Yuanization of the American Economy?

There's a big outcry on the left in response to Representative Michele Bachmann's congressional resolution that would prohibit the replacement of the dollar by a foreign currency as the unit of exchange in the United States. Greg Sargent and Matthew Yglesias, respectively, have riduculed Ms. Bachmann as a "colorful" personality and have attacked her resolution as more "madness." The Hotsheet has jumped on the bandwagon, indicating that Ms. Bachmann's demand for the truth from the Obama administration reflects confusion "about calls by China for a so-called 'international reserve currency'." In other words, leftists are attacking Representative Bachmann's alleged policy buffoonery.

I tried unsuccessfully to contact Ms. Bachmann's Washington office, although I did reach a staff member from the Minnesota district offices. I was told my inquiries would be forwarded to the national office. However, Greg Sargent spoke with Debbee Keller, Bachmann's spokesperson, and she said that the resolution only applied to the introduction of a foreign currency unit inside the United States. The proposal has no implications for limiting the introduction of a new international reserve currency to replace the dollar as the premiere unit of global finance.

There's something of a rush to judgment on the left, however. It's well-established in developmental economics for "full dollarization" to be established in domestic economies suffering from economic crises and the lack of international confidence in local currencies. With dollarization, the dollar replaces local currencies as both the unit of tender in routine exchange transactions, as well as the official currency in world balance of payments accounting. So when Treasury Secretary Timothy Geithner suggested that he'd be "quite open" to abandoning the U.S. dollar as the international system's reserve currency, the logical implication is that another national currency would take its place, with all the attendant privileges. Although the American economy remains the world's largest, the crises of the U.S. financial system have placed tremendous pressure on the confidence of the dollar in global trade and finance. Some are predicting that it's only a matter of time before China's economy replaces the U.S. as the world's leading market, and thus, "It’s clear to see that the Chinese yuan will be the world’s reserve currency in the future."

Considering the great uncertainties facing the U.S. economy, as well as the propensity for Secretary Geithner to create economic controversy with his economic free-thinking, there is nothing inherently unreasonable for Representative Bachmann to demand direct answers from the Obama administration; that is, it is entirely appropriate to demand that top U.S. officials clarify the appropriate legal foundations for the transition away from the dominance of the dollar in both domestic and world financial transactions.

It is not unusual for advanced industrial economies to replace their domestic currencies. France and Germany, long thought as classic examples on nations jealously protective of state sovereignty, are now the leading cases of world-class economies that have abandoned their national currencies (wth the Euro). More recently, Canada has been open to the dollarization of its economy. Should the Chinese economy come to dominate international trade and finance in the decades ahead - as so many now predict - there is nothing inherently illogical about considering, and protecting against, the possible "yuanization" of the American domestic market.

Perhaps Matthew Yglesias and some of his allies on the left might have reasoned through the full implications of this before dismissing Representative Bachmann's proposal as a "dog whistle to the “end times” folks."