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The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance Hardcover – 14 Jan 2014

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Product details

  • Hardcover: 432 pages
  • Publisher: Princeton University Press (14 Jan. 2014)
  • Language: English
  • ISBN-10: 0691161127
  • ISBN-13: 978-0691161129
  • Product Dimensions: 3.8 x 17.1 x 24.8 cm
  • Average Customer Review: 4.3 out of 5 stars  See all reviews (6 customer reviews)
  • Amazon Bestsellers Rank: 391,142 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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Product Description

Review

Winner of the 2015 Gold Medal in Economics, Axiom Business Book Awards

Honorable Mention for the 2015 PROSE Award in Business, Finance & Management, Association of American Publishers

One of Financial Times (FT.com) Best Economics Books of 2014, chosen by Martin Wolf

One of China Business News' Financial Books of the Year for 2014

"Thoughtful . . ."--Jeff Sommer, New York Times

"[A] surprising argument. . . . [L]ucid . . ."--David Wessel, Wall Street Journal

"Richly detailed study of global finances, examining how and why the dollar became the favored currency of international trade."--Kirkus

"To understand how the world of international finance works, what the agendas are and what is at stake, this work is indispensable."--Henny Sender, Financial Times

"In his authoritative new book on the dollar, Eswar Prasad . . . argues that China and other foreign countries that own around half the outstanding US federal government debt are trapped in a risky game where the US may be tempted to renege on its debt obligations by printing more dollars."--John Plender, Financial Times

"A lively and compelling analysis on currency wars in the wake of the financial crisis--and the likely persistence of the U.S. dollar as the world's pre-eminent currency."--Harold James, Central Banking Journal

From the Back Cover

"As Eswar Prasad points out, there is something paradoxical about a world where the dollar strengthens with the U.S. financial crisis, capital flows from poor countries to rich ones, and more sophisticated finance often leads to greater risk. Prasad's book unpacks these paradoxes in a provocative and challenging way. It deserves the attention of all those who care about the future of the dollar and the international monetary system."--Lawrence H. Summers, Harvard University

"Combining history, modern analysis, and practical examples, this elegant book counters conventional wisdom and brilliantly documents why it's so hard to escape the dollar trap. Prasad describes an increasingly unstable equilibrium that begs for better international policy coordination and he sets out fascinating and important alternatives that will particularly interest policymakers and investors. A must-read for all concerned about the dollar's global role."--Mohamed A. El-Erian, author of When Markets Collide and CEO of PIMCO

"At a time when the global repercussions of U.S. monetary policy are being closely examined, The Dollar Trap takes an authoritative look at the dollar's role in the international economy. The discussion of capital flows and the historical rise and fall of reserve currencies provides insights into the turbulent post-financial-crisis era and serves as a roadmap for thinking about the dollar's future. A must-read for anyone interested in how the wheels of international finance spin."--Carmen M. Reinhart, Harvard University

"Prasad tackles one of the toughest and most important implications of the 2008 financial crisis--the exorbitant privilege that has long been accorded the almighty U.S. dollar as the world's dominant reserve currency. While he argues convincingly that this status is unlikely to change in the years immediately ahead, he plants seeds that make the reader ponder when--not if--the dominant role of the greenback might start to change."--Stephen Roach, Yale University and former chairman of Morgan Stanley Asia

"This book makes a compelling case against the conventional wisdom that the dollar's dominance is drawing to an end. Prasad provides an elegantly written and provocative account of the various paradoxes that beset the global financial system, and shows how the United States holds many trump cards that will secure the dollar's primacy for a long time to come."--Nouriel Roubini, coauthor of Crisis Economics

"Giving an insightful look at a problematic international monetary system, The Dollar Trap draws conclusions that may comfort some but disturb others. To those caught in the trap there remains a strong desire to find a safe way out. The guardians of the dollar should have the time and the political will to act, in order to demonstrate that this is all unnecessary."--Joseph Yam, former chief executive of the Hong Kong Monetary Authority

"Scholarly and yet eminently readable, this outstanding book should be compulsory reading for Indian policymakers, market participants, and all those concerned with the Indian economy. I fully endorse the masterly analysis, clear conclusions, and elegant articulation in this book on a subject critical for India's future. This provocative, informative, and incisive book fills a huge void in our understanding of the future of the dollar and indeed of the global economy."--Yaga Venugopal Reddy, former governor of the Reserve Bank of India

"Adopting a contrarian view to the idea that the dollar's role as a global reserve currency will diminish, The Dollar Trap makes a compelling argument for the continuing relevance of the dollar even in the wake of the global economic dynamics witnessed after 2008 and the rise of emerging markets. Dr. Prasad makes an important contribution to the discussion on the international monetary order. I am sure this book will be of great interest to anyone wanting to understand the forces shaping the global economy, trade, and financial markets."--Chanda Kochhar, managing director and CEO of ICICI Bank


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4 of 4 people found the following review helpful By Baraniecki Mark Stuart on 13 April 2014
Format: Hardcover Verified Purchase
In this worthwhile book Eswar Prasad presents the view that the post WWII world reserve currency,the US dollar, now has a more multifaceted role. Despite record US budget and trade deficits it still maintains its reserve status and he highlights the organizations that would like to keep it that way.

He makes it fairly clear for example that the Chinese government has for years been operating a Mercantilist policy (recycling dollar trade surpluses into dollar bonds) to lower the renminbi/dollar exchange rate and support/protect their extensive export industries.

For their part the US government welcomes the perpetual Asian funding of their deficits allowing them to "kick the can down the road" and avoid the politically dangerous structural issues of cutting services or raising taxes.

Equally, US companies are happy with record profits as they move US manufacturing jobs to low cost Asian countries. They obviously want their production to stay cheap in dollar terms which means supporting Chinese dollar recycling and the general idea of free trade/free capital flows.

In turn, the US public has come to expect "Every Day Low Prices" based on Asian sourcing and this seems be part of an unwritten bargain in return for "Every Day Low Interest Rates" on their savings (if they have any) and generally low taxation (at least by European standards).

Prasad sees this as a stable but fragile equilibrium and titles the book "The Dollar Trap" to reflect the discomfort of Asian dollar bond holders with their excess capital risk and the US financial authorities with their excess funding needs.
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3 of 3 people found the following review helpful By Peter Pearson on 10 Mar. 2014
Format: Hardcover Verified Purchase
If you're interested in the financial markets and how they function, but perhaps don't have a degree in Economics, this is a book that will probably interest you. It's not over-complex or too academic, but does require a reasonable knowledge of how the main financial markets function, especially the bond market. It's pitched at about the same level as main articles you'd find in the Financial Times.

Eswar Prasad was formerly head of the IMFs China division and so brings some interesting insights into how China's financial markets function. He argues that because of the lack of transparency of China's markets, the chances of the renminbi becoming a reserve currency any time soon are highly unlikely. The argument is that because there are no major challenges to the dollar's safe-haven role, the 'dollar trap' (when everyone buys treasury bonds in time of crisis) is likely to stay with us for some time to come.
Perhaps understandably in a book about the dollar the book is rather America-focused. There is sometimes a lack of historical context and a feeling that a longer time scale for some arguments would have been useful. In a section about 'Community currencies' he talks about a local currency in New York called Ithaca Hours as if it were something bold and new, when towns and cities issued their own currency in England many years ago and are still used in places like Totnes (Devon) today.
Overall though the book is clear and interesting with simple graphs and charts and should be of interest to anyone seeking a greater understanding of how the financial markets function.
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1 of 1 people found the following review helpful By Adrian J. Smith on 15 Oct. 2014
Format: Kindle Edition Verified Purchase
Eswar Prasad of Cornell University makes the case that the crash of 2008 and the ongoing debt crisis, rather than weaking the dominance of the dollar, has in fact strengthened it. As illogical as this would appear on first observation, it really boils down to the lack of clear alternatives to the dollar as a reserve currency. The main competitor, the Renminbi, or Yuan, is hampered by the fact that China has not yet an open capital account, and it's rather undeveloped financial system prevent the Renminbi from being ready for primetime. Additonally, the institutional structure of China, with it's lack of rule of law, and enforced property rights, have made it not quite as attractive to the US, despite the instability that initially stemmed from the US. The idea of a monetary atom bomb being dropped by China, in the form of offloading of treasuries, is unlikely as the author agrees with others that this could harm China more than the US.
Other alternative currencies, such as IMF Special Drawing Rights, are examined, but IMF SDRs remain undeveloped, and not really a tangible alternative. Gold, on the other hand, is mainly hindered by the fact that it remains so illiquid it could not feasibly replace the dollar.
Prasad's main conclusions is that the Dollar remains attractive to investors for many reasons, not least of which is the institutional structure of the US, and it's solid enforcement of property rights.
Prasad's conclusion is not overly positive. The world monetary system is effectively a sandpile, and it could reach tipping point at some unknowable date. However, Prasad cautions against a rush to an alternative to the dollar at this point.
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