Just because Michele Bachmann is crazy doesn't mean she doesn't have a right to be worried about the U.S. dollar. She isn't alone -- bond investors are worried about the dollar, China is worried about the dollar, Brazil is worried about the dollar, Europe is worried about the dollar. The dollar is the de facto "reserve currency" of the world -- 64 percent of the world's official foreign exchange reserves are held in dollars. If the dollar suffers a precipitous loss in value, a lot of people will get hurt.
So it wasn't completely ridiculous for Bachmann to interrogate Ben Bernanke, during his appearance before the House Financial Services committee on Thursday morning, on his assessment of a statement made by Robert Zoellick, the president of the World Bank, on Wednesday.
"The United States would be mistaken to take for granted the dollar's place as the world's predominate reserve currency. Looking forward there will increasingly be other options to the dollar."
Bachmann to Bernanke:
I found this statement astounding when I heard him make this on Monday. A statement of this magnitude should concern everyone, I think, because replacing the dollar's favored role in the global marketplace with another country's currency or with a new international currency of some sort I think would be devastating to the soundness of our dollar and to our nation's currency and our economy.
Unfortunately, Bachmann has the causation a bit bass-ackwards. The dollar will only be replaced if it turns out to be fundamentally unsound. That is, if the United States continues to mismanage its economy, the dollar will no longer be a safe place for other countries to invest their savings in, and they will look for another alternatives. Whether that will be another currency, like the Euro or the Chinese yuan, or, some kind of composite currency built from a mix of existing currencies is totally unclear right now, and won't play out for many many years. It's not really a pressing political issue. The pressing political issue is getting the finances of the United States on a sound footing.
Despite the protestations of House Republicans, I doubt that there is anyone in the Obama White House who is very comfortable with huge deficits into the unforeseeable future, with a consequent inevitable deterioration of the U.S.'s primary role in the global economy. The White House calculation has been: First we try to stop the economic meltdown, and then address some of the core components of rising government costs, such as, number one, healthcare. The Republicans, after eight years of total fiscal irresponsibility, suddenly want to reverse course and balance the budget in the middle of an economic disaster. Strangely, even though they decisively lost the last two elections and played a major role in creating the current mess, they still seem to think that they should be shaping government policy.
For a very clear and persuasive analysis of the dollar's possible future, I don't think you can do better than a brand new paper published in Berkeley's "Global Economic Journal," "Will the Dollar be Dethroned as the Main Reserve Currency?" by two Central Washington University economists, Robert J. Carbaugh, David W. Hedrick.
Their bottom line:
"If the United States is successful at unwinding its current expansionary monetary and fiscal policies as economic conditions improve, it will be difficult to unseat the dollar as the primary reserve currency. If, however, political pressures make it difficult for U.S. policymakers to address their current macroeconomic imbalances, inflation will lead to further weakening of the dollar and undermine its position as the worldâ€™s main reserve currency.
So we'll see. When and if the economy starts growing vigorously again, there will be enormous pressure on the Obama administration to focus on deficit reduction. How this can be achieved without significant tax increases, I don't know, but that will certainly be a major narrative for Obama's tenure. He won the election: Give him his shot.
But there's a deeper fear behind Bachmann's protestations than just competing models of how to manage the economy. For Bachmann and many others, the dollar's role as international reserve currency is proof of American exceptionalism: the belief that the U.S. is somehow better than all other countries, whether because it has been blessed by God or the brilliance of the founding fathers or simply due to its sheer superpower military might. If the dollar was ever replaced, well, that would be kind of humiliating, wouldn't it? Like the Yankees getting knocked off by the Red Sox. After all, Britain used to be Number One. The pound used to be the world's reserve currency. And look what happened to Britain! First they went from being a creditor nation to a debtor nation, and then they lost their empire, and now they just tool along, playing second fiddle to the U.S. Bachmann's blathering about Obama's conspiratorial intention to betray the dollar in favor of a "one-world currency" is rooted in insecurity, in the fear that the U.S. might be not inevitably ordained to be king of the world.
It's not an unfounded fear. Even if the U.S. does get its act together and reduce the trade and government deficits that are undermining the dollar's attractiveness, there is no guarantee that a similar transfer of power won't occur later this century. China is obviously going to be in the running, as its GDP approaches the U.S.'s China is managing its economy much more responsibly than the U.S., is growing much faster, and is already the number one creditor nation in the world. It won't happen today, and it won't happen tomorrow, but if current trends continue, it will happen.
In any case, as Carbaugh and Hedrick point out, the dollar has gradually becoming less central to the global economy for decades: "The dollar's share of world foreign-exchange reserves has declined from 80 percent in the 1970s to about 65 percent today."
But finally, the future doesn't necessarily have to be a zero sum game, with just one country ruling supreme before another overcomes it: First Britain, than the U.S., and then China. As noted above, China isn't the only country nervous about the dollar. Emerging nations like Brazil and India and Russia are also getting itchy -- and their clout is steadily growing. Michele Bachmann may not like it, but the world is becoming increasingly multipolar. The permanent expansion of the G-7 group of elite nations to the G-20 is just one signpost on this road. The inability of the West to dictate terms at World Trade Organization negotiations is another. We are headed to a future where decisions are made in a more collective fashion.
I guess here's where Michele and I will just have to agree to disagree. There might not be any room in this new world order for an "exceptional" nation. I don't think that's necessarily a bad thing.