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The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance Hardcover – Illustrated, Jan. 26 2014
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Why the dollar is―and will remain―the dominant global currency
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.
"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
"Highly recommended especially for those interested in understanding the paradigm shifts that happened in the international monetary regime in the 1970s and 1980s."---Mehmet Kerem Caban, Asian Journal of Public Affairs
"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
- Publisher : Princeton University Press; Illustrated edition (Jan. 26 2014)
- Language : English
- Hardcover : 432 pages
- ISBN-10 : 0691161127
- ISBN-13 : 978-0691161129
- Item weight : 709 g
- Dimensions : 16.23 x 3.53 x 24.18 cm
- Best Sellers Rank: #866,126 in Books (See Top 100 in Books)
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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 help the US trade deficit) 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: Why Global Markets, States, and Democracy Can't Coexist "). 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 (equals higher profits), 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 soldiers returning from the war and the wiping out 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 & 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.
UPDATE 25th October 2015:
Another aspect of the book is that it (perhaps) assumes that when these political/economic factors are corrected the U.S. can return to the higher employment and balanced budgets of the 1950's 1960's. This may not in fact be the case since the international OECD, PISA rankings of maths/science/reading skills of high school students is an excellent predictor of a country's future economic performance with Singapore, Hong Kong, China, Taiwan and Korea at the top and the United States at the bottom and still falling (now at the level of Greece and Portugal), so there may be some more fundamental factors at work here.
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.
通貨には、計算単位、決済通貨、そして価値の胎蔵としての準備通貨としての３つの側面がありますが、前２つの役割に関しては、若干の陰りが見られますが、３番目の役割に関しては、当面ドルに代わる代替通貨は存在しえないことがさまざまな角度から論証されていきます。その非代替性は、つまるところアメリカ経済の規模、そしてそれを反映した金融市場の規模と深さ、つまるところはUS treasuryの市場としての流動性の潤沢さに決定づけられているというわけです。もっともUS treasuryの規模は財政赤字を反映しているわけで、これもparadoxというわけです。
驚くべきことに著者の議論は最後の部分では、米国システムの制度的な特徴（check and balance, legal framework, inflation へ構造的に敵対することになる年金によるUS treasuryの購入）の礼賛につながっていくのです。著者はおそらく生まれながらのアメリカ人かどうかは知りませんが、ここまでの米国礼賛を著作の中でさせてしまうアメリカのソフト・パワーはたいしたものです。現在の日本人の留学生はここまでの米国礼賛にくみするのかどうかは知りませんが、昔は子供の出産のために妻を日本に帰国させていたというアメリカ人や他国からの留学生からは信じられない「愚行」（政治学への道案内 (講談社学術文庫)を「平気」でやらかしていたものです。あれ、話が脱線してしまいました。
本書の面白さは資本規制という政策の分析とglobal liquidity insuranceの部分です。面白いというのは、ここに著者の経済学者としての特徴がよく現れているからです。つまるところは資本規制には著者は反対なのですが、ここで引き出しから出される議論はグローバルな意味での経済的な利益なのです。しかしながら、著者も通貨戦争の部分で認めているように、為替レートに代表されるように、グローバルな利益なんて存在しないのです。政策担当者が認識するのはあくまでもゼロサムゲームの中での相対性の議論なのです。
著者によってたびたび繰り返される、「より発展した」銀行システムや資本市場、や「改革」という言葉もむなしく響き、その実体はよくわかりません。アメリカだってつまるところは経済的なロジックだけで動いているわけではないことは著者によっても何度も指摘されています。つまるところはお互いの譲れない国家利益を背後に抱えた中での相容れることない価値観を巡る神々の闘争なのです。そしてアメリカが作り上げたこのシステムはその脆弱性にもかかわらずその安定性は堅固なのです。 The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy (Economic Controversies) そうこの議論は経済学者だけに任せるにはあまりにも重要な問題なのです。