I guess I overall don’t understand entirely how currency works… that is, why is the US dollar the “reserve currency” for several nations and why would BRICS challenge that? And finally, what effect would that have on the US.
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The best way to understand the problem is an example:
Say you live in a fantasy kingdom that has the only supply of fairy dust in the whole world.
Fairy dust is like oil, or in our world the “Petro-dollar”
Every other kingdom uses fairy dust for their furnaces to make magical items, also to trade as currency.
Your Kingdom doesn’t really make anything except for fairy dust, so everyone in your kingdom relies on the money the government makes from selling and trading it to survive.
Suddenly, another kingdom starts making the fairy dust, and tells its neighbors they want to trade using goblin ears. This new kingdom suddenly puts your kingdom in jeopardy of going bankrupt, if the other nations all agree to buy the dust and trade in goblin ears, effectively shutting down your entire kingdoms economy!
So you go to your neighbors and make a deal that they won’t ever trade in goblin ears, so you still control a majority of the trade.
The best way to understand the problem is an example:
Say you live in a fantasy kingdom that has the only supply of fairy dust in the whole world.
Fairy dust is like oil, or in our world the “Petro-dollar”
Every other kingdom uses fairy dust for their furnaces to make magical items, also to trade as currency.
Your Kingdom doesn’t really make anything except for fairy dust, so everyone in your kingdom relies on the money the government makes from selling and trading it to survive.
Suddenly, another kingdom starts making the fairy dust, and tells its neighbors they want to trade using goblin ears. This new kingdom suddenly puts your kingdom in jeopardy of going bankrupt, if the other nations all agree to buy the dust and trade in goblin ears, effectively shutting down your entire kingdoms economy!
So you go to your neighbors and make a deal that they won’t ever trade in goblin ears, so you still control a majority of the trade.
The best way to understand the problem is an example:
Say you live in a fantasy kingdom that has the only supply of fairy dust in the whole world.
Fairy dust is like oil, or in our world the “Petro-dollar”
Every other kingdom uses fairy dust for their furnaces to make magical items, also to trade as currency.
Your Kingdom doesn’t really make anything except for fairy dust, so everyone in your kingdom relies on the money the government makes from selling and trading it to survive.
Suddenly, another kingdom starts making the fairy dust, and tells its neighbors they want to trade using goblin ears. This new kingdom suddenly puts your kingdom in jeopardy of going bankrupt, if the other nations all agree to buy the dust and trade in goblin ears, effectively shutting down your entire kingdoms economy!
So you go to your neighbors and make a deal that they won’t ever trade in goblin ears, so you still control a majority of the trade.
1. The reserve currency means that a fledgling country’s currency can have a stable backing to it. It makes that country’s currency more legitimate
2. Other countries have an incentive to make their currency the reserve to drive up the demand for that currency and increase its apparent legitimacy across the globe.
3. For the US, if fewer people are using the US dollar means a lower value for the dollars in circulation.
1. The reserve currency means that a fledgling country’s currency can have a stable backing to it. It makes that country’s currency more legitimate
2. Other countries have an incentive to make their currency the reserve to drive up the demand for that currency and increase its apparent legitimacy across the globe.
3. For the US, if fewer people are using the US dollar means a lower value for the dollars in circulation.
1. The reserve currency means that a fledgling country’s currency can have a stable backing to it. It makes that country’s currency more legitimate
2. Other countries have an incentive to make their currency the reserve to drive up the demand for that currency and increase its apparent legitimacy across the globe.
3. For the US, if fewer people are using the US dollar means a lower value for the dollars in circulation.
The reason the US government can just endlessly print money is because the money is not just backed by the wealth of the United States, because oil can only be bought and sold in dollars in most cases it’s also backed by the oil wealth in the world, countries want the currency so that they can do trade. If countries no longer need the dollar, and view things like the yuan as a safer currency to do the deals with, noone will want the dollar any more. Supply and demand, the value of the dollar goes bye bye. Obviously this won’t happen overnight and dollars will still be desired as a reserve currency, but not in the same quantity it once was.
The reason the US government can just endlessly print money is because the money is not just backed by the wealth of the United States, because oil can only be bought and sold in dollars in most cases it’s also backed by the oil wealth in the world, countries want the currency so that they can do trade. If countries no longer need the dollar, and view things like the yuan as a safer currency to do the deals with, noone will want the dollar any more. Supply and demand, the value of the dollar goes bye bye. Obviously this won’t happen overnight and dollars will still be desired as a reserve currency, but not in the same quantity it once was.
The reason the US government can just endlessly print money is because the money is not just backed by the wealth of the United States, because oil can only be bought and sold in dollars in most cases it’s also backed by the oil wealth in the world, countries want the currency so that they can do trade. If countries no longer need the dollar, and view things like the yuan as a safer currency to do the deals with, noone will want the dollar any more. Supply and demand, the value of the dollar goes bye bye. Obviously this won’t happen overnight and dollars will still be desired as a reserve currency, but not in the same quantity it once was.
The US dollar is the reserve currency because the US is stable, strong and currency freely convertible. The “Petrodollar” thing the other posters are alluding to only applies to Saudi Arabia. The US provides aid to KSA in exchange for them only accepting USD for their oil. All other oil producers are free to accept whatever currency they please in exchange for their oil but they choose the USD because of the reasons I stated above. Also the agreement has already expired and KSA is free to accept payment in any currency.
BRICS is a new economic bloc similar to the EU consisting of Brazil, Russia, India, China and South Africa. They’re proposing establishing a new currency to backed by their members so they don’t have to depend on the USD to try and weaken the US’ economic position. If no one needs the USD, then the US is in a weaker bargaining position when it comes to trade. A weakening USD would be a boon for US industries depending on exports (their products are now cheaper and more competitive) but would be devastating for industries depending on imports (their products are now more expensive to produce).
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