Happy Friday was a gloomy, cloudy Asti.

I don’t mind the cloud cover, as we can use the rain to refill the entire Po Valley. And it reminds me of London anyway.

Like most Friday pieces, today’s is supposed to be light. This, I hope, eases you into the weekend.

But the Triffin Dilemma is also essential to the current economics puzzle. And it’ll make you sound super bright at dinner parties.

So there’s no need to memorize any of this. In fact, I’d just bookmark it so you can come back to it whenever you want.

In this edition of the Rude, we will cover the Triffin Dilemma, what it is, how it affects us today, and its possible solutions.

Who was Robert Triffin?

Robert Triffin was a Belgian-American economist known for analyzing the problems with using national currencies (like the U.S. dollar) as international reserve currencies. He was born in Belgium on October 5, 1911, and died on February 26, 1993.

Triffin earned his Ph.D. in Economics from Harvard in 1938. He worked for the Federal Reserve System and the International Monetary Fund before becoming a professor of economics at Yale, where he taught from 1951 to 1977.

Triffin is best known for his “Dilemma” or “Paradox.” It describes the conflict between short-term domestic and long-term international economic objectives for countries with global reserve currencies.

He presented this idea to the U.S. Congress in 1960.

Triffin was also instrumental in creating the European Monetary System and proposed the creation of what is now the European Currency Unit (ECU), a precursor to the euro.

What was the Triffin Dilemma?

The Triffin Dilemma is an economic concept describing the problems that arise when a national currency also serves as an international reserve currency.

The "dilemma" or conflict comes from the different economic objectives a country must try to balance when its currency is used as a global reserve currency.

On the one hand, the global economic community demands an ample supply of reserve currency for international trade and financial transactions. This means the country issuing the reserve currency (the US, in today’s case) would need to run large trade deficits, essentially supplying the world with its money.

Sound familiar so far?

On the other hand, maintaining the value and stability of the currency is also important. If the country runs large and consistent trade deficits, it may lead to a lack of confidence in the currency's value. In the long run, this could lead to a currency crisis.

Again, this is all too familiar. And it also runs right up against the debt ceiling crisis in the news today.

The U.S. must balance the global demand for dollars (which necessitates running trade deficits) with the need to maintain the value and stability of the dollar. This is the essence of the Triffin Dilemma.

It’s worth noting China doesn’t suffer from this as the yuan isn’t a reserve currency yet.

What’s the “Impossible Trinity?”

The Triffin Dilemma indeed involves a kind of "impossible trinity," but it's not the same as the one commonly referred to in macroeconomics. In the context of the Triffin Dilemma, the "impossible trinity" can be thought of as:

1. Maintaining a fixed exchange rate: A country with a global reserve currency might want to keep a fixed exchange rate to provide stability and certainty for international trade and finance. (Note: in regular macroeconomics, this point is a stable exchange rate rather than a fixed one.)

2. Free capital movement: In a globalized world, capital is often desired to move freely across borders. This can facilitate investment and economic growth.

3. An independent monetary policy: A country may use monetary policy to manage its domestic economy by setting interest rates to control inflation or stimulate growth.

However, according to the Triffin Dilemma, a country whose currency is the global reserve currency can't achieve all three of these goals simultaneously.

If it wants to maintain a fixed exchange rate and free capital movement, it can't also have an independent monetary policy. The need to provide liquidity to the rest of the world (by running a current account deficit) would conflict with its domestic monetary policy goals.

If it wants free capital movement and an independent monetary policy, it can't maintain a fixed exchange rate. Changes in interest rates would lead to capital flows that affect the exchange rate.

And if it wants a fixed exchange rate and an independent monetary policy, it can't have free capital movement. Capital controls would be needed to maintain the fixed exchange rate in the face of changes in interest rates.

This is the essence of the Triffin Dilemma, highlighting the challenges countries face when their currency is used as the global reserve currency.

Again, the Chinese are in no rush to get into this mess.

What are the Possible Solutions?

There are several potential solutions that economists and policymakers have proposed over the years:

• Multiple Reserve Currencies: The burden currently falls solely on the U.S. dollar would be distributed. For instance, the euro, yen, and yuan could play more prominent roles. This is the likeliest scenario.

• Supranational Currency: As a regional currency, the euro is a mess. Just imagine a global one!

• Central Bank Digital Currencies (CBDCs): Biden Bucks? Heaven forfend!

• Gold Standard: I would love it, but the Fed and other mainstream economists would never allow it.

• Policy Coordination: Sooner or later, this would break down, as it always does.

• Managed Floating Exchange Rates: It’ll break one day like it always does.

Each of these potential solutions comes with its challenges and trade-offs.

Speaking of the euro, Triffin’s ideas greatly impacted the project.

The Formation of the Euro

While he wasn't directly involved in forming the euro (which happened several years after his death), Triffin’s ideas and proposals greatly influenced the process.

Triffin was a strong advocate for European integration, and he believed that a common European currency would be a crucial step toward this goal.

In the 1960s and 1970s, he proposed the creation of a European reserve currency, which he called the "Europa," and a European Central Bank.

His idea was for European countries to pool their gold and dollar reserves to back this new currency.

This new currency would then serve as a common reserve currency for the European Economic Community, reducing Europe's dependence on the U.S. dollar and helping to stabilize the global financial system.

Although Triffin’s specific proposal wasn't adopted, his ideas significantly influenced the discussions around monetary integration in Europe.

The European Currency Unit (ECU), a basket of the currencies of the European Community member states, was introduced in 1979, and it served as a precursor to the euro.

The euro was eventually launched in 1999, and the European Central Bank, which Triffin had proposed, was established to manage it.

Of course, whether the euro sees out the decade is anyone’s guess.

Wrap Up

Robert Triffin was an influential and insightful economist whose “dilemma” vexes world economic policy to this day… and daily!

Now you know more about it and why U.S. debt keeps piling up. Our current monetary system makes it almost impossible for U.S. debts to shrink.

Do our young congressmen and women know anything about Robert Triffin?

I wouldn’t bet a dollar on it.

Have a wonderful and restful weekend!