- Triffin’s dilemma…
- When an exorbitant privilege is also a curse…
- April 15 is now under a week away! If you haven’t yet, you need to learn about this loophole that can LEGALLY save you thousands in taxes this year
Dear Reader,
The president — famously or infamously — is out to even the scales of trade.
He claims other nations are “taking advantage of the Good OL’ USA!”
They are sending in far more goods to the United States than they allow the United States to send into them.
Thus United States manufacturers are denied open access to foreign markets.
And the United States economy therefore suffers. With it, the American worker.
I hazard there is a certain degree of justice here.
Existing tariff arrangements owe largely to the post-World War II global economic order.
War had reduced many of the world’s developed economies to rubble.
The United States extended them favorable trade arrangements to get them up and going again.
That world exists no longer. Yet many of the trade arrangements do — or perhaps did until April 2.
Yet has the president considered Triffin’s Dilemma?
The Burden of a Global Currency
Belgian economist Robert Triffin argued decades ago that:
If a nation’s currency is to put in double duty as a global reserve currency, the issuing nation must print drowning amounts of it — far beyond its national needs.
Why? To keep global trade going along.
Japan, for example, sells an automobile in the United States. In exchange for the auto it receives dollars.
These dollars add to Japan’s currency reserves.
Thus it is not true that the United States does not export. It does in fact export. It exports dollars.
A failure of the issuing nation’s printing press would deprive the world of required currency reserves.
And the gears of global commerce would grind down.
Why then the dilemma?
The Dilemma
It is a dilemma because the nation ladling out the reserve currency must run chronic current account deficits.
This nation must import far more than it exports so that the world can acquire its requisite reserves.
Should this nation post trade surpluses it would starve the world of its currency.
Yet Mr. Triffin argued these chronic deficits would eventually bring down tremendous weights upon the currency.
That is, the currency’s vastly excessive supply would fatally undermine its value.
This currency would plunge toward nothingness.
Interest rates would go skyshooting as the world emptied overboard the increasingly worthless paper.
Hence… Triffin’s dilemma.
The Dilemma in a Nutshell
Rowe Price in summary:
- Testifying before Congress in 1959 and 1960, Belgian-American economist Robert Triffin argued that there was a long-term crisis brewing for the country serving as host to the world’s reserve currency…
- Importantly, what Triffin understood is that the world’s reserve currency is held by other nations as foreign exchange (FX) reserves to support international trade. And as the global economy continued growing there would be an insatiable natural demand for the reserve currency.
- To meet this voracious demand required the host of the reserve currency to run persistence trade deficits to make the arrangement work. Inevitably, the longer the trade imbalance persisted, the more severe the credit quality degradation of the reserve currency host over time would be.
- This paradox, known as “Triffin’s Dilemma,” exposed the inherent contradictions in a global system where one currency served as both a national and global reserve currency.
Thus issuing the world’s leading reserve currency is at once a blessing — and a curse.
A blessing because the issuer need not balance its trade.
The “Exorbitant Privilege”
In August 1971, old Nixon banged shut the gold window.
The gold standard was a mere rump in its dying days. It nonetheless kept the balance of trade in a range.
A nation running a persistent trade deficit risked depleting its gold stocks. The unbacked dollar — the ersatz dollar — removed all checks.
America no longer had to produce goods to exchange for other goods… or fear for its gold.
“By the sweat of your brow you will eat,” Genesis instructs us.
Under the new dollar standard, America could eat by the sweat of foreign brows — without perspiring one bead of its own.
Scraps of paper, rolling off an over-labored printing press, were its primary production.
Ream upon ream went abroad in exchange for goods — real goods.
Former French president Valéry Giscard d’Estaing labeled it the “exorbitant privilege.”
When a Privilege Is Also a Curse
Yet the “exorbitant privilege” is likewise a curse — most notably when the issuing nation no longer outpaces the world economically.
Economist Stephen Miran:
- To export dollars and dollar assets, American consumers must live beyond their means (importing more than they export) and provide net demand — and thus economic growth — to the world.
- If the American economy constitutes a large share of the global economy, these borrowings for the sake of reserve provision won’t affect Americans. But as the American economy has shrunk from almost 40% of global GDP in the 1960s to about 24% today, the borrowing necessary to supply reserve assets to the globe has become larger as a share of domestic GDP.
- As the U.S. economy gets smaller relative to everyone else, it will grow increasingly indebted, and run ever-larger trade deficits, to keep supplying reserve assets. That process will drive instability in the U.S. economy — and cause the dollar to lose its attractiveness.
More:
- The reserve demand for dollars results in a currency persistently too strong for domestic industry to remain internationally competitive. Americans… have exported financial assets in such a way as to hollow out significant portions of the real economy.
- The dollar might be fairly valued from models of international finance due to the reserve demand for our debt, but it has clearly traded at levels far too high to balance international trade.
- The result: a domestic manufacturing sector that is a shadow of its former self and socioeconomic blight across former manufacturing hubs.
No Way Out?
Thus the United States hangs upon the hooks of Mr. Triffin’s mighty dilemma.
It benefits in multiple ways from the exorbitant privilege.
Yet it must plunge deeper into debt and deficit to maintain that exorbitance… which eventuates in the very collapse of the privilege.
A dilemma indeed. And the United States is to its neck with it.
In January its overall trade deficit attained record dimensions.
Meantime, its national debt runs at a delirious $36.7 trillion.
How the United States wriggles out of this dilemma… I do not know.
Brian Maher
for Freedom Financial News
