Triffin Dilemma: Fact or Fiction?

Hopefully this episode helps you understand the argument people are making and if it holds water next time the invoke the Triffin Dilemma.

My interest in the Triffin Dilemma started several months ago. Little did I know then that I was trying to debunk an ahistorical extension of the original Triffin argument. I initially came to this conclusion:

The problem with using Triffin in an argument about a dollar collapse is

1) it's ahistorical and 2) there doesn't need to be a capital account deficit in the US and surpluses in other countries for them to acquire dollar reserves.

The problem with using Triffin in an argument about a dollar collapse is

1) it's ahistorical and 2) there doesn't need to be a capital account deficit in the US and surpluses in other countries for them to acquire dollar reserves.
— Ansel Lindner (@AnselLindner) December 21, 2020

In this episode, I try to provide you with a basic understanding of the original Triffin Dilemma from Robert Triffin in 1959, and of why the modern extensions of this famous prediction are poor facsimiles. I provide tons of useful links below as part of the show notes.

Balance of Payments

It all comes down to the Balance of Payments for a country which issues the global reserve currency. The two main parts of the BoP are the current account and the capital account (including the financial account which we don't talk about). These two halves of the BoP must balance.

The current account consists main of a balance of trade. Is the country running a trade surplus or a trade deficit. Other factors are things like foreign aid which we don't have to consider because it's very small compared to the trade balance.

The capital account consists of flow of assets and liabilities for the country as a whole. When a foreigner buys a US asset (or a dollar denominated asset) this is a positive input for the capital account. In the reverse, when a US person or entity buys an asset in a foreign country it is a negative input for the capital account.

Remember, the current account must be offset by the capital account. Therefore, if the US has a trade deficit of say $500 billion, they must have a capital account surplus of $500 billion.

Triffin and Trade Surpluses

When Triffin was writing the original Triffin Dilemma, in the 50's and 60's, the US ran massive trade surpluses. This means the capital account was negative - the US was losing assets abroad, or more accurately gaining liabilities abroad. Triffin was concerned that when the dollar denominated value of foreign liabilities surpassed that of the US's gold stock which backed the dollar at the time, there would be a run on the gold stock by those foreigners. They would sell their dollar denominated assets and take delivery of the gold, portending the doom of the US dollar peg.

Current Account and Fiscal Triffin

The US dollar did end up going off the gold standard in 1971, but not for the reasons Triffin predicted. Despite being accidently right, this form of argument became very popular in economics. Today, we can see two main extensions to the Triffin Dilemma, "current account Triffin" which is exactly the opposite of the original theory, and "fiscal Triffin" which is about global demand for US debt to cause the US to run unsustainable fiscal deficits.

The current account Triffin is the most used by inflationists to support their dollar bear views, and, well, it's totally false. It reverses cause and effect, and lacks a clear systemic risk.

The fiscal Triffin is more sound, but it is also false. It fails to consider other forms of safe assets like Mortgage Backed Securities and other derivatives. These are inferior to US Treasuries, but they are still widely used in their place (with an associated premium surely). Fiscal Triffin also lacks a clear systemic risk to the financial system, so is unlike the original.

Hope this helps.