Triffin’s Dilemma

The global economic system has often been based on an asymmetric relationship of an anchor economy — currently the US — that runs persistent current account deficits even as it provides liquidity to the rest of the world. This leads to a symbiotic relationship where the anchor country gets cheap financing and the rest of the world gets the monetary liquidity needed to lubricate economic activity. However, this system eventually breaks down because the anchor country needs to run continuous current account deficits in order to provide more and more liquidity needed by an expanding world economy, making it increasingly indebted over time. In turn, this undermines the very credibility on which the monetary system is based. This scenario was first described in the 1950s in relation to the Bretton Woods system by Robert Triffin and has since become known as Triffin’s Dilemma.

• The Triffin dilemma or Triffin paradox says that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives.
• 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. Net currency inflows and outflows cannot both happen at once.

Any solution to Triffin’s Dilemma?

The only clear historical solution to Triffin’s dilemma can be seen with the ‘triangular trade’ system between Britain, India and China in the 19th century. Under this arrangement, the British sold manufactured goods to the Indians and purchased opium. The opium was then sold to the Chinese in exchange for goods that were then sold back in Europe. Britain did not bleed gold in order to keep the system flowing. This system was stable in the sense that it did not suffer from Triffin’s Dilemma but functioned because the East India Company was militarily able to impose its will. Chinese attempts to close down the opium trade resulted in the Opium Wars of 1839-42 and 1856-60. In other words, Triffin’s dilemma was circumvented through war, colonisation and drug-running. (Noted from one of the ET Editorials J )