a Chinese-dominated currency. China’s share of BRICS output is only expected grow in the future.

Not only does this arrangement make the other four countries junior partners in a China-dominated arrangement, but de facto administration of the bric by China would bring back all the same decades-old problems that have prevented the RMB from replacing the dollar.

See the Economics Correspondent’s columns on problems with China’s RMB at:

http://www.cautiouseconomics.com/2019/05/inflation-currencies04.html

6) Which leaves us with probably the biggest problem of all: the same inflation temptations that led to the end of the Bretton Woods gold dollar.

Even though the bric is supposed to be gold-backed (an uncertain prospect in and of itself), the domestic currencies of the BRICS countries will still be fiat, and BRICS countries are not expected to forswear inflation from their own monetary policy anytime soon.

What does this mean for overseas holders of brics who wish to invest their reserves in BRICS countries with the same ease that they invest reserve dollars in the United States?

Under such an arrangement inflated local currencies will depreciate against the gold bric, sometimes rapidly.

Non-BRICS central banks will want to park their bric holdings in BRICS nation securities markets to earn a return, but that means they will have to convert their brics into, say, reals to buy Brazilian bonds.

Years later, when they convert their real-denominated investments back into brics the exchange rate will have moved against them, thanks to Brazilian inflation, and they could suffer a serious bric-denominated loss on their investment.

Even if the BRICS countries create some sort of brics-denomiated sovereign securities to challenge US Treasuries—a herculean feat to construct and maintain in and of itself—unlike dollar-denominated US Treasuries BRICS governments will have to back them with tax payments received in their local currencies and convert them into ever more expensive brics.

BRICS countries might pledge to keep their fiscal deficits and inflation below a certain threshold as part of the initial brics framework, but we’ve seen how well those pledges held up with the eurozone's ballooning deficits in the 2010's and eurozone inflation during just the last two years. And that currency union is comprised of far more liberal democracies than the BRICS not to mention a resolutely anti-inflationary Germany at the helm.

The Correspondent doubts a BRICS anti-inflation pledge will be any more credible.

So BRICS countries will be acutely aware that overseas brics holders are avoiding investing in their countries due to exchange rate movements and, unwilling to slow their own currencies’ inflation, will pressure the brics union to inflate the supply of brics to stabilize their own currencies’ exchange rates.

If the BRICS union succumbs to such temptation, which the Economics Correspondent sees as very likely in the medium-to-longer term, the gold-convertibility promise will quickly break down just as it did with the dollar in 1971.

Again, if this sounds like an implausible scenario just look at how much internal strife and infighting has emerged within the euro project. And the euro is a fiat currency with member states that are all more democratic and more economically advanced than the BRICS nations.

And even if the BRICS union resisted all temptations to inflate, overseas holders of brics would still have major concerns over the standard laundry-list of problems that the dollar avoids such as immaturity and transparency of BRICS securities markets, property rights for holders of brics-denominated assets, consistent trade surpluses, and imposition of capital controls. The BRICS countries might pledge to end capital controls to make the bric more attractive but China and Russia actively impose capital controls today while Brazil and India have a recent history.

So in summary it’s one thing to laud the idea of a “gold-backed BRICS currency” and write headlines about its inevitable displacement of the US dollar, but a lot of things have to fall into place perfectly for the reality to match the hype.

The Economics Correspondent can already find several conflicts of interest and priorities between politically unstable BRICS partners that could not only derail the bric shortly after its launch, but possibly prevent any true, honest “gold backing” before it even gets started.

And if the BRICS squabble among themselves enough to threaten the currency’s legitimacy, senior partner China might simply grab the reins in which case the bric becomes a de facto “international yuan” which will default back to the same trust issues that keep the RMB from becoming a major reserve holding today (see links above for more information).