I am inclined towards the Austrian School in my economics. What I find particularly attractive is the healthy distrust Austrians have of sophisticated mathematical models in describing the economy. It must be noted that faulty models were at the bottom of the 2008 financial crisis. What I often wonder is, when greed and fear, the basic driving forces of the economy cannot be quantified, what does one get by quantifying the rest of the economy? Economics, in my opinion, is, and is destined to remain, a soft science.
It was hence with a skeptical bent of mind that I picked up Eswar S Prasad’s The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance (2014). Prasad was a PhD student of Robert Lucas (Nobel Prize winner and proponent of rational expectations theory) and thus well-entrenched in Chicago economics and its econometric modeling. I was fully expecting a crash course on Keynesian or monetarist theory. I was nevertheless pleasantly surprised. The book complemented perfectly with what I had learnt about International Finance from other sources.
The central thesis of the book is: “The dollar will remain the dominant reserve currency for a long time to come, mostly for want of better alternatives.” The reason is, since 2008, every time the economy went through an uncertain phase, “[a] wave of money flooded into [emphasis in original] the U.S. …U.S. investors pulled their capital back home from abroad, while foreign investors in search of a safe haven for their money added to the inflows.” Thus there seems to be no alternative to the dollar. As Prasad states: “Perhaps the dollar has become the indispensable glue holding the international monetary system together.”
Prasad admits that the economy might crash by crossing a tipping point but is hesitant to analyze the triggers. He says: “The world economy is in a fragile equilibrium. Although our imagination does not conceive of the scenario that could cause it to happen, it is possible that we are on a sandpile that is just a few grains away from collapse. The dollar trap might one day end in a dollar crash. For all its logical allure, however, this scenario is not easy to lay out in a convincing way.”
On the other hand, I spend my nights worrying about tipping points. Will the downing of MH 17 act as a trigger? Will US’s support to Iran and its cold shouldering of Saudi Arabia act as a trigger? I keep my fingers crossed.
It was hence with a skeptical bent of mind that I picked up Eswar S Prasad’s The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance (2014). Prasad was a PhD student of Robert Lucas (Nobel Prize winner and proponent of rational expectations theory) and thus well-entrenched in Chicago economics and its econometric modeling. I was fully expecting a crash course on Keynesian or monetarist theory. I was nevertheless pleasantly surprised. The book complemented perfectly with what I had learnt about International Finance from other sources.
The central thesis of the book is: “The dollar will remain the dominant reserve currency for a long time to come, mostly for want of better alternatives.” The reason is, since 2008, every time the economy went through an uncertain phase, “[a] wave of money flooded into [emphasis in original] the U.S. …U.S. investors pulled their capital back home from abroad, while foreign investors in search of a safe haven for their money added to the inflows.” Thus there seems to be no alternative to the dollar. As Prasad states: “Perhaps the dollar has become the indispensable glue holding the international monetary system together.”
Prasad admits that the economy might crash by crossing a tipping point but is hesitant to analyze the triggers. He says: “The world economy is in a fragile equilibrium. Although our imagination does not conceive of the scenario that could cause it to happen, it is possible that we are on a sandpile that is just a few grains away from collapse. The dollar trap might one day end in a dollar crash. For all its logical allure, however, this scenario is not easy to lay out in a convincing way.”
On the other hand, I spend my nights worrying about tipping points. Will the downing of MH 17 act as a trigger? Will US’s support to Iran and its cold shouldering of Saudi Arabia act as a trigger? I keep my fingers crossed.
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