The Triffin Dilemma

30.08.2018 |

Episode #6 of the course Brain-twisting paradoxes by John Robin


Are you ready for more paradoxes?

Today, as promised, we are going to return to brain-twisters of the money variety. In fact, you’re going to recognize a name from the paradox of thrift: John Maynard Keynes, a pioneer of this other sort of problem. In fact, it was in more deeply considering the ramifications of the paradox of thrift in currency reserve funds that Keynes anticipated this further problem.


Short-Term vs. Long-Term Contradiction

We saw on Day 4 when considering the paradox of thrift that small-picture economic thinking can eclipse the bigger picture.

Let’s stick with our example in considering how this might extend to short-term vs. long-term spending.

Imagine you’re an entrepreneur and you have a business idea that you’re certain will pull ahead eventually, but only if you can invest yourself in it fully and pour in all required resources to developing this business to the point where it is profitable.

The only way to do this is with overhead (advanced money) or debt. Assume you don’t have any savings, and in fact, you must take out numerous credit cards.

Now, in general, maxing out credit cards is not a good idea. But what if that’s what it takes for you to cover your basic living expenses and conservatively reduced fees to get your business operational?

For example, the founders of Airbnb chased their dream far, taking out credit card after credit card after credit card to keep going and going, even after meeting failure after failure after failure. They saw eventual success, and eventually when it came, it amounted to a $25 billion company. Similarly, the founder of Smashwords, Mark Coker, was so in debt, he was on the brink of losing his house before he eventually pulled ahead to found one of the central hubs for self-publishing authors.

The point here is similar to the paradox of thrift: Not only should one sometimes consider how savings can be put into economic action, but one should also consider how debt can be used in a similar manner.


The Origin of the Dilemma: Robert Triffin

This paradox, known as the Triffin dilemma, originated in the 1960s as an analysis of global reserve. This is a pool of spending where a group of countries will supply money to cover trade deficits.

The principle is similar to our individual example, except here, imagine industries and countries instead of running your own business. Focusing on long-term gains, countries and industries are able to draw on a debt so they can cover deficits when they arise. The countries supplying this income do so by creating a global reserve.

This process, in principle, has allowed world economics to prosper, though it hasn’t been without fault. In the 2007-2008 financial crisis, for instance, the US, who supplies the global reserve currency for trade, went through an extreme economic crisis due to the deficit. This might be thought of as akin to what entrepreneurs, in our earlier example, experience during the make-or-break point in their business when debt is reaching its limits and if the company doesn’t finally pull ahead, it will go bankrupt.

It’s important to keep this in mind too, as a flip side to Triffin’s dilemma: Success stories are a great demonstration of how the key to long-term economic success is often to dip into a fund (often as debt) to get to the place where a business can take off.

That said, many businesses don’t succeed, so this dilemma is well named as a dilemma—rather than a guarantee. The same can be said of countries or industries: Trade dynamics can fluctuate due to political or sociological factors within a country or entity.

Just like shrewd economists and investors, one must assess the big picture and in doing so, see past what seems a short-term falloff. Within the heart of this dilemma is the true power behind bringing to life something that would otherwise be impossible if one never takes risks.

Tomorrow, we’ll cover a very different sort of paradox, one in the realm of science. How hot is your cold water? I’ll leave you to think that over for the rest of the day.


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Recommended reading

How Airbnb Was Founded—the Triffin dilemma at its finest.


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