The Triffin dilemma (sometimes Triffin paradox) is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who noted how the country whose currency is the global reserve currency, that foreign nations wish to hold as foreign exchange (FX) reserves, must be willing to supply the world with an extra supply of its currency in order to fulfill world demand for these FX reserves, leading to a trade deficit.[1]
The use of a national currency, such as the U.S. dollar, as global reserve currency leads to tension between its national and global monetary policy. This is reflected in fundamental imbalances in the balance of payments on the current account, as some goals require an outflow of dollars from the United States, while others require an inflow.
The Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called 'Bancor'. Historically, the IMF's SDRs has been the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such, the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars.
^While named for Triffin, "(...) a virtually identical warning had been sounded nearly two decades earlier by Feliks Młynarski in his 1929 book. «The steadily increasing accumulation of foreign exchange reserves,» Mlynarski wrote, «is the most essential feature of the gold exchange standard.» But as the volume of the foreign deposits grew large relative to the gold stocks of the reserve country, confidence in the convertibility of the reserve currencies inevitably would ebb" (Barry J. Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford University Press, New York & Oxford 1995, page 203). Also "French economist Jacques Rueff described the fatal weakness of foreign-exchange reserves in a 1932 lecture." John D. Mueller, Wall Street Journal, October 8, 2018, page A19.
The Triffindilemma (sometimes Triffin paradox) is the conflict of economic interests that arises between short-term domestic and long-term international...
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