The ugly side of Triffin, by Alasdair Macleod

How a reserve currency can turn into an inflationary nightmare for the reserve currency country. From Alasdair Macleod at

Following the Lehman crisis, it became fashionable to cite the Triffin dilemma as justification for inflationary US policies and why they would not undermine the US dollar in the foreign exchanges.

But far from being simply a justification for continual dollar trade deficits, Triffin correctly described a situation which was bound to lead to problems for a reserve currency. This article describes how his analysis was borne out by events during the Bretton Woods Agreement, and the lessons that can be learned from it with respect to the current situation facing the US dollar.


In the years following the Lehman crisis, it became popular to refer to the Triffin dilemma. Commentators usually invoked it as an explanation of a strong dollar despite a worsening trade deficit and even for the encouragement of more dollar inflation to satisfy foreign demand. According to Triffin, being the reserve currency and the medium for pricing commodities and international trade, foreigners always needed dollars. Therefore, the US could continue to run a trade deficit without damaging the exchange rate.

At that time, the world was recovering from what many economists have since named as the great financial crisis. It originated in the US residential property market which had boomed on the back of unfettered bank credit expansion and a growing alphabet soup of collateralisations. Central banks, who were meant to be the ringmasters controlling the expansion of banking activities were caught unexpectedly and disgracefully unaware of the expansion of off-balance sheet bank lending. And their understanding of the dangers of securitisations of securitisations of liar loans upon which the marginal pricing of residential property depended was sadly lacking.

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