The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance
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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.
overall quota under the QFII program to $150 billion, although the approved quota had reached only $43 billion. See the press release from the China Securities Regulatory Commission titled “QFII Quota Raised to USD 150 billion and RQFII Pilot Expanded in Singapore and London.” July 12, 2013. Available at http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/201308/t20130815_232696.htm. The Exchange Rate Regime Before 2010, renminbi-related activities in the offshore market were quite limited,
net positions can be misleading, however. Larger gross positions make things riskier even for someone with a favorable net position. Even if her net worth was positive, Mary would be in trouble if she had a lot of debt, as her assets and income may not be as secure as she thinks. If an economic downturn led to a sharp fall in her equity portfolio at the same time she got laid off, she would be in a bad situation. Her debt level would not be affected by the downturn, nor would her required debt
reciprocally, each yuan can now be exchanged for more dollars. FIGURE 5-1. Rising Stocks of Foreign Exchange Reserves Data sources: IMF; People’s Bank of China. Appreciation in the value of the domestic currency—an increase in its value relative to other currencies—is good for consumers. It makes foreign goods cheaper, raising the overall purchasing power of household incomes. In the above example of renminbi appreciation, a Chinese tourist in New York City can now buy a (genuine) $600 Coach
only for half the amount that Brazil, Mexico, and Singapore had received. With a long agenda of her own and unwilling to deal with issues outside the State Department’s mandate, Secretary Clinton ignored this request. On March 10, 2009, the U.S. embassy in Jakarta conveyed to State Department headquarters and the White House a request from a number of senior Indonesian officials for a response to their request for a swap line. Indonesia’s request was politely but firmly declined. The Spurned
insurance program would not be relevant. Even before the crisis, based on its high budget deficits and debt levels (which were already high before it became apparent that its fiscal books had been doctored), it would have had to pay extremely high premiums to get any insurance at all. Even if the Greek government could afford those premiums, the modest line of credit it would have access to through such an insurance scheme would not be of much use (the line of credit would be modest because,