Welcome back to Beating Sisyphus, a production of the Cornell Emerging Markets Center for Emerging Markets in collaboration with the Cornell Emerging Markets Institute Club, live from Ithaca, New York. We bring together leaders from across economics, technology, and policy to explore how innovation emerges under pressure. My name is Thomas Riveros, and I co-host this alongside Lourdes Casanova, the director of the center. Today, we are very glad to welcome on the show Eswar Prasad. Eswar is the Tolani Senior Professor of International Trade Policy at Cornell and a Senior Fellow at the Brookings Institution. He earned his PhD from the University of Chicago and later led the IMF's China division. Today, we are here to discuss his latest book, Doom Loop, in which he argues that the forces we thought would bring together greater stability, such as globalization, international organizations, and the rise of middle powers, have actually created a destructive feedback loop. Eswar, it's an incredible honor to have you on the show today.
Thank you, Thomas and Lourdes, for having me on. It's a real pleasure to talk to both of you.
Thank you, Eswar. And also, for me, it's very special because you are a colleague that I admire. Seeing you at the IMF two weeks ago in the Global Economics Forecast, it was really amazing. And so, I respect you. I follow what you say, and definitely, I learn a lot from you. So, let's just start by looking back at your career. So, how did you become interested in economics?
So, first of all, Lourdes, let me say that the respect and admiration is mutual. I know that you've accomplished a great deal here at Cornell, especially with the Emerging Markets Institute, which has gone from strength to strength. I remember the very modest beginnings, and it's hard to imagine that it was so modest given how far you have brought it. And I know that it's your dynamism and your leadership that has really elevated the Emerging Markets Institute to such prominence. As for my journey to economics, Lourdes, the truth is it was a bit of, you know, a sort of strange path because in India, you know, the bright students typically go into engineering or medicine. The leftovers go into accounting, and I didn't find any of these particularly appealing, and I thought economics was quite interesting. And I had anticipated getting a degree in economics and then an MBA and then going off to get a career. But as I started in my undergraduate work in economics at the University of Madras, I found that I was quite drawn to it, and especially the sense that it provided a framework to think about a broad range of issues, got me more interested in economics. So maybe out of sheer inertia, I just continued with economics, applied to graduate school in the United States, was admitted to a few places, came here, and ever since I've relished studying economics. So it's been a real joy and a privilege to be in this field, which I think provides a very powerful set of tools for thinking about really a very broad range of issues, not just in economics and finance.
So thank you. I remember when I arrived in Cornell in 2012, where soon after you published the book about the strength of the dollar, that was a completely different world than today. So what have you brought to this more pessimistic view right now in your book, Doom Loop? So, what happened that changed completely the way you face and you study and you think that things are going to go?
So, one thing worth noting is that the 2014 book of mine that you referred to, The Dollar Trap, you know, the main thesis of that book was that the dollar's prominence is not just a result of US economic strength, financial markets, institutions, and so on, but also the result of weaknesses in the rest of the world. And we can come back to talking more about this later, but the thesis of that book, if anything, has gotten validated over time. But in the Doom Loop, I wanted to think about a broader set of issues about where the world economic and financial order is headed. And to be honest, I had a very different book in mind when I got started on this project. I had anticipated writing a book about how, you know, in the 1990s with the demise of the Soviet Union, the United States became the dominant power in every respect, military, economic, financial. And now, of course, economic power is much more evenly distributed with the emerging markets that you know so very well, Lourdes, and that you too have studied, Thomas, such as China, India, and many others have become much more important in terms of the GDP. And as an economist, one instinctively thinks that more competition is good for efficiency, for balance, and also for stability. Because when no power is dominant, it means that no power can be reckless with its policies because there will be significant consequences in terms of loss of power. So, I was going to write a book about all the forces that would take us back towards this more stable world, a more stable equilibrium, as we economists might call it. But as I started thinking about the forces that might generate the shift back towards this new equilibrium, I quickly came to the conclusion, actually not quickly, it took me a while to come to this conclusion, that in fact we are stuck in a very difficult moment when the forces of economics, domestic politics, and geopolitics are stuck in a negative feedback loop, that is, they are bringing out the worst in each other. I'll just give you one example, which is that of globalization, something that again you have written extensively about and worked on, Lourdes. Once upon a time, not too long ago, it was seen as a positive-sum game, one where different countries could benefit mutually through increased trade and financial flows. And the one very important element of that was that not only did it generate positive benefits for all countries involved, but also it provided an offset to the intrinsically zero-sum game of geopolitics. In geopolitics, one country gains influence, the other country, almost by definition, has to lose influence. Economics doesn't have to be like that. Trade can benefit everybody. But now even globalization has come to be seen as a zero-sum game, where one country's gains in trade can come only at the expense of another. And this has affected domestic politics in a very negative way. There is a sense that globalization might have had benefits at the aggregate level even in countries like the United States, but many people have not shared in those benefits. They feel left out in terms of job opportunities and in terms of economic opportunities more broadly. So, they tend to vote against politicians who are seen as in favor of globalization. So, now you have this negative link between economics and politics, and that affects geopolitical relationships as well. And the spiraling of the US-China relationship is a perfect example of that. So, now we have these three forces that could have been working in a positive direction and indeed were working in a positive direction in the 1990s and 2000s, now working in the form of a doom loop.
No, that's fascinating and I think we'll definitely turn to globalization a bit later on. I wanted to start though speaking a bit on the importance of dollar dominance, and we got to have your good friend Steve Kamin on the program a couple months ago, and of course I got to meet him in your class, so very thankful for that introduction. But of course he, you know, argued that although there are serious issues with the dollar and it is eroding, it still maintains kind of its value overall and it maintains this global dominance, and you share a similar view in the book. Could you share, you know, why you think that is and what is going to, you know, hold the dollar up?
So, if we lived in a world of logic, Thomas, things would look very different. You know, in a logical world, the fact that US macroeconomic policies are not working very well, especially the fact that the US has a very high level of public debt, with just the tradeable portion of the federal debt now in excess of 100% of US GDP and the gross debt is in fact even larger than that, that should make people very worried about holding US Treasury securities in particular. And then while the US economy still remains by many measures the most dynamic, the largest in the world, has the deepest and most liquid financial markets. In my 2014 book that you referred to, Lourdes, and I made the point that beyond all of this is the institutional framework in the US that really engenders the trust of both domestic and foreign investors in the dollar. So, what are the elements of the institutional framework? The rule of law, where even the government is subservient to the laws it creates, then a system of checks and balances, and also the independence of institutions like the Federal Reserve, which is tasked with maintaining the stable value of the dollar. All of these institutions are fraying before our eyes, so logically, the world should be turning away from the dollar. But at the same time, one of the elements that I emphasize in my book is that we are moving to a world where instability seems to have become the norm. So, in an unstable world, investors, both foreign investors and domestic investors, both central banks and private investors, want a safe place to put their money. And unfortunately for the rest of the world, and perhaps fortunately for the US, the rest of the world has not really stepped up. If you look at the Eurozone, since the creation of the Euro in 1999, it looked like the Euro might be a credible rival to the dollar, but the Euro, you know, remains driven by centrifugal forces that continue to pull it apart, especially in terms of politics, and Europe remains a somewhat enervated economic force. China is, of course, a powerful economy, a major trading power, a manufacturing powerhouse, but it doesn't have the institutions that engender the trust of foreign investors. So, while the dollar share of global foreign exchange reserves, for instance, has come down a little bit over the last few years, it doesn't look like there is any country that can seriously rival the dollar. And in fact, if you look at the dollar's role as a payment currency in international transactions, there are some indications that the dollar share is, if anything, has gone up, while those of other currencies like the euro have suffered. So, I wrote a Financial Times op-ed recently where I made the point that essentially dollar dominance is everyone else's fault. If only the rest of the world would get its act together, we could move to a more logical world where, because of weak US macroeconomic policies, the dysfunction in the political system, and the erosion of the institutions, we should be seeing a migration away from the dollar. Now, central banks around the world talk about how desperately they want to diversify away from the dollar, how they want to escape from the clutches of the dollar-dominated financial system, but really they have nowhere else to go.
You are very right. If I look at my country of origin, Spain, during the almost 400 years empire, the kingdom of Spain went bankrupt a number of times, but everybody continued to trust the currency. And in fact, when the dollar was launched, it was pegged to the Spanish currency and used the same sign. Even today, the Mexican peso uses a double dollar sign. So, as you said, currencies and institutions are trust, are past and present. But if we look more, and as you said, and I fully agree, everybody benefits from this system. Everybody benefits that we have a currency that we trade in. Still, we trade into that. Although, it seems that the Chinese CIPS is increasing the value in the last months, and more is done through CIPS. So, we have a moving world. And so, looking at currencies again, going back to the currencies that we saw are so important in currency crises, producing such big crises in emerging markets. Let's say the Asian crisis, the debt crisis in Latin America, the unpegging of the Argentine peso. One could argue that even now Argentina is suffering from it. The same with the real, the Brazilian real, has moved from six to the dollar to two to the dollar back to six. Definitely very difficult to plan anything with a currency that is so volatile. Looking at the renminbi again is very puzzling to me that an emerging market, probably not anymore an emerging market right now, but no other emerging market that I know has been able to keep the renminbi one of the most stable currencies in the world in the last 20 plus years. So, amazing. Continues to do so. But, okay, with you just mentioning trust, what do you think more will it take for the renminbi to rise as a more prominent currency in the world?
The feature that you spoke about, stability of the renminbi, is of course relative to the US dollar.
