Triffin’s Dilemma __ America’s Cross To Bear?

Have you ever wondered why the United State, the world’s largest economy, has experienced trade deficits for each of the last 38 years? It is precisely because the US Dollar is the world’s reserve currency. An economist by the name of Robert Triffin was the first to recognize the problem that would occur to a nation whose currency was used as the world’s reserve currency in the  late 1950’s. We wrote a book on the subject in 1960 and testified before Congress about his concerns. Here is what Wikipedia has to say about what has become known as the Triffin Dilemma or Triffin Paradox:

The Triffin dilemma (or the Triffin paradox) can occur when a national currency also serves as an international reserve currency, in which case a conflict can arise between short-term domestic and long-term international economic objectives. The resulting dilemma is thus to choose between these objectives, and was first identified in the 1960s byBelgianAmerican economist Robert Triffin, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this ‘reserve’ currency (foreign exchange reserves) and thus cause a trade deficit.

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States.

The Triffin dilemma is usually used to articulate the problems with the U.S. dollar’s role as the reserve currency under the Bretton Woods system, or more generally of using any national currency as an international reserve currency.

In other words, what Mr. Triffin was saying is that if the US dollar is used by other nations to back-up their own currencies, those other nations need a lot of dollars. How do they get all those dollars they need? There are at least two ways: lend dollars to the other nations or establish monetary policies that cause American businesses to import far more than they export. Well, there is a third way: print dollars. Tiffin warned that there would eventually be a conflict between what the Federal Reserve should for the good of the American economy and what the Federal Reserve must do to grease the wheels of the world economy, which is tied to the dollar.

Zero Hedge gives us some history:

Prior to the 1944 Bretton Woods agreement, central banks used gold as the asset to back their currencies. By the end of World War II, the United States had established itself as the world’s creditor and largest holders of gold. Under the 1944 Bretton Woods agreement, the US Dollar was fully backed by gold at a fixed value of 1/35th an ounce per dollar, and foreign Central Banks could use US Dollar assets as reserves backing their currency, in lieu of gold. This agreement avoided the inevitable deflationary pressure a return to pre-war gold/currency ratios would have forced just as Europe was beginning to rebuild, and allowed US debt held abroad to be used as an asset by central banks against their local currencies.

After WW II, America was the only industrialized country still intact. Through the Marshall Plan and rebuilding Japan and later South Korea, Americas was lending huge amounts of dollars to other countries , which in turn were used to collateralize their own currencies. America was able to run huge trade surpluses and our economy was booming. But, then Triffin’s Delimma came into play. The demand for dollars around the world exceeded America’s ability to back it with gold. Those sneaky folks at the Federal Reserve printed more dollars anyway. And, when other countries figured out what was happening there was a run on America’s gold reserves and so  President Richard Nixon had no choice but to stop backing the dollar with gold. However, the dollar remained the world’s reserve currency because of the size and strength of the US economy.

The prevalent view amongst economist today is that since the US went off the gold standard that Triffin’s Dilemma is no longer in play. A good example of this point of view is provided by the author of this Real Currencies article:

The Triffin Dilemma is basically an explanation for the fact that the US was bled dry of its Gold in the post War years, until Nixon finally ended the one-sided transfer.

However, today’s dollars are printed at will and the Fed most certainly does not have any problems providing all the dollars the world will ever need. Quite the opposite, actually: the day is not long before trillions of dollars that are no longer needed (because the dollar is losing its reserve currency status) will be repatriated. It will be interesting to see how the Fed intends to mop those up.

Furthermore, the Triffin Dilemma automatically assumes that a trade deficit is the only way of getting the money into international circulation. But this is nonsense: the Fed is well capable, and does so routinely, of ‘lending’ out massive sums to its international banker buddies, who see to it the money leaves the US asap.

There are, however, contrarian who hold a different opinion. One of my favorite contrarians is Charles Hugh Smith. He has a great article up at his Of Two Minds blog that I hope you will bookmark and read. It is a tad long but not too long. He explains away so many myths and he does it in simple English. His explanation Triffin’s Dilemma is easily understood and why running trade deficits is made necessary because of the dollar’s use as a reserve currency. He explains clearly the untold story of the Federals Reserves dual responsibility of trying to balance the needs of the United States on one hand and the global economy on the other hand. And, although it is never said out loud, he explains that  the Fed must give preference to its global goals ahead of our national goals.

Most importantly, the American Empire needs to control and issue the global reserve currency. The Fed is a handmaiden to the Empire; the Fed’s claims of independence and its “dual mandate” are useful misdirections.

In the course of his article, Mr. Smith explains very clearly why the fears that the China or anyone else are going to replace the dollar as the reserve currency with their currency are   unwarranted.

The purpose of the Charles Hugh Smith’s article was not to explain Triffin’s Dilemma; but to make his case that the dollar, in spite of Federal Reserve printing, is going to get stronger as the Yen and the Euro decline. In fact he believes the dollar will get a lot stronger. Will  the dollar’s rise at the expense of the Yen and the Euro be a sign that the world financial system built around the dollar is coming to an end?

Well, that’s what I’m thinking. What are your thoughts?


13 thoughts on “Triffin’s Dilemma __ America’s Cross To Bear?

  1. 1. Go back to the gold standard.

    2. Would it be that bad if we weren’t the world’s reserve currency? I’m not saying the short term shock wouldn’t be back for the U.S. but in the long run it would help us. Of course, politicians don’t get elected by preaching the “long run.” So I expect nothing to change.

    1. “Would it be that bad if we weren’t the world’s reserve currency?”
      We wouldn’t be able to print all that money and get away with it.
      You be the judge of whether that is bad or good.

      1. Your question is over my pay grade; but I would wonder what would happen to those trillions of dollars other countries are holding. Wouldn’t they start panic spend for US goods and we would suddenly have those trillions circulating in our economy. I don’t know how hyperinflatio could be avoided. On the other hand, I am probably wrong.

  2. Zero Hedge has a story about China-Australia directly coverting currency bypassing the U.S. dollar –

    This doesn’t mean China is trying to replace the dollar as the reserve currency, only that they are sidestepping it to decrease costs and increase trade. There are many other examples of China and others participating in direct currency swaps thus avoiding the dollar completely.

    What does Asylum Watch think about this gradual increase in currency swaps negating the dollar completely? Rather than anyone replacing the dollar, countries are simply negotiating direct currency exchange deals for trade with various countries. In other words, no global reserve currency needed.

    1. Asylum Watch is dumber than a wooden watch. However, for what it is worth, at some point all those dollars around the world come rushing to American soil to convert it into assets as fast as possible. Think hyperinflation. That’s my two cents. I will be waiting for my change back.

  3. I agree that it is premature to think that the Yuan or any other currency will soon replace the dollar as a reserve currency; but I do not buy into the concept that the Triffin dilemma is forcing the Fed or the Treasury to adapt US monetary policy to its international needs. The Fed has been acting in fool regard to domestic needs since 2008 and it remains doing so. I agree that the dollar will remain strong for two reasons: there is no viable alternative for a reserve currency of trust, and our domestic needs are mopping up all the extra supply of dollars that we are printing – that is, we are borrowing all we can find and making our current account red hot.

    To conclude: There is no Triffin dilemma simply because our domestic needs come first and they are matched by our borrowing requirements.

    All will change when interest rates begin to rise significantly which will mean that our domestic requirements will no longer match our international goals.
    I can hardly wait for the fun to begin!

    1. “To conclude: There is no Triffin dilemma simply because our domestic needs come first and they are matched by our borrowing requirements.”

      Do you have a better explanation for 38 years of trade deficits? I don’t.

      On your last point, the Euro Zone is so screwed up they may save our baccon, at least for a while.

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