What is [amazon_link id=”0691161127″ target=”_blank” ]The Dollar Trap[/amazon_link]? In this book Eswar Prasad argues that the US grip on the global financial system has increased, not diminished, since the global (or North Atlantic, if you’re in China) financial crisis. The core of the argument is that foreigners (ie. non-Americans) have too much invested in dollar assets to permit a significant decline in the US currency. What Barry Eichengreen flagged in his book as the country’s [amazon_link id=”0199642478″ target=”_blank” ]Exorbitant Privilege[/amazon_link] continues (he too predicted there was nothing to knock it off its perch, despite the ‘rise and fall’ subtitle). The chart of the day in The Economist today, setting out the decline in emerging market currencies during the past nine months – accelerating just recently  – only underlines the asymmetry.

[amazon_image id=”0691161127″ link=”true” target=”_blank” size=”medium” ]The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance[/amazon_image]

It can’t last, of course. Danny Quah’s research (pdf) shows that the world’s centre of gravity for economic activity has shifted from the Atlantic firmly into Asia. [amazon_link id=”B00I124BKO” target=”_blank” ]Jim O’Neill argues that behind the BRICs are coming the MINTs[/amazon_link], and even a near-term decline in the growth of emerging markets will not reverse the shift. Yet as Prasad concludes, “The situation is rife with paradoxes.” The US relative status in the world economy is inexorably shrinking, it is a fiscal mess, the monetary taper will cause havoc, yet despite this fragility, it is hard to see what can dislodge the dollar from its perch.

I’m certainly not going to risk a prediction. But I would observe that in general fragile systems can persist in that state for a long time, but when the end comes, it’s often a sudden and catastrophic collapse. The unthinkable can become the inevitable.