The Rio Reset's New Architecture Rests on an Old Foundation
Peter Reagan

What if BRICS doesn’t need a new currency to replace the dollar? What if the foundation for a post-dollar system is already in place — quietly powering trade, lending, and liquidity flows beneath the surface?

If you're familiar with my original Rio Reset article, then you already know what's going on, If you're not, here's a brief recap: 

The global financial system is an incredibly complex network of banks, institutions, guidelines and communications protocols that generally operate behind the scenes, all owned and managed by the U.S. and our G7 allies. The BRICS alliance have been working for nearly a decade on developing their own, parallel global financial system. One that doesn't communicate through Western cables and doesn't rely on established institutions. They've cloned the existing infrastructure and upgraded it for the 21st century, with the goal of insulating themselves and their allies from Western economic warfare. 

Most of the criticism I've received to date boils down to one of the following objections: 

BRICS can't make their own financial system because we wouldn't let them. 

To date, BRICS have created their own versions of the SWIFT interbank messaging protocol, their own International Monetary Fund, their own World Bank, their own Bank of International Settlements, their own central bank currency swap agreement, their own cross-border interbank payment system (actually several of them, Russia's SPFS and China's CIPS and BRICS Pay) and dozens of local currency trade deals inked specifically to bypass the dollar. 

The claim that we wouldn't let BRICS do this is demonstrably false. Simply because they already have.

The second major objection:

BRICS can't replace the dollar because there's no alternative.

That's not true either. 

There is an alternative to the dollar (for BRICS and everyone else)

Because, as I've noted, the mechanisms underlying our global financial system are so deeply buried, most people (even many finance types) just don't understand that there is an alternative to the dollar.

That alternative, already the #2 reserve asset worldwide, is gold bullion. There are three main reasons for this: 

1. Historical precedent: Considering that global central banks own about 38,000 tons of gold (17% of all above-ground gold, nearly every nation already has gold in its reserves.
2. Regulations: Worldwide, everyone from the International Monetary Fund to the Basel III Committee agree that physical gold bullion held in custody is a Tier 1 riskless reserve asset. Gold isn't something new that requires years of study and scrutiny before integration into the existing financial structure.
3. No counterparty risk: Gold is unique among reserve assets in this way. Most reserve assets are based on currency. Although you and I use currency to pay our bills and buy our groceries, between nations, currency is simply a promise to pay something of real value later on. Gold is the only asset that isn't someone else's liability.

Now, a lot of people might read all this and think, Just another goldbug hand-waving about the "barbarous relic." 

They’re thinking, This is impossible! Gold hasn't played a role in the financial system AT ALL since 1971.

Well, that's not true. In fact, gold is actively in use today, right now.

The invisible use of gold in today's global financial system 

Remember what I was saying about how much of the institutions and mechanisms that make up the financial system aren't obvious? It's true. Like many complex but well-designed systems, we only see and only interact with the tip of the iceberg.

Gold still plays an active, though largely hidden, role.

Reserves: Most obviously, gold sits in the vaults of central banks as an official reserve asset. It's not merely decorative, by the way. As I mentioned previously, vaulted gold is categorized by the IMF and Basel III as a Tier 1 asset with zero risk weighting.

Interbank swaps: Even less visible is gold's role in interbank swaps, especially through the Bank for International Settlements (BIS). Swaps are a mechanism for raising liquid funds in times of crisis. For example, during the 2008-2009 financial crisis, the BIS arranged gold swaps worth over 346 metric tons to provide liquidity to struggling financial institutions. These swaps allowed institutions to raise dollars without having to sell their gold outright. Keeping their reserves safe, while unlocking short-term cash at the same time.

Leasing: One of the major criticisms of gold as an asset is that it pays nothing. Well, that's not quite true... Central banks with large gold holdings have the option of leasing their bullion to banks, which use it to settle trades, provide liquidity or hedge short positions. This practice generates modest yield (usually 2% or less) for the central banks while keeping the gold "at work." So it's not quite true to say that gold pays nothing.

Collateral for emergency loans: In times of crisis, gold becomes a tool of last resort. Countries in financial distress have used their gold to collateralize emergency loans. India famously did so in 1991, pledging 67 tons of gold to secure a loan and avoid defaulting on its sovereign debt. Venezuela struck gold-for-cash swap deals with Deutsche Bank and Citibank in the 2010s. More recently, the ongoing dispute over Ukrainian gold stored at the Bank of England has highlighted how gold reserves remain highly strategic, especially when access to other assets is politically constrained.

Cross-border settlement: Though less frequent, cross-border settlements involving gold do occur. Some bilateral trade deals between Russia and Iran, for instance, have used gold as a settlement mechanism. In practice, here's what this means: Russia exports, say, $50 billion in grain, oilseeds, lumber, chemicals, and military equipment to Iran. Iran exports $25 billion in fruits, vegetables, dairy products, and metals to Russia. Iran still owes Russia $25 billion, and Russia doesn't accept payment in rial, so Iran pays their balance in gold.

These examples of how gold is currently being actively used in the global financial system show that gold is more than a passive asset. Today, right now, gold serves as a functional medium of exchange at the international level.

The Rio Reset: Rewiring, then rebooting 

As we've seen, BRICS nations aren't just griping about the Western-dominated financial system. They're building workarounds. They've reduced or eliminated their dependence on the institutions and systems ("the plumbing") controlled by the West.

It's important to understand this isn't a speculative project! BRICS have been testing their own network for a while now. They know it's sound, because it's based on the system that already works. They know it works, because they've been using it among themselves.

At the same time, leading BRICS members (particularly China, Russia, and India) have been steadily accumulating gold reserves over the past decade. Not strictly to dedollarize; instead, to prepare themselves for a transition away from a dollar-centric financial system. By basing their system on gold as a neutral asset, they sidestep all the questions of trust that inevitably rise when trade is based on IOUs and promises to pay. Gold is a trustless asset, and its use makes trade much easier and more trustworthy even between nations who don't trust one another.

When you consider that BRICS aren't a natural alliance, but rather an alliance of convenience, this makes a lot more sense. Consider: Russia and China had a severe border dispute in 1969. India and China went to war over their mutual border in 1962 and have endured dozens of border clashes and stand-offs since then. These nations don't necessarily trust one another!

So they've designed their financial system to ensure they don't need to trust one another.

The Rio Reset is real, but it isn't radical

Think about what the word "reset" means. When you reset your phone, you return it to its factory default settings. That's exactly what the Rio Reset is. It's not a revolution! Rather, it's a return to a previous state.

BRICS aren’t trying to invent anything new. They're simply taking a massively complex system, one that we know works, and adapting it to their needs. Most importantly, they’re running it for their own benefit. As Phillip Patrick recently explained, the U.S. economy benefits greatly from dollar privilege – worth about $800 billion a year. That’s what BRICS want to take away – and that’s why the Rio Reset matters to you, even if you don’t care about the financial industry or bilateral trade deals.

What does that look like for us? 

• Higher borrowing costs: Mortgage rates, credit card rates, auto loans and business lines of credit all get more expensive – and banks become more hesitant to lend
  
• A higher cost of living: A weaker dollar means imports cost more, and prices rise across the board – especially for essentials including gas and groceries, also on smartphones, TVs and appliances
  
• Shrinking purchasing power: Unless your paycheck or your savings keep pace with the higher cost of living, you simply might not be able to afford your standard of living anymore
  
• More fragile capital markets: Less demand for dollars means less demand for dollar-based assets, meaning everything from home prices to government debt lose value and are more vulnerable to economic downturns
  
• Federal budget challenges: With lower demand for U.S. debt, the federal government will be forced to pick its poison – either inflating away the debt, slashing spending or raising taxes (inflating away the debt is by far the most likely, meaning further reduction in purchasing power)

Rather than inventing yet another new kind of money, they're relying on the oldest form of money. The Rio Reset is restoring the financial system to its old, pre-Bretton Woods status quo. Their approach isn’t radical. It’s conservative in the truest sense.

The new architecture of The Rio Reset is built on the same foundation as the old one. On a foundation that never actually disappeared, but was concealed from public view. BRICS are much more overt and public about using gold as their foundation for good reason! They need the trust and universal acceptance that only gold provides. 

What truly astonishes me is that they did all this in plain sight, one piece at a time. And we never really understood their plan until it was almost too late.

 

 

Peter Reagan is a seasoned financial market strategist at Birch Gold Group with over 15 years of experience in the precious metals industry. He has been featured in several leading publications, including Newsmax and Zerohedge. At Birch Gold Group, Peter leverages his deep market insights to help educate customers on how they can diversify their savings into gold and other precious metals. His commitment to education has made him a trusted thought leader in the field. In addition to the Birch Gold website, you can follow Peter on LinkedIn.

 

www.birchgold.com