TRIFFIN’S DILEMMA
Contents
• Dollar as domestic currency vs dollar as global currency
• Triffin’s Dilemma
• Fiscal deficits
• Dollar Milkshake Theory
• Gold
• Liquidity vs credit vs capital
• Lessons from history
The Dollar Trap
Why America Can’t Stop Feeding the World with Its Own Debt
Let’s start with a simple observation: the dollar is both America’s national currency and the world’s reserve currency. That double role sounds glorious, but it is also the root cause of the mess we’re in today.
Back in 1944, at Bretton Woods, Keynes proposed a neutral global currency, the Bancor. America refused it. Fresh from the war, owning half the world’s gold and producing half its GDP, Washington seized the opportunity for global power and insisted on making the US dollar the centre of global trade. The dollar carried the glory, the prestige... and the burden.
America refused with good reason - after all, if the world adopted the bancor, it would mean the participating countries losing some of their sovereignty over monetary policy since they would have to adjust their currencies to trade imbalances. This would not just take away their sovereignty but would also - impractical terms - be a slow cumbersome bureaucratic and expensive new institution with all its rules.
So America rejected this suggestion for political economic and practical reasons and chose to insist on the dollar as the world’s reserve currency for the exorbitant priviledge of power it would give America over other nations.
However ...
Triffin’s Dilemma
Enter Robert Triffin, an economist writing in 1960. He spotted the contradiction.
For the world to have enough dollars for trade and reserves, America would have to run deficits, buying more from abroad than it sold, and issuing mountains of Treasuries for foreigners to hold. That supplied liquidity to the world, but gradually eviscerated America’s own economy.
Deficits mean debt
Debt means ever more borrowing.
And ever more borrowing ultimately undermines faith in the dollar itself.
It’s a treadmill: the US can’t stop running deficits without starving the world of dollars. But running deficits forever makes the whole system fragile.... look at where Britain finished in 1949, and America is following exactly the same path:
Dollars at Home, Dollars Abroad
Here’s the contradiction. When America spends more than it earns, it looks reckless at home — “fiscal irresponsibility”. Abroad, though, those deficits are welcomed, because they’re the only way the world gets the dollars it needs for trade, savings, and foreign reserves.
So every dollar of US debt is both:
• A domestic liability, and
• A global asset.
That’s the contradiction of being the issuer of the reserve currency.
Capital, Credit, Liquidity
It helps to distinguish three key items:
• Capital: the wealth itself - factories, land, savings.
• Credit: borrowed money - IOUs, loans, bonds.
• Liquidity: how quickly something can be turned into cash without materially affecting the open market price.
Most of what we call “money” today is really credit: promises to pay in the future. Gold is different. As J.P. Morgan said in 1912: “Gold is money. Everything else is credit”. With gold there’s no counterparty and so no counterparty risk
That’s why in ancient Rome, a senator’s fine toga cost about an ounce of gold - and today, a US senator’s fine suit costs the same. Gold has preserved value across two thousand years - it's the other credit Fiat currencies that have lost their purchasing power, their value.
The Dollar Milkshake
Now enter Brent Johnson’s colourful metaphor. Think of the global financial system as a milkshake that is full of capital, credit and liquidity. The straw is the US dollar.
When crisis hits, investors suck dollars out of the system:
• Because $13 trillion of offshore debts were borrowed in dollars and must be repaid in dollars
• Because US Treasuries are (were) the ultimate safe haven
• Because in panic, everyone wants what everyone else will accept.
This demand drives the dollar up, sometimes violently. The DXY index could soar to 120–122 ( it’s at 97 - 98 today). In that moment, even gold can collapse — sold off to raise dollars.
But that spike is unsustainable. Once the Fed intervenes by having to vastly expand the money supply M2 (with rate cuts, QE, debt monetisation, operation twist ...), trust in the dollar cracks, and investors switch to the one money with no counterparty risk: gold. That’s when gold rallies explosively.
So both arguments are right: the dollar soars first, then collapses — and gold wins in the end.
The Cost of Being the World’s Banker
Why does this matter now? Because America’s deficits are swelling and have been on and off since it abandoned the gold standard. Lawmakers don’t have to run deficits, but the system almost compels it:
• The world demands US treasuries
• Wall Street demands collateral for loans
• And politicians find deficits more palatable than tax hikes.
It works — until it doesn’t. Debt piles up, interest costs balloon, inequality widens, manufacturing shrinks, and American middle class voters feel poorer. The dollar’s glory abroad translates into populism at home.
The Lesson
Keynes foresaw the trap. Triffin diagnosed it. And today we live inside it.
The US dollar is a lifeline to international trade but at the same time, a time bomb:
• Lifeline, because the world runs on it
• Time bomb, because the very deficits that supply dollars abroad undermine the system’s foundations.
And as history shows, all empires eventually stumble and fall when their financial contradictions overwhelm them.
The toga, the suit, and the ounce of gold remind us that mere promises to pay are fragile. Money that stands on its own - gold - sees empires come and go.
Next: how to avoid Triffin's Dilemma - the case of Singapore.
0 comments:
Post a Comment
Keep it clean, keep it lean