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The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance by [Prasad, Eswar S.]
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The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance Kindle Edition

4.4 out of 5 stars 35 customer reviews

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Length: 432 pages Word Wise: Enabled Enhanced Typesetting: Enabled
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Editorial Reviews

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

"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

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


Product Details

  • File Size: 8716 KB
  • Print Length: 432 pages
  • Publisher: Princeton University Press (January 26, 2014)
  • Publication Date: January 26, 2014
  • Language: English
  • ASIN: B00G9FP0IC
  • Text-to-Speech: Enabled
  • X-Ray:
  • Word Wise: Enabled
  • Lending: Not Enabled
  • Enhanced Typesetting: Enabled
  • Amazon Best Sellers Rank: #654,288 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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Customer Reviews

Top Customer Reviews

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.
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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.
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Format: Hardcover 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).
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Format: Kindle Edition Verified Purchase
If you only read one book on the possibility of a dollar crash and a hyper-inflationary scenario this should be it. It is an excellent examination of the mechanics of global finance and economics. That said, the perfect companion piece, and contrary view, is James Rickards, Death of Money, an update on his recent Currency Wars.

Prasad glosses over the possibility of gold being used as a currency standard in the future and the viability of bitcoin, as well as offering only two examples of tipping points that might push the dollar in a different direction than his conclusion of continued preeminence. Other tipping points that Prasad excludes include terrorist acts and natural disasters.

Rickard suggests China could sell of all of their Treasuries in a financial war. He then anticipates the objections that those like Prasad make, that it would be suicide to do so: selling off Treasuries would panic the market, reducing the value of remaining T's so that billions of dollars would be lost.
According to Prasad, just selling off $100 billion of China's approximately $1 trillion ownership would panic the markets and create a sell-off.

Prasad proposes two Tipping Points that might upset his prognostication that the dollar retain preeminence for some time:
1) investors lose faith in the ability of the US to honor its debt obligations without resorting to inflation, which causes them to dump Treasuries which drives interest rates up, which increases the interest expense of the US government.

2) China might consider the use of its Treasury holdings as a weapon against the U.S. But, not according to published statements, plus China would be shooting themselves in the foot.
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