Triffin Revisited: Why the Unwinding of the Dilemma Matters

There is a well-known dilemma that exists for the country that “owns” or operates the global reserve currency. Since global trade and many capital account transactions are settled in the reserve currency, it is incumbent on the economy that provides the reserve currency to ensure that it is a net exporter of its currency so as to accommodate global growth and hence the growing need for reserves and international settlement funds. During the Bretton Woods era this requirement was identified by then US Treasury Secretary Triffin as implying that the US needed to run persistent current account deficits to supply an ever-increasing supply of dollars to the world.

This situation did, though, imply that the US would also find itself amassing substantial liabilities to the foreigners that owned these claims on the Federal Reserve (that is, dollars), which he identified as representing a potential problem for the US itself. The Triffin Dilemma for the US came to be defined by “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” (not that this prevented the US from exploiting the situation during the Vietnam War). 

Triffin was, though, writing in a world in which there were stringent capital controls and we would argue that when considering the “growth in the supply of the reserve currency to the global system” one should include not just the current account balance but also the reserve currency country’s exports of capital. In effect, we are suggesting that the purchase of a security by a US resident in a foreign country is just as capable of providing dollars to the rest of the world as is the purchase of another country’s exports by a US-based entity. Crucially, if we employ this definition, we find that between the mid-1950s and the late 1990s the supply of dollars from the US to the rest of the world essentially expanded by the same dollar amount that the US economy was itself expanding.

There were terms in which the supply was a little greater (for example, the early 1970s, mid-1980s and the mid-1990s) and periods in which it was perhaps a little slower (early 1980s, early 1990s) but in general the two series were reasonably well correlated until 1999. Thereafter, though, it would seem that Greenspan’s response to the Asian Crisis/LTCM debacle and the subsequent dramatic breakdown in the link between the rate at which the US was exporting dollars and the growth in the economy. By the mid-2000s, the US was exporting dollars at almost six times its usual rate relative to the growth in the country’s GDP.