The Triffin Dilemma


I was thinking about money in today's world, particularly whether we can achieve all three functions: unit of account, medium of exchange, and store of value.

The store of value function seems to be failing most for our global reserve currency, so let's focus on the other two. Even though we seem to have no problems with unit of account and medium of exchange, it's actually not trivial to maintain these functions globally.

Imagine the times right after WWII when the decision was made to use USD as the global reserve currency. Great idea in theory - but how do you supply the entire world with a common money?

Printing dollars and allocating them to other countries' balance sheets might be one approach, but given the immense global demand for money, this would immediately lead to hyperinflation.

The chosen alternative was much more elegant: supply the world with dollars by buying goods from all over the world. Unfortunately, this solution isn't perfect either, as it means the reserve currency country must run a permanent trade deficit.

This is what the Triffin Dilemma is ultimately about - the country issuing the global reserve currency needs to run increasingly higher trade deficits to meet global demand for its currency.

Here's how the trap works:

  1. Trade deficits become necessary to supply dollars globally
  2. These lead to budget deficits as the government finances the imbalances
  3. Over time, this accumulates into unsustainable levels of debt
  4. Meanwhile, industrial capacity gets offshored to trading partners
  5. Eventually, this creates a national security threat - high debt with diminished military and industrial capacity

This is essentially where we are right now.

I used to think that irresponsible debt levels were purely driven by greedy politicians unable to see beyond their time in office. The Triffin Dilemma shows that part of this story is actually a structural problem on an international scale - and the world has not yet found an answer to it.

But we're clearly running out of time, and an answer must come. Either we get a new global currency doomed to repeat the same cycle, or we find some truly new solution.

The question is: what will that solution look like?