Eswar S Prasad is a professor at Cornell University and a Senior Fellow at the Brookings Institution. His latest book, The Dollar Trap, published by Princeton University Press, explores the global monetary system, and the dominant role played in it by the dollar.
Prasad explains that the dollar cannot for now escape its role as the global reserve currency, “due to weaknesses in the rest of the world and deep problems in the structure of the global monetary system.” There are substantial consequences of this, for the US, other western nations and the developing world.
He spoke to the Prospector about this and other subjects, the full results of which will be published here over the coming days.
Jay Elwes: We’ve been talking to a lot of economists and reading with great interest the thoughts of, for example, Larry Summers and Robert Gordon—who I spoke to last week—and Thomas Piketty, all of whom are gloomy and worry that economic growth will necessarily return to levels enjoyed in the past. Are you optimistic for growth in developed economies, or do you share their gloom?
Eswar Prasad: The US in particular is a fundamentally very resilient and dynamic economy, so I think the US will pull it together. But what causes a lot of concern really is the lack of political will in many of the advanced economies in particular to undertake the hard reforms that are needed. There is this reliance on monetary policy as a simple and easy tool for getting away from doing what really needs to be done.
So if you take the US for instance, there are good grounds for pessimism because on fiscal policy for instance, ideally fiscal policy should support the economic recovery for now and we should be dealing with the longer-term fiscal problems. But the US is getting it backward, pulling back on fiscal policy and not dealing with the longer-term fiscal problems, and the pulling back in the short term is having a v…