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The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance [Hardcover]

Eswar S. Prasad
3.7 out of 5 stars  See all reviews (3 customer reviews)
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Book Description

14 Jan 2014

The U.S. dollar's dominance seems under threat. The near collapse of the U.S. financial system in 2008-2009, political paralysis that has blocked effective policymaking, and emerging competitors such as the Chinese renminbi have heightened speculation about the dollar's looming displacement as the main reserve currency. Yet, as The Dollar Trap powerfully argues, the financial crisis, a dysfunctional international monetary system, and U.S. policies have paradoxically strengthened the dollar's importance.

Eswar Prasad examines how the dollar came to have a central role in the world economy and demonstrates that it will remain the cornerstone of global finance for the foreseeable future. Marshaling a range of arguments and data, and drawing on the latest research, Prasad shows why it will be difficult to dislodge the dollar-centric system. With vast amounts of foreign financial capital locked up in dollar assets, including U.S. government securities, other countries now have a strong incentive to prevent a dollar crash.

Prasad takes the reader through key contemporary issues in international finance--including the growing economic influence of emerging markets, the currency wars, the complexities of the China-U.S. relationship, and the role of institutions like the International Monetary Fund--and offers new ideas for fixing the flawed monetary system. Readers are also given a rare look into some of the intrigue and backdoor scheming in the corridors of international finance.

The Dollar Trap offers a panoramic analysis of the fragile state of global finance and makes a compelling case that, despite all its flaws, the dollar will remain the ultimate safe-haven currency.


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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: 24.2 x 16.2 x 3.5 cm
  • Average Customer Review: 3.7 out of 5 stars  See all reviews (3 customer reviews)
  • Amazon Bestsellers Rank: 146,519 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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Review

"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

From the Inside Flap

"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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Most Helpful Customer Reviews
3 of 3 people found the following review helpful
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
4.0 out of 5 stars An interesting dilemma 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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4.0 out of 5 stars Unescabable dollar 25 May 2014
Format:Hardcover|Verified Purchase
It is a very informative book. I read it very smoothly and quickly. It is a very well written and pointing the right subject.
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Amazon.com: 4.6 out of 5 stars  19 reviews
14 of 14 people found the following review helpful
3.0 out of 5 stars An Interesting Analysis of the Dollar with some Questionable Conclusions 13 April 2014
By Baraniecki Mark Stuart - Published on Amazon.com
Format:Hardcover
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. He shows Bernanke trying to defuse the situation with calls for the Chinese to revalue their currency and for Congress to tackle structural budget deficits, although it all seems to fall on deaf ears.

A problem with the book could be described as the Dani Rodrik view (ref. his book, "The Globalization Paradox: Democracy and the Future of the World Economy"). Basically Rodrik disagrees with the convenient neo-liberal view that the "World is Flat" and convincingly shows that countries that participate in world trade are at different points in the development cycle and have differing needs. US corporations go to China in search of a reliable source of long term cheap labour, whereas the Chinese view export industries as a source of technological skill development, higher employment (than importers) and a route to industrial development (i.e. they plan to learn and compete with the US higher up the value chain, which they are successfully doing).

If Rodrik is right, then the situation is not "stable but fragile", but is becoming increasingly unstable as the US loses more higher value added industries to Asia, sees increasing services outsourcing and runs even larger trade deficits, quite apart from future domestic welfare commitments.

The author could maybe also have explored more fully the "Currency War" idea. He frames mercantilism as a Currency War but doesn't show that Currency Wars are quite winnable. The victor of the 1920's post WWI currency war was undoubtedly Weimar Germany. Their large scale currency printing resulted in a very competitive export industry, buzzing factories, employment for millions of returning soldiers and the wiping out of unpayable foreign and domestic government debts. The downside of course was that by 1923, the price of a cabbage that had recently sold for 25 pf now cost 50.000.000 marks and the German middle class was ruined (see Bernd Widdig's excellent book "Culture and Inflation in Weimar Germany (Weimar and Now: German Cultural Criticism)").

Widdig's view is that Weimar budget deficits covered by money printing betrayed the people's trust in the German government but Prasad takes the line that FED printing (in the face of insufficient Asian bond purchases) will be constrained by the political power of Americas fixed income electorate such as pensioners, bondholders, insurance funds etc. This may be wishful thinking, as the German (actually mostly ethnic non-German) financial elite easily avoided hyperinflation by borrowing large sums that went straight into foreign currency and real estate and they came out of the other side with their power enhanced. There isn't any compelling reason why the US financial elite couldn't do the same, especially as 3/5 of US bonds are owned by non-Americans.

There is also an element of inertia in the use of the dollar as a reserve currency which he could have look at. It has been the standard unit of exchange since WW2 and perhaps it is just convenient to pretend that it is business as usual as long as things hold together. It's interesting in this regard that Sterling still had a partial role as a reserve currency as late as the 1970's despite Great Britain's spectacular industrial failure, large budget and trade deficits and a hard line socialist government. In their useful book, "Goodbye, Great Britain: The 1976 IMF Crisis", Burk and Cairncross show that this residual reserve role only disappeared when UK inflation hit 30% p.a. in 1975.

The author says at various points that there is no realistic alternative to the Dollar for large institutional investors and downplays the Euro although the Euro zone has a similar share of world GDP as the US, less debt and a balanced trade account. It meets his criteria for a reserve currency and presumably German opposition to inflationary policies should also serve as a useful backstop.

In chapter 11 he proposes a rather unconvincing international insurance scheme to protect deficit nations from rapid currency outflows with the idea that deficit nations should pay larger premiums in view of their higher risk profiles, when perhaps he could have gone directly to the point and suggested making all currencies (of nations wishing to trade) freely convertible for trade in goods, services and FDI but banning the capital account and portfolio transactions that are the root of the problem

All countries would then be responsible for their own surpluses and deficits with their economic efficiency and government budget policies reflected in their exchange rates.
10 of 10 people found the following review helpful
5.0 out of 5 stars Thoughtful, topical, and very well-written 30 Jan 2014
By Julian Berengaut - Published on Amazon.com
Format:Kindle Edition|Verified Purchase
Today's headlines in the financial press are all about how minor adjustments in US monetary policy (the taper) lead to major repercussions for emerging markets all over the globe with their governments having to take unpopular measures to defend their currencies. Think about for a moment and marvel how strange it is--their economies are growing faster, their financial systems haven't had to recover from a near bankruptcy, they are financing our fiscal deficits and not the other way around. So how come they are the ones who suffer when the Fed steers its policies to benefit the US economy? Professor Prasad explains this odd state of affairs in his fascinating book with its total command of economic theory and empirical data (including Wikileaks!) and with a keen eye on real-life policy dilemmas as experienced by the key policy makers. Yes, despite the US economy lurching from one crisis to another, the role of the US dollar in the international financial system keeps getting stronger and is likely to remain so for a long time to come. Faced with a world-wide savings glut and a shortage of safe assets, it is the relative position of the US dollar that matters. Economics isn't always about rewarding the virtuous. Highly recommended. As they say, read the whole thing.
8 of 8 people found the following review helpful
5.0 out of 5 stars "Everybody loves a good story..." - but make sure you hear the right one, straight from the expert! 2 Feb 2014
By Pawel Stefanski - Published on Amazon.com
Format:Hardcover
As one of my investing gurus, Barry Ritholtz recently wrote about the ups and downs of the latest gold rush, the first lesson that everyone should learn from that experience is "Beware the narrative". The same could be said about the latest history of the US dollar - the most popular narratives ("untamed inflation, which has to follow the qualitative easing...", "the flight away from the dollar following US debt downgrade...", etc.) have routinely been proven false by the actual turn of events. Professor Prasad explains why it is so in his highly readable, yet accurate and choke full of details, book. I am sure that highly qualified macro economists will share detailed observations in their reviews - my recommendation is made from an "informed general public" point of view. It is from this perspective that I can highly recommend this timely book to anyone, who wants to understand not only the latest events of global finance, but the fundamental processes, responsible for why they happened "just so". And there is no better expert than Eshwar Prasad to turn to for this story.
5 of 5 people found the following review helpful
5.0 out of 5 stars Engaging and straightforward; recommended for all audiences 6 Feb 2014
By Shane F. Blackman - Published on Amazon.com
Format:Hardcover
For someone who usually skips economics news articles because they are too technical and/or speculative, this book is uniquely gripping, incisive, and coherent. Eswar Prasad combines scholarly rigor, revealing anecdotes, and a humorous narrative to make this highly relevant book a true pleasure to read.
3 of 3 people found the following review helpful
5.0 out of 5 stars Excellent Book 3 Feb 2014
By Rahul Anand - Published on Amazon.com
Format:Hardcover
A must read for anyone who wants to understand how international finance works and how U.S. dollar has tightened its grip over time. It gives a very comprehensive accont of the history and future of international currencies. The author has explained complicated economic concepts in a very simple and lucid way. His argumets are persuasive, and make us think. Highly recommended.
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