1/3 TRIFFIN’S DILEMMA

24 September 2025

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:

The Debt crisis that ended Great Britain's Empire

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.

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RAY DALIO'S NEW BOOK, HOW COUNTRIES GO BROKE

4 June 2025

Ray Dalio’s How Countries Go Broke: The Big Cycle is a stark warning from one of the world’s leading investors. Drawing on centuries of economic history, Dalio shows how nations rise through productivity and fall through debt, denial, and decay. His message is clear: when governments prioritise short-term politics over long-term stability, economic collapse is not a question of if—but when.

How Countries Go Broke: The Big Cycle

1. The Big Debt Cycle Explained

• Early Stage:
• Mid Stage:
• Late Stage:
• Crisis Stage:

2. Indicators of Economic Vulnerability

• High Debt-to-Income Ratios:
• Rising Interest Payments:
• Dependence on Foreign Investors:
• Currency Depreciation:

3. The Role of Central Banks

4. Historical Context and Case Studies

5. Recommendations for Policymakers

• Fiscal Discipline:
• Productive Investment:
• Transparent Communication:
• Diversification:

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1. HOW COUNTRIES GO BROKE — RAY DALIO’S BIG CYCLE EXPLAINED

Ray Dalio’s latest book, How Countries Go Broke: The Big Cycle, offers a clear and sobering explanation of how great nations rise and fall - not through sudden external shocks, but through predictable internal cycles of debt, excess, and mismanagement. This is not a book of abstract theory - it’s meant for understanding the slow and often self-inflicted collapse of economies, including our own.

2. THE BIG DEBT CYCLE — A PATTERN REPEATED THROUGH HISTORY

Dalio’s central claim is simple: countries go broke in cycles, and these cycles are surprisingly consistent across empires,  centuries and continents. The process begins with healthy borrowing and ends with currency collapse, political instability, and often regime change as a new Order is born.

The Big Cycle has four broad stages:

Early Stage: Borrowing is modest and productive. The economy grows. Confidence builds.

Mid Stage: Debt grows faster than income. Asset prices boom. Politicians avoid austerity.

Late Stage: The country becomes addicted to borrowing. Interest payments soar. Growth slows. Central banks print money to fill the gap.

Crisis Stage: Inflation rises. The currency devalues. Foreign investors flee. Social unrest grows. The debt can no longer be serviced.

At this point, the country is bankrupt—even if it doesn’t admit it.

3. THE ROLE OF CENTRAL BANKS AND POLITICAL SHORT-TERMISM

According to Dalio, the modern central bank doesn’t prevent crises, it delays them. By lowering interest rates and buying government bonds (QE quantitative easing), central banks enable politicians to continue borrowing and spending. But this only shifts the pain and the burden to the future, often worsening the eventual reckoning.

And the political class? Dalio is blunt. They are trapped in the incentives of the election cycle. He could talk more about the lobbies.. Raising taxes or cutting spending is unpopular. So instead, they rely on cheap money and denial ... until the bond market revolts.

4. CASE STUDIES — THIS ISN’T THEORY, IT’S HISTORY

Dalio draws on dozens of real-world examples to show that the Big Cycle plays out again and again:

The Great Depression (1930s USA): Massive debt from the 1920s, deflation, social unrest, and global protectionism.

The 1970s Inflation Crisis: Loose monetary policy, oil shocks, rising interest rates.

The 2008 Financial Crisis: Excessive private debt, cheap credit, systemic fragility.

Modern Emerging Markets: Argentina, Turkey, Sri Lanka—nations that fell into currency collapse and default after foreign capital dried up.

Dalio warns that the U.S. is now in the late stage of its Big Cycle.

5. WHAT SHOULD GOVERNMENTS DO?

Dalio isn’t fatalistic—he offers solutions. But they require political will and economic discipline:

Keep debt below 3% of GDP.

Use borrowing for productive investment, not short-term consumption.

Encourage long-term planning over election-cycle thinking.

Prepare early, because when the crisis arrives, it’s too late.

6. BROADER IMPLICATIONS — THIS IS ABOUT POWER, NOT JUST MONEY

While Dalio is an economist, his conclusions have geopolitical weight. As a country’s finances deteriorate, its power declines. Economic fragility invites external threats. Military ambition becomes increasingly unaffordable. Civil unrest becomes uncontainable. In Dalio’s model, debt is not just a balance sheet item, it is the litmus test of national viability.

As the U.S. faces growing deficits, political paralysis, and monetary overreach, Dalio’s warning is not at all theoretical or abstract, it is immediate and practical.

7. GLOSSARY

Big Debt Cycle: Dalio’s term for the multi-decade pattern of borrowing, overextension, crisis, and reset.

Quantitative Easing: Central bank policy of buying government bonds to lower interest rates and inject liquidity.

Currency Devaluation: When a currency loses value relative to others, often leading to inflation.

Fiscal Discipline: Government policy of managing spending and borrowing within sustainable limits.

Sovereign Default: When a country is unable to repay its national debt.

8. REFERENCES

Dalio, Ray. How Countries Go Broke: The Big Cycle. Bridgewater Associates, 2024.

Dalio, Ray. Principles for Navigating Big Debt Crises. Bridgewater Publishing, 2018.

Reinhart, Carmen & Rogoff, Kenneth. This Time is Different: Eight Centuries of Financial Folly. Princeton University Press, 2009.

BIS Annual Report (2023): www.bis.org

IMF Fiscal Monitor (2024): www.imf.org

Final thought: Countries don’t go broke suddenly. They do so gradually, then all at once. Ray Dalio’s book tells policymakers, investors and rhe public what is really going on and how to correct the system.

If we don't understand the pattern, we will inevitably repeat it.

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AMERICA'S TWIN DEFICITS AND TRUMP'S MAGA VISION

10 May 2025

An Updated Look at America's Twin Deficits

An earlier analysis has been updated, this post can now look more specifically at how the United States might address its growing twin deficits - the fiscal deficit and the trade deficit - to "make america great again" and achieve Trump's vision.

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1. Understanding the Problem is Difficult

• For non-economists, it's hard to understand the root causes of the twin deficits.
• It's even harder to grasp what the government might be trying to do about them.
• And harder still to identify the real-world obstacles to implementing any corrective strategy.
• Nevertheless, let's make the effort, choices remain, and the right ones could delay Western decline and forestall the day when Chinese military parades march through Western capitals.

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2. The Problem: Trade and Currency Pressure

The scenario: America’s trade deficit stands at around 7% of GDP, debt-to-GDP is north of 120%. The cause of America's problems lies in these twin deficits and the dollar's reserve status. 

Eventually, lenders will step back, debt monetisation will send interest rates to the moon, interest payments will gobble up all government revenues,  the currency will collapse, hyperinflation will destroy the economy and everyone's savings will be lost. 

For the moment, we are watching a slow collapse in the world's confidence in America, but a tipping point will be reached, then there'll be a sudden, unexpected and precipitous collapse in the economy, unemployment and inflation will take off. 

Sounds dramatic? This is how all empires decline and burn out.

More precisely,

• Reducing the trade deficit to, say, 3% would help limit borrowing and stabilise interest rates.
• But it would also reduce global demand for dollars.
• The dollar, possibly overvalued by as much as 60%, would weaken.
• Capital inflows would slow.
• Asset prices would fall.
• That would not make the president or his programme popular among the donor class.

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3. MAGA vs the Donor Class

• Trump is caught politically between two groups:
  • The MAGA base who want re-industrialisation and jobs.
  • The wealthy donors who want asset prices and dollar supremacy preserved.
• To reconcile the two, the US might:
  • Pressure allies to buy Treasuries.
  • Raise tariffs.
  • Demand allies buy more US goods in exchange for protection.
  • Force companies to relocate production to the "flyover states".
• But re-shoring means painful supply chain disruptions, as we saw during COVID.

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4. Fiscal Choices and the Return of Austerity

• To balance the books, the US must choose between
  • Mandatory spending (entitlements, welfare, salaries), and
  • Discretionary spending (defence, infrastructure).
• Borrowing more when each dollar yields less than a dollar in return is a losing proposition.
• That brings the “A” word for austerity back to the centre of the debate.

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5. Strategic Retrenchment

• If foreign trade shrinks and the dollar declines:
  • Fewer global shipping routes need defending.
  • Foreign military commitments can be cut.
  • Domestic welfare and order becomes more important than global projection.

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6. Ending Wars of Choice

• If you want to avoid chaos at home due to austerity, then keep social protections in place.
• That requires scaling back foreign adventures.
• The era of expensive, unnecessary “wars of choice” must end.

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7. The Lobbies Will Not Like It

• The military-industrial complex, Wall Street, and globalist ideologues won’t accept any of this quietly.
• But if America is to survive socially and economically, it must:
  • Retreat selectively,
  • Rebuild industry,
  • Practise fiscal realism.
• The signs of collapse are there today. It may take years but once it begins - reluctance to lend a severe spike in interest rates - the collapse in confidence followed by withdrawal of support by the bond markets, will happen quickly and catch most people by surprise.

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[END]

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