Triffin dilemma

Episode #6 of the course “Brain-twisting paradoxes”

The Triffin dilemma, or Triffin’s paradox, is the conflict of economic interests that arises when a nation’s currency also serves as the international reserve currency. In this scenario, there could be differing objectives between short-term domestic policies and long-term international policies. The Triffin dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s.

As Triffin pointed out, the country whose currency foreign nationals wish to hold (the international reserve currency) necessarily needs to supply the world with a surplus in order to establish a risk-free reserve currency (foreign exchange reserves), thereby creating a trade deficit. In doing so, however, the supplier country becomes more indebted to foreign nationals until the risk-free asset ceases to be risk-free, thereby defeating the system.

This is a conflict of interest, because domestic citizens of that country would prefer to see trade gains. In other words, they don’t want their country to be continually losing money, which in essence is what needs to happen to supply enough money for the international community’s trade reserves.

In the short term, a trade deficit does have advantages for the country that supplies the currency. It legitimizes its product—the currency. But over the long run, continued deficits decrease value and credibility of the currency. The Triffin dilemma happened to the United States following World War II when the U.S. dollar was decided to be the international reserve currency. In 1959, the amount of U.S. dollars in circulation eventually exceeded the amount of gold backing them up. This resulted from a combination of money flowing out of the country through the Marshall Plan, the U.S. military’s budget, and the natural occurrence of Americans buying goods made overseas.

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