Eswar Prasad on the “The Dollar Trap”

“[I]n the aftermath of the financial crisis, U.S. policies and a dysfunctional international monetary system have paradoxically strengthened the dollar’s importance.”

This is from a description of Eswar Prasad’s important new book, The Dollar Trap (Princeton). From the website:

The U.S. dollar has reigned supreme as the world’s dominant reserve currency for nearly a century. But now the dollar’s dominance is under threat.

The near-collapse of the U.S. financial system in 2008, the high and rising level of U.S. government debt, and political gridlock in Washington have shaken confidence in the U.S. economy and the safety of its government debt. Other currencies such as China’s renminbi are staking their own claims to become reserve currencies, adding to speculation that the dollar’s glory days are coming to an end.

The Dollar Trap overturns this conventional wisdom. The book shows how, in the aftermath of the financial crisis, U.S. policies and a dysfunctional international monetary system have paradoxically strengthened the dollar’s importance.

In international finance, it turns out, everything is relative. Ultimately, there is no good answer to this question: If not the dollar, then what? That is why, despite all its flaws, the dollar will remain the ultimate safe haven currency.

6 thoughts on “Eswar Prasad on the “The Dollar Trap”

  1. Michael

    I think dollar will be the supreme currency in the next century. Eurozone has its own debt problems, much bigger than US. China is a poor country and it will face a lot of econimic and social problem. Japan stopped developing more than 20 years ago, it use some monetary tricks to overcome their problems but it doesn’t create new value. Because of that I believe in US dollar.

  2. Ricardo

    The quote is almost funny if it wasn’t so serious. In paraphrase, the dollar is a horrible currency, except for all the others. I’m not sure that gives folks who are serious about monetary policy a “warm fuzzy.”

  3. Ricardo

    Parallel Currency Revolution


    ….a major step forward will be when a major government — such as China — begins to issue an international alternative currency based on gold. The existing, dollar-based yuan would continue as it is, but there would be another Chinese currency, supported by the Chinese state, that is suitable for international use on a vast scale. Major Chinese banks (and non-Chinese banks) would provide a full array of banking services based on this new gold-based currency, capable of institutional size to serve transactions between giant multinational corporations. Chinese people, or anyone else worldwide, would be welcome to use it on a voluntary basis.

    Would you use this instead of Bitcoin? I would.

    Shanghai would become the next financial capital of the world. It is so easy to do.

  4. baffling

    why would any government be willing to cede the power of its currency to the gold trade? they won’t, and that is why all the major currencies are fiat and will not return to the gold standard.

    bitcoin does raise some interesting issues. however, one can always expect a currency drama to occur sometime in the future. at that point, who do you want backing your currency-a bunch of computer hacks or the largest, strongest country in the world? alternative’s to the dollar have some big mountains to climb.

  5. Patrick R. Sullivan

    ‘In international finance, it turns out, everything is relative.’

    Guess what, in economics everything is relative. ‘Compared to what?’ should be the first question answered in any controversy in economics.

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