Thread by @jameslavish

You may have heard the term BRICS recently, and how this group of countries has taken issue with the USD

But what exactly—or should I say *who* exactly—are the BRICS, and can they really topple the USD?

Time for a US Dollar 🧵👇

🧐 What is BRICS?

First things first, BRICS is just an acronym for a group of countries seeking to form their own economic cooperation

A non-Western-centric bloc, you might say

These countries are currently, Brazil, Russia, India, China, and South Africa

BRICS.

The term BRIC was originally coined by Goldman Sachs economist Jim O’Neill in 2001, and when South Africa joined in 2010, it became BRICS

See, BRICS wants to break away from the need to hold and transact in USD

They're looking to do this for various reasons, but two are clear:

1. By continuing to use USDs as the primary medium of exchange, these countries continue to feed the US economic engine at the expense of their own economic growth

2. Needing USDs for transactions forces these countries to hold reserves of USD and USTs as reserve assets, and...

There're two reasons they’re want to opt out of USTs:

1. When the US sanctioned Russia last year, freezing their USTs and shutting them out from SWIFT (the worldwide money transfer system), the US demonstrated authoritarian control over any USD asset held in foreign treasuries.

2. The US Treasury has repeatedly printed USD to buy its own debt during times of crisis, and this has expanded the money supply and induced perpetual inflation

Hence, the USD is worth less every single year—and anyone holding USTs or USD loses purchasing power.

Pretty good reasons to opt out of the USD, actually

Instead, the BRICS alliance would like to either agree to transact in their own currencies or adopt a European-style model, where one currency (like the Chinese yuan) is the primary medium of exchange between all of them.

And so now, we are hearing increased rumblings, like this:

https://twitter.com/ft/status/1646506631675498498?s=61&t=4SGtHC1SrAyIsMEavgb_nw

But how exactly can BRICS accomplish this?

Simple, really: they all migrate away from holding US Treasuries and turn to other assets, like each others’ currencies, #gold, or #Bitcoin

And begin convincing others to do the same.

Evidence of this already occurring came recently when the United Arab Emirates (UAE) settled a large LNG (natural gas) trade with China, which was done in…wait for it…

Chinese yuan

Well, well.

Sounds ominous for the USD, when also considering the chart below

The GDP of BRICS countries recently surpassed the total GDP of the G7 countries.

uh oh

The question then becomes, could BRICS cause the USD to lose status as the global reserve currency?

But to answer that we must first ask, can BRICS unseat the US Treasury (UST) as the global reserve *asset*?

🤩BRICS → BRIICSS

Let’s be honest, UST's dominance as global reserve asset, while not exactly on the ropes, is in decline.

There're many reasons for this, but the past few years have not been kind to the US Treasury.

I.e., in response to US sanctions, Russia sold their USTs, China has been unwinding theirs, Japan has reduced USTs to stabilize their own currency, etc…

As a result, foreign ownership of USTs has decreased significantly as a percentage of total holders over the last decade:

And no surprise, the USD is headed in the same direction:

And to put this in context, the lost share is not going to the euro, the British pound, or the yen

It is going to ‘other currencies’, which includes the Chinese yuan.

First, let’s be clear. Take another peek at the above chart

There are hundreds of currencies in the world, and the USD is still *by far* the dominant medium of exchange

Nothing is even close.

But

This very dominance is causing certain countries to seek a way to be less dependent on the USD and the UST

To extract themselves from the whims and needs of a central bank that lives a world away from their own economy

Yet still finds a way to dominate it.

And so, as more countries seek to escape the US grip, we find other countries applying for ‘membership’ to the BRICS alliance

The two most recent inquiries came from Iran and Saudi Arabia

Iran is no surprise.

But wait, you say, the same Saudi Arabia that agreed to settle virtually all their oil trades in USD since we left the gold standard in the early 70’s?

Yes, one and the same

The resulting cooperative would be dubbed BRIICSS.

Problem is, they have no single currency they can all rely on (read: trust) for denominating an asset in, i.e., a UST

And unlike the UST (a mega yacht with a leaky hull), they must find a way to denominate in something they can all transact in that will also hold its value.

The obvious and overwhelmingly popular choice today?

You got it

#Gold (and #Bitcoin?)

Let’s look what’s been recently happening there, next.

🤔 BRIICS+ and the Prisoner’s Dilemma

Lo and behold, it seems Russia, China, India, and Turkey have been buying #gold like it’s the most important asset to have in their reserves.

More important than the US Treasury, in fact.

The result?

Good Lord, that’s more #gold buying than we’ve seen since the 1960s

I mean, central banks had been net *sellers* of #gold throughout all the 1990s and early 2000s.

Of course, the WEF sugarcoats reality here, reasoning that central banks have been using #gold to ‘balance’ reserves and ‘diversify’ portfolios

But let’s look at what really happened.

It’s clear that this reversal in sentiment occurred right after the Great Financial Crisis

You know, that little global financial meltdown event that ‘required’ central banks to step in and rescue companies

Rescue banks.

Translated: they printed metric sh*t-tons of their respective currencies and flooded markets with them to ensure the charade, the whole cynical clown show, continues.

Remember:

printing money = debasement, and debasement = loss of purchasing power

To protect against this loss of purchasing power, central banks have been buying, er, loading up on #gold.

It’s entirely possible that these countries (and others) have been also loading up on (or eyeing the possibility of using) #Bitcoin for an additional reserve asset and/or medium of exchange.

After all, it’s easier to exchange and cheaper to move than gold. It’s instantly verifiable for audit purposes, and most importantly, it cannot be frozen or seized.

Seems like a natural progression, actually

And if you have been watching the hashrate of #Bitcoin, you've noticed that it has exploded this past year

Translated for Bitcoin beginners: more computers are being plugged in to mine #Bitcoin.

It’s pure speculation that the majority of these Bitcoin miners are coming from China (I know, I know, they banned 'mining' last year 🙄) and Russia (it’d be pretty easy to hide a few million ASICS in Siberia), but it would seem to make sense, wouldn’t it?

OK, back to the main discussion here, and the expansion of BRICS which may become BRIICSS (BRICS + Iran + Saudi Arabia).

Then what? Will more countries seek to join? Could we see a BRIICSS+?

To put it simply, any country who is on the geopolitical relationship fringe with the United States may soon find themselves in an awkward situation

A dilemma

A *prisoner’s dilemma*, you may even say.

If you’ve never analyzed game theory and the prisoner’s dilemma, here’s how it works:

Say we have two countries, Country A and Country B

Each country has two choices: maintain its current USD reliance (cooperate) or join BRICS in the hopes of challenging the USD system (defect)

There are four possible outcomes of a prisoner’s dilemma:

1. Both countries cooperate (maintain USD holdings):

In this scenario, both countries continue to rely on the USD as a global reserve currency, and the status quo is maintained

USD remains dominant.

2. Both countries defect (join BRICS):

If both countries reduce USD dependence in favor of a BRICS system, they collectively challenge the USD's dominance

This leads to a reduction in demand for USD-denominated assets (read: USTs) and increased probability that BRICS succeeds.

3. Country A cooperates, Country B defects:

In this case, Country B benefits from diversifying its reserves and potentially profiting from price appreciation of gold/Bitcoin, while Country A continues to rely on the USD
(cont'd)

Country B's move could still negatively impact the USD, but the effect would likely be smaller than if both countries shifted their holdings

Neither country fully benefits, BRICS likely ultimately fails.

4. Country A defects, Country B cooperates:

This scenario is the just reverse of outcome 3, with the same result.

Put simply, it would take a massive—a seismic shift—in behavior and significant transfer of assets to #gold and/or #Bitcoin for BRICS to succeed, IMO

Could it happen?

Sure. It’s absolutely a possibility and more than a non-zero probability.

🤯 Could BRIICS+ lead to hyperbitcoinization?

Back to game theory and challenging the UST as the global reserve asset.

While gold is a trusted (non-UST) SoV, and has been for centuries, it's still not ideal, especially in this digital day and age, and is unlikely the world ever fully returns to the #gold standard

But then there is #Bitcoin.

Decentralized, trustless, easily divisible, and easily transferred, #Bitcoin’s properties are like gold that has evolved into the digital age

Of course there're additional base layer protocol benefits, but today let's look at #Bitcoin as a store of value and means of exchange.

Let’s suppose that the BRICS countries ultimately turn to #Bitcoin as the main reserve asset of their currencies (or a collective currency, like a #Bitcoin-backed yuan)

Then, if BRICS becomes BRIICSS+, the US will find itself in its own version of the prisoner’s dilemma.

In short, the US will have to decide whether to adopt #Bitcoin as part of its national reserves (cooperate) or maintain the status quo (defect)

Using the US and BRIICSS+ as the two players in this game, There are four possible outcomes:

1. Both US and BRIICSS+ cooperate (adopt Bitcoin):

The USD becomes backed by #Bitcoin and though #Bitcoin becomes the global reserve asset, the USD remains the global reserve currency.

2. Both US and BRIICSS+ defect (maintain the status quo):

Neither the US nor BRICS countries adopt #Bitcoin, and the current reserve asset landscape remains unchanged

The UST remains the global reserve asset (for now), and the USD remains the global reserve currency.

3. US adopts #Bitcoin, BRIICSS+ does not:

US benefits from #Bitcoin price appreciation and diversification of its reserves. The USD remains global reserve currency

BRIICSS+ ultimately fails.

4. US maintains status quo, BRIICSS+ adopt Bitcoin:

Demand for #Bitcoin increases, leading to price appreciation and decreased volatility

This results in a weakened USD + reduced demand for USTs—especially as more and larger energy purchases are settled in #Bitcoin
(cont'd)

The USD risks losing its dominance as the global reserve currency

The ultimate (and most dangerous for US) outcome of this scenario is hyperbitcoinization, or #Bitcoin rapidly replacing all fiat currencies as the primary medium of exchange, unit of account, and store of value.

Game Theory

So, from the US perspective, the danger of not adopting #Bitcoin is most evident in scenario 4

This is the only scenario where the USD is most at risk of being toppled as global reserve currency and hyperbitcoinization occurs.

Do I think this will happen?

I do believe it is an eventuality. But I also believe this is a long way off. I mean decades and decades...

Do I think the expansion of BRICS and that cooperative expanding will cause this eventuality?

Will BRICS be the so-called trigger?

Put simply, no.

I believe the countries that make up BRICS are too unstable themselves individually to form a strong enough partnership with enough trust to threaten the US hegemony

At least for the foreseeable future.

And I believe the US government and officials believe the very same

They are not worried about BRICS toppling the UST, and they are not concerned with hyperbitcoinization...

Yet.

And so, I maintain that the most likely scenario (which is also far off in the future) is that #Bitcoin becomes the ultimate global store of value and the USD remains the global medium of exchange

Buy and sell in USD, save in #Bitcoin.

But that’s me and my point of view. And that’s why I maintain and continue to add to my position of #Bitcoin as a long long long term holding

And when I say long term, I mean

Forever.

This thread is a summary of a recent 🧠Informationist Newsletter.

There's a free version that you can check out here: jameslavish.substack.com