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05 April 2013

BRICS Deliver Serious Blow To the U.S. Dollar

The 5th annual BRICS[1] Summit has wrapped up in Durban, South Africa, and an agreement was signed by the member countries to establish an international development bank to bypass the International Monetary Fund. More importantly, the agreement also provides for the establishment of a new currency to replace the dollar in international trade.

Since the so-called Bretton Woods System, established in 1944[2], the U.S. has enjoyed the benefits of being the worlds official reserve currency. This privilege has enabled the U.S. to prosper by creating an artificial demand for the dollar. With their new arrangement the BRICS countries have abandoned this convention.[3] 

BRICS nations comprise 20% of the global Direct Foreign Investment and this figure is set to rise dramatically. Trade among the group is expected to reach $500 billion in the next 7 years. The group also collectively holds 4.4 trillion USD in reserve. Since they, and presumably other third world countries who join them, will no longer have a need to buy dollars, this will remove a major foundation of the dollars strength. 

Why are they doing this? The short answer is; They are losing the currency wars. The U.S., Europe and Japan have lowered interest rates to near zero, putting extreme upside pressure on the BRICS currencies.

What does it mean to you? Again, the short answer; Inflation. And eventually hyper-inflation as all of the reserves are dumped, along with the trillions in market operations by the Federal Reserve in recent years, there will be a literal flood of dollars and no demand for them.

[1] BRICS is an acronym for Brazil, Russia, India, China and South Africa
[3] The Bretton Woods System was officially abandoned in 1971, but the U.S. dollar continued to be used as the worlds reserve currency. For a concise history see- footnote 2