What is the Triffin Dilemma and why should you care?
The US Dollar may lose its status as the global reserve currency, and that might be a good thing for the United States.
To understand this, let’s break down the paradox called the Triffin Dilemma, and why this is relevant now.
When one nation’s currency is dominant in global trade (country A), other countries price the products they export in that reserve currency.
This makes it advantageous for country B to have a weaker currency because their goods will be more affordable to people in country A.
Over the past few decades, manufacturing has moved out of the US to other nations with weaker currencies.
The US companies can pay those employees less, and run manufacturing plants in those countries more inexpensively (overhead). The US dollars go much further in country B.
The US has been mainly exporting dollars as a result of reserve currency status, which has hurt the group of workers with manufacturing skills.
US corporations who are focused on profit have difficultly justifying manufacturing in the US to their shareholders.
The countries with weaker currencies who export a lot of goods tend to hold their profits (surplus) in the stronger currency (A).
As a result, those countries have a vested interest in the reserve currency staying strong so that their reserves have more value.
This leads to the dilemma: weighing the advantages and disadvantages of being a reserve currency.
What are the advantages?
(a) goods are priced in your currency so you aren’t impacted by volatile foreign exchange rates
(b) issuers of reserve currencies pay lower rates to borrow money
(c) political power. The issuers of reserve currencies can sanction other nations
The benefits of being a reserve currency must be balanced against the impact on trade to determine the impact on a country issuing that currency.
This is one reason why a basket of currencies, or a digital asset like Bitcoin or XRP, are appealing.
A nation-independent currency would relieve nations, especially those who export goods, from the negative impact on their economy.
One response to “The Reserve Currency Dilemma”
[…] is known as the Triffin Dilemma and is why US exports have declined significantly since the 1970s (when the dollar came off gold […]