- Eswar Prasad, author of ‘The Dollar Trap’
- Ralph Answang
Last year, China’s yuan for the first time joined the ranks of the most-traded international currencies, highlighting the country’s ambitions to play a larger role in a market long dominated by the dollar.
But in his new book, “The Dollar Trap,” Eswar Prasad, a former top Chinahand at the International Monetary Fund, says the dollar has no rival as the world’s currency—and probably won’t for decades.
The 48-year-old, who now splits his time between teaching at Cornell University and thinking big thoughts at the Brookings Institution in Washington, D.C., talked with China Real Time about the dominance of the dollar, whether the yuan could ever become a reserve currency and why he draws inspiration from the old radio and TV hit “Gunsmoke.” Edited excerpts.
Download The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance by Eswar Prasad 2014 Pdf Book ePub. Dollar’s dominance seems under threat. The near collapse of the U.S.
Why did you write “The Dollar Trap”?
My objective was to think about the future of the international monetary system. Given all the prognostication about the decline of the dollar, I wanted to see if the dollar could lose its pre-eminent role. I found it’s difficult to lay out a convincing scenario where the dollar is displaced any time in the foreseeable future as the dominant reserve currency.
The Dollar Trap - Eswar 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. Eswar's Home Page. Selected as one of Financial Times Best Books of 2014. Gold Medal, Axiom Business Book Awards 2015: Economics. This elegant book counters conventional wisdom and brilliantly documents why it’s so hard to escape the dollar trap.-- Mohamed A. Read 'The Dollar Trap How the U.S. Dollar Tightened Its Grip on Global Finance' by Eswar S. Prasad with Rakuten Kobo. Dollar's dominance seems under threat. The Dollar Trap. Thanks for Sharing! Download options: EPUB 2 (Adobe DRM).
According to your book, that’s less of a compliment to the U.S. and more a reflection of weakness everywhere else.
In international finance everything is relative. It’s not that the U.S. has especially good policies or growth prospects, it’s that the rest of the world looks weaker when it comes to putting together the powerful financial institutions that the U.S. has. The U.S. has a combination that is very difficult for the rest of the world to match: deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in.
There are times, like during the debt-ceiling debate, when that trust is called into question. But the world has no other place to go, especially during times of global financial market turbulence or, paradoxically, even turbulence originating in the U.S.
China seems to be on a path of overtaking the U.S. as the world’s largest economy within a decade or two. Could China’s currency, the renminbi, become the world’s reserve currency?
For China, the goal of capital-account liberalization (the free flow of financial capital in and out of China) is more important than having the RMB become the reserve currency. The upside of having the reserve currency is that the RMB would be more broadly used. It would give China international prestige and it would allow China to borrow (internationally) more cheaply. But the downside is that it could increase demand for the RMB, put pressure on RMB to appreciate and reduce China’s trade competitiveness.
What does China need to do make its currency accepted globally?
For the RMB to be a reserve currency, China needs to allow investors to have access to high-quality assets denominated in RMB. That means the development of corporate bond markets and the issuance of more government bonds.
I have no doubt China’s RMB will become an important reserve currency in five to 10 years, but I don’t think it will challenge the dollar. Foreign central banks view the RMB as useful in terms of diversifying reserves. Everyone also wants to be friends with the country that contributes most to global growth. But without legal reforms, it’s unlikely China will be viewed as a safe haven for investors.
There is fear in the U.S. that China could use its huge stash of U.S. Treasurys as a weapon by selling off large amounts and trying to tank the U.S. economy. How realistic is that?
According to official data, China owns about $1.3 trillion of U.S. Treasurys. The reality is probably significantly more than that. Say China takes $100 billion out of U.S. securities. Where would they put it? Japan and Switzerland won’t want the money to come into their markets. The size of the euro-zone bond market that’s considered safe is very small. Gold can’t accommodate that much money without prices going haywire. Given the amounts involved, there is really no place for China to go. They are stuck.
Your book examines global currency wars. How bad are things?
There is a fundamental problem in the international economic policy arena. A number of large countries, especially advanced economies and emerging markets like India and Brazil, are relying on monetary policy to support growth, low inflation and financial stability. Monetary policy inherently has big spillovers.
The Brazilians articulated the problem by talking of currency wars. (The battles) are going on now. Japan and Switzerland are doing their utmost to keep their currencies from appreciating and keeping them weak. The U.S. is not eager to keep its currency strong. This inevitably leads countries to focus on exports to boost growth. (The competition means) tensions continue to simmer.
Some economists have urged the creation of a supranational currency to replace the dollar as the world’s standard, like gold once was.
It’s hard to imagine an asset deemed safe by international investors unless there is a fiscal authority backing it up and a trusted institution, like a central bank, behind the currency. The International Monetary Fund could potentially issue such a currency. But the currency risks would fall on the IMF. Who would manage the losses? How would they be apportioned?
The fact that the dollar has a trusted central bank behind it, and that the central bank is backed by a government with the power to raise money through taxation, is very important. The dollar will remain unchallenged in the foreseeable future.
Why the infatuation with “Gunsmoke”? Many of the chapters starting with quotes from the show, but I assume you didn’t know it growing up in southern India.
I listen on Sunday evenings to old radio broadcasts of “Gunsmoke” on National Public Radio. A number of episodes and quotes have stuck with me. I am enamored of the clipped, tough-guy dialogue of Marshall Matt Dillon.
--Bob Davis. Follow him on Twitter @bobdavis187.
Eswar Prasad on the 'Dollar Trap'
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