The Paradox of Triffin’s Dilemma
NOTE:
The information for this summary brief has been taken from the
article written by James Rickards and published on The Daily Reckonings
website. This article does an exemplary job and all credit goes to the author James Rickards.
[URL: http://dailyreckoning.com/triffins-dilemma-and-the-future-of-sdrs/]
[URL: http://dailyreckoning.com/triffins-dilemma-and-the-future-of-sdrs/]
BRETTON WOODS
Triffin’s dilemma arose from the Bretton
Woods system established in 1944. Under that system, the dollar was pegged to
gold at $35.00 per ounce. Other major currencies were pegged to the dollar at
fixed exchange rates. The architects of the system knew that these other
exchange rates might have to be devalued from time to time, mostly because of
trade deficits, but the devaluation process was designed to be slow and
cumbersome.
A country that wanted to devalue (for
example, the U.K. in 1967) first had to consult with the International Monetary
Fund, IMF. The IMF would typically recommend structural changes, to fiscal
policy, tax policy and other areas designed to cure the trade deficit. The IMF
also stood ready to offer bridge loans of hard currency to help the deficit-hit
country withstand temporary stresses while the structural changes were
implemented. Only if the structural changes failed and the trade deficits were
persistent would the IMF allow devaluation.
That was the process for countries other than
the U.S. As far as the U.S. was concerned, the link between gold and the dollar
was fixed for all time and could never be changed. The dollar/gold link was the
anchor of the entire system. This fixed link between the dollar and gold made
the dollar the most prized reserve currency in the world. That was the hidden
agenda of Bretton Woods.
PRE-BRETTON WOODS
With the
dollar as the main reserve currency, U.K. pounds sterling, a competing reserve
currency, would eventually fall by the wayside.
The U.K.
relied on Imperial Preference among its trading partners in the British
Commonwealth to gain trade surpluses, and also relied on the willingness of
those Commonwealth partners to hold sterling in their reserves. The Bank of England
assumed Commonwealth members would not ask to convert the sterling to gold.
Imperial Preference came under attack by the General Agreement on Tariffs and
Trade, the GATT, which was also part of Bretton Woods. (Today, GATT is known as
the World Trade Organization, WTO.)
Bretton
Woods was a one-two combination punch designed by the U.S. to destroy the
British empire. GATT undermined Imperial Preference. The dollar-gold link
undermined sterling. It worked. The U.K.’s trade deficits persisted, and the
Commonwealth partners demanded their gold. Eventually, the pound sterling was
devalued, and the empire dissolved. It was replaced by a new age of U.S. empire
and King Dollar.
TRIFFIN'S PARADOX
There was only one problem, and Robert
Triffin pointed this out. If the dollar was the lead reserve currency, then the
entire world needed dollars to finance world trade. In order to supply these
dollars, the U.S. had to run trade deficits.
The U.S. ran trade deficits, the world got
dollars and global trade flourished. But if you run deficits long enough, you
go broke. That was Triffin’s dilemma. Any system based on dollars would eventually
cause the dollar to collapse because there would either be too many dollars or
not enough gold at fixed prices to keep the game going. This paradox between
dollar deficits and dollar confidence was unsustainable.
This system did break down in the 1970s. The
solution then was to abolish the dollar-gold peg in 1971, and demonetize gold
in 1974. But there was a third leg of the stool invented in 1969 — the IMF’s
Special Drawing Right, SDR.
PETRODOLLAR & SDR
The SDR was
a new kind of world money printed by the IMF. The idea was that it could be
used as a reserve currency side by side with the dollar. This meant that if the
U.S. cured its trade deficit, and supplied fewer dollars to the world, any
shortfall in reserves could be made up by printing SDRs. In fact, SDRs were
printed and handed out repeatedly during the dollar crisis from 1969–1980.
Then a new
King Dollar age was started by Paul Volcker and Ronald Reagan. Under the new
King Dollar system, U.S. interest rates would be high enough to make the dollar
an attractive reserve asset even without gold backing. Remember those 20%
interest rates of the early 1980s? Henry Kissinger also persuaded Saudi Arabia
to keep pricing oil in dollars. This “petrodollar deal” meant that countries
that wanted oil needed dollars to pay for it whether they liked the dollar or
not.
The Arabs
deposited the dollars they received in Citibank, Chase and the other big banks
of the day. The bankers, led by Wriston at Citibank and David Rockefeller at
Chase, then loaned the money to Asia, South America and Africa. From there, the
dollars were used to buy U.S. exports like aircraft, heavy equipment and
agricultural produce. Suddenly, the game started up again, this time without
gold. This new Age of King Dollar lasted from 1980–2010.
Still, it was all based on confidence in the
dollar. Triffin’s dilemma never went away; it was just in the background
waiting to re-emerge while the world binged on new dollar creation and forgot
about gold. The U.S. ran persistent large trade deficits during this entire
30-year period as Triffin predicted. The world gorged on dollar reserves with
China leading the way in the 1990s and early 2000s.
CURRENCY WAR
The new game
ended in 2010 with the start of a currency war in the aftermath of the Panic of
2008. Trading partners are again jockeying for position as they did in the
early 1970s. A new systemic collapse is waiting in the wings.
The weak
dollar of 2011 was designed to stimulate U.S. growth and keep the world from
sinking into a new depression. It worked in the short run, but now the tables
are turned. Today, the dollar is strong, and the euro and yen have weakened.
This gives Japan and Europe some relief, but it comes at the expense of the
U.S., where growth has slowed down again.
The new
dollar-yuan peg with China has also contributed to a slowdown in China. There’s
just not enough global growth to go around. The major trading and finance
powers are cannibalizing each other with weak currencies. Soon the U.S. and
China may devalue relative to Europe and Japan, but that just moves the global
weakness back to them.
Is there no
way to escape the room? Is there no way out of Triffin’s dilemma?
DILEMMA SOLVED
A new gold
standard might be one way to solve the problem, but it would require a gold
price of $10,000 per ounce in order to be non-deflationary. No central banker
in the world wants that, because it limits their ability to print money and be
central economic planners. Is there an alternative to gold?
There is one other way out. That’s our
old friend, the SDR. The brilliance of the SDR solution is that it solves
Triffin’s dilemma.
Recall the
paradox is that the reserve currency issuer has to run trade deficits, but if
you run deficits long enough, you go broke. But SDRs are issued by the IMF. The
IMF is not a country and does not have a trade deficit. In theory, the
IMF can print SDRs forever and never go broke. The SDRs just go round and round
among the IMF members in a closed circuit.
Individuals
won’t have SDRs. Only countries will have them in their reserves. These
countries have no desire to break the new SDR system, because they’re all in it
together. The U.S. is no longer the boss. Instead, you have the “Five Families”
consisting of China, Japan, the U.S., Europe and Russia operating through the
IMF.
GLOBAL FINANCIAL RESET
The only losers are the citizens of the IMF
member countries who will suffer local currency inflation.
This SDR
system is so little understood that people won’t know where the inflation is
coming from. Elected officials will blame the IMF, but the IMF is
unaccountable. That’s the beauty of SDRs — Triffin’s dilemma is solved, debt
problems are inflated away and no one is accountable. That’s the global elite
plan in a nutshell.
We never
take our eye off the IMF and its plans to expand the use of SDRs. The IMF will
include the Chinese yuan in the SDR basket over the next 12 months to make sure
the Chinese are “on the bus” when the endgame begins. That’s an important step
in the SDR process.
