What is Triffin's Dilemma?

In 1959, a Belgian economist named Robert Triffin testified to Congress about the dangers of the USD becoming the global reserve currency, after he observed what was called the "dollar glut".

Under Bretton Woods, the dollar was to be redeemable into gold, but the 'dollar glut' noted that there was an overabundance of dollars outside the US, without the corresponding amount of gold. This ultimately led to a collapse of the gold standard in 1971.

Because of being the reserve currency and the demand for dollars, the US was forced to run deficits on its current account. This means that the US was importing more than it was exporting, then financing the difference by borrowing or creating more dollars.

However, this current account deficit led to an accumulation of vastly more dollars overseas, than there was gold (which allegedly backed those dollars' value).

Balance of payments ('BOP'- the difference between money flowing into a country, vs out of the country):

The BOP has two main components:
-Current Account
-Capital Account and Financial Account

The Current Account, as previously mentioned, is primarily comprised of the Trade Balance ('BOT'), or the value of imports vs exports.

The Capital Account represents capital transfers and the transfer of non-financial assets and the Financial Account shows investment flows which include foreign direct investment ('FDI'), portfolio investment, and other capital investments into and out of the country.

As you can see, any deficit in the current account (mainly, the trade deficit), must be balanced by an equal amount of capital inflows. This is what has led to the hyper-financialization of our economy.

Post Bretton Woods, the agreement was essentially this:

"We love the power that comes with being able to wield King Dollar as a weapon so much, that we will hollow out our industrial base and ship our jobs overseas.

You will make everything we need, and we will run ever-increasing twin deficits to get you dollars for our stuff. We'll oversee the best capital markets in the world, so you can recycle those dollars back into our assets."

This is what has led to historic wealth inequality, *worse even than The Gilded Age*

This has also created, arguably, the biggest national security threat of our time, illustrated beautifully by COVID (reliance on China for PPE, medication, etc.) and the stunning lack of a functional defense industrial base (eg losing a proxy war to a country with 1/10th the GDP)

As the dollar continues to strengthen, our exports become less and less competitive, but the 'carry' for the rest of the world (especially given how strongly performing US assets are), continues to increase.

This only ends, when the dollar's reserve currency status ends.

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