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From Canada

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Flawed Analysis

Reviewed in Canada on May 10, 2022

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The petrodollar system enabled the dollar to regain its status as global reserve currency. The petrodollar system and sanctions against Russia will destroy the dollar.

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Baraniecki Mark Stuart

An Interesting Analysis of the Dollar with some Questionable Conclusions

Reviewed in the United Kingdom on April 13, 2014

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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 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.

6 people found this helpful

Peter Pearson

An interesting dilemma

Reviewed in the United Kingdom on March 10, 2014

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.

3 people found this helpful

gazi ercel

Unescabable dollar

Reviewed in the United Kingdom on May 25, 2014

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.

E. Happel

Paradox

Reviewed in Germany on November 21, 2019

Verified Purchase

Sehr interessantes Buch, das zu contra-intuitiven Ergebnissen kommt. / A book that is very interesting and well argued, leading to contra-intuitive results.

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なぜだが２０１４年２月18日のreviewが消えていたため、再録

Reviewed in Japan on February 14, 2016

Verified Purchase

これは見事にまとめられた作品です。テーマはドルの存在です。題名通り、the dollar trapに陥ってしまった世界の金融通貨システムの現状がさまざまな角度から、分析されていきます。さまざまな問題点とその維持可能性が疑問に持たれているドルの覇権ですが、どうしてもこの罠から抜けられないintricateな仕組みがこれでもかというほど分析されてい見ます。
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。
不思議なことにこの種の分析を突き詰めていくと、議論は経済学の領域を超えていきます。議論は、あくまでも相対性の中での位置づけということになり、米ドルの存在は、ある意味で「超」論理の世界に位置付けられることになります。
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。
本書のもう一つの政策的な関心は中国です。結論としては、中国はその巨額なUS Treasuryの保有にもかかわらず、それを政策のleverageとして使うことはほぼ不可能という判断に落ち着いています。とはいいながらも気になるのでしょう、中国の国際経済政策がさまざまな角度から分析されます。日本の場合は、円の国際化は金融政策の自由度を失うとして１９８０年代には避けられた政策の選択肢だったと記憶していますが、中国は違った考えのようです。中国は二兎を追っています。自国の政策のフリーハンドを失うことなく、元の国際化の便益のみを追求できると考えているようです。
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。
国際関係がその基本を民族国家システムに置く限り、そしてそこに国際関係とは異質の行動原理（共産党独裁の下での領土と勢力圏拡大を第一の目的とする）を持つ中国というプレーヤーが存在する限り、この種のグローバルなIMF主導のスキームや仕組みの議論は、個別の国の利益を離れては、机上の空論の域を出ることはありません。
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。

One person found this helpful

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algo41

Too repetitious - 2.5 stars

Reviewed in the United States on August 23, 2019

Verified Purchase

This work combines “recent” monetary history with the “why’s”; I qualify “recent“ since the book was published in 2015, and the data sets generally end in 2012. As an important employee of the IMF Prasad has something of an insider view, and writes reasonably well. Unfortunately, he is much too repetitious, while sometimes citing what may be self-evident to economists without further explanation. I have some background in economics and follow financial news, but I believe even without that I would have been bothered by the amount of repetition, not just within chapters, but worse, between chapters.

A major point is that “the dollar will remain the dominant reserve currency for a long time to come, mostly for want of better alternatives.” It affords “safe assets: protect investors’ principal, can easily be converted to other currencies, and are liquid” so that even when the US precipitated a financial crisis in 2008, the result was an inflow of foreign investment and a rise in the dollar’s value. Further, the US “has fostered a set of institutions—democratic government, public institutions, financial markets, a legal framework—that, for all their flaws, are still the ones that set the standard for the world.”

The US runs large current account deficits, while emerging markets tend to run large surpluses. Prasad says data shows that the “gap in productive investment opportunities between emerging markets and advanced economies has, if anything, risen further in favor of the former group since the mid-2000s.” (this gap is pointed to at least twice, neither time with support for the assertion, but possibly in still another cite it is there). One important reason for emerging market surpluses is that countries feel the need to build up reserves to protect against future financial crises. Alternatively, reserves are the results of a country’s attempt to keep its currency from appreciating.

While taking the US to task for the profligacy leading to its current account deficits, Prasad explains why he is sanguine there will not be a tipping point any time soon or ever. He documents schemes including a proposal he helped formulate to protect emerging markets without their resort to surpluses, but is not optimistic about them. He also cites all the reasons why capital inflows into emerging markets may not lead to productive investment, with direct investment the most useful.

2 people found this helpful

A. Menon

A look at the role of the dollar through the crisis and how entangled the currency is in the modern global economy

Reviewed in the United States on May 7, 2014

Verified Purchase

The dollar continues to be the center of much literature these days and its position as the primary reserve currency at the center of global finance remains unchallenged. The Dollar Trap recounts how the dollar has done through the crisis, how some of the empirical facts about its use would seem counterintuitive at first but more sensible with more time for reflection and describes the landscape today along with some of the fragilities that come with the architecture. It is an informative book for those unfamiliar with the role of the dollar today in international finance as well as even handed about the perspectives of its use by the central banking and international finance community.

The book is split into 4 parts but the first one titles "setting the stage" is just that, a short 2 chapters on the role of the dollar through the financial crisis and through quantitative easing and the euro sovereign crisis. Despite the financial crisis originating in the US, the dollar remained the asset of safety; a result that many would be considered counterintuitive. The first major part of the book is titled "Building Blocks". Starting with economic principles the author discusses how traditional economic theories of capital flows do not correspond to what happens in practice. Capital ought to flow from where capital is abundant to where it is scarce as the relative return would justify more investment where its marginal utility is higher. Thus from this lense of neoclassical growth poor countries should be the recipient of capital flows with the flows coming from the developed world. In practice the asian tigers, japan and China have all achieved growth while running account surpluses (asian financial crisis aside). The author discusses why this happens and discusses various perspectives but focuses on the role of the dollar as a macroeconomic stabilizing tool.

The author then moves on to the framework of the international monetary system and the differences in institutional quality around the world in the third section titled "Inadequate Institutions". With the Fed engaging in quantitative easing to try to ease monetary conditions with the belief that investment from lower rates would spur growth there was a spillover into exchange rates globally. The dollar would relatively weaken as participants would prefer to earn higher yields in other currencies (baring in mind that quantitative easing does not have a uniform record of weakening the dollar and as such the above argument can be true at times but is one of many background processes). In a time with subdued domestic demand, the export channel has been extremely important for many emerging economies and relative strength of the exchange rate became a political issue. The author discusses the economics and politics of this channel as well as the economic perspectives of both emerging markets and of the US. He also discusses classical arguments in favor of flexible exchange rates and then emerging market practical arguments for their failures. He includes counterintuitive narratives about how even better institutions might create new inflows and be counterproductive (ie usually economists would argue that if an economy cannot handle hot money flows it should develop better financial markets but there could be cases where better financial markets ceterus paribus would change the relative desirablility of the destination with better markets such that the improvement would be counterproductive). One gets a true sense of how interconnected the financial world is and local improvements to global problems might not be incrementally beneficial. Coordination is often required when a system is brittle to change. The author ends with a proposal for global insurance that is based off real time policy decisions by countries which would determine the premiums paid. It is an interesting idea though practically it is hard to see it happen anytime soon.

The author finally moves on to the competitors for the dollar. The fourth section is titled Currency Competition. The hegemonic position of the dollar and why is the topic of much of the book so the end focuses on whether there are competitors to it in the making. The author spends the most time on the RMB and discusses where it has grown, how the authorities are handling its introduction (which is gradualist) and what is needed for reserve currencies. The author notes that China, though incredibly important economically and as a trading partner does not fulfill the qualities of a reserve currency as in a world that is based off capital and financial flows rather than trade flows the depth, breath and liquidity of the reserve asset matter more than where the goods are being traded (though in the long run it is hard not to see a relationship between those two). The author also discusses the idea of dollar fragility but dismisses it in todays context by noting the self-reinforcement of the system. This is not to make the claim that the system is stable but rather than todays dynamics are locally self reinforcing.

The Dollar Trap is a comprehensive overview of the role of the dollar in a world of increasing financial and capital flows. Some of the attributes of the dollar at first seem counterintuitive but when looked at as the relatively most attractive asset in a world of scarce safe scalable assets the paradox's disappear. This is not encouraging as the use dollar can lead to complacence by the US and its fantastic institutions might not be sufficient at some point though that some point might be far in the future. It is interesting to note the Euro was not discussed at much length despite it being the 2nd reserve currency; its problems are quite obvious today but nonetheless speculaltion about a slow drift to a more consolidated fiscal region is not considered. All in all there is a lot of solid insightful information in this work. I dont think that it has a strong thesis though, it is just informative by its practical description of the landscape today. So at times the organization doesnt lead to a natural flow. Nonetheless it is a worthwhile read for those interested in the global monetary system as it stands today, what its vulnerabilities are and where it might be headed.

5 people found this helpful

R. Anthony

Best of class, and a must read

Reviewed in the United States on March 27, 2014

Verified Purchase

This is a truly outstanding book. It is the most lucid and complete explication of the dollar's place in today's global economy currently available. This treatise includes all aspects of dollar currency trading, the position of US government debt in a global economy, the dollar's place as a reserve currency, the slow disconnect between the dollars use as a unit of account, plus medium of exchange, and it's universal and vitally important resource as a safe and liquid international investment. The title of the book, "Dollar Trap" is the perfect title.

This is a very well written book. The author uses an easy and accessible writing style. (A difficult notion when writing a book on economic topics.) That said, the reader should have a reasonable background in macro economic theory. Highly recommended.

2 people found this helpful

Sethu Konduru

Excellent time to read as Greece drama unfolds

Reviewed in the United States on July 1, 2015

Verified Purchase

Must read for all who has question about what is happening with globalization and for students to experience reality vs. theory. For a non Econ or Fin professional this book helps us to understand the importance of basic data most of the countries publish to put into a perspective. Book did help me to reinforce my faith in all critical US institutions with checks and balances , not in relation with a Idealistic world rater with other peer nations.

Excellent time to read as Greece drama unfolds.

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