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scepticus

Triffin Paradox And The New Bancor

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From Wikipedia:

The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency, to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: to maintain all desired goals, dollars must both overall flow out of the United States, but dollars must at the same time flow in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.

In August 1971, President Richard Nixon acknowledged the demise of Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.

In order to maintain the Bretton Woods system the US had to:

1) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the US Dollar was overvalued. This meant that the US had less gold as people starting converting the US dollars to gold and taking it offshore. With less gold in the country there was even more speculation that the US Dollar was overvalued.

2) run a balance of payments current account surplus to maintain confidence in the US Dollar.

Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.

In the wake of the Financial crisis of 2007-2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF. [1] [2]

This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs (IMF Special Drawing Rights) as a global reserve currency.

Dr Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes's Bancor which would have been a special international currency to be used instead of the dollar.

Everything is proceeding as Keynes forsaw.

Keynes understood much, and he even understood enough to forsee the limits to the policy people normally call keynsianism.

At some point during the global resolution of this crisis there will be a Bancor. This will presumably come to pass once (or at the same time as) asian nations start appreciating their currencies, at which point the $US reserve role will be unworkable.

After that keynes leaves us with but one prediction, that states that the future likely has more to learn from Gesell than it does from Marx. Once the Bancor is in place, there would be no real barriers to testing this final nugget of wisdom from maynard.

Edited by scepticus

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After that keynes leaves us with but one prediction, that states that the future likely has more to learn from Gesell than it does from Marx. Once the Bancor is in place, there would be no real barriers to testing this final nugget of wisdom from maynard.

:lol::lol::lol:

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the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency, to fulfill world demand for foreign exchange reserves.

Sorry, but that seems like an extremely basic failure in economic logic. If foreigners want to hold more dollars and there is a fixed supply of them, that implies a rise in the price of dollars relative to other currencies until supply=demand.

The Triffin Paradox sounds like just more of the nonsense reasoning you get when you use an elastic ruler (fiat currency) to measure success.

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Sorry, but that seems like an extremely basic failure in economic logic. If foreigners want to hold more dollars and there is a fixed supply of them, that implies a rise in the price of dollars relative to other currencies until supply=demand.

sure but you can't run a reserve currency on that basis, that is the point.

a continuation of international trade will require a reserve currency however.

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sure but you can't run a reserve currency on that basis, that is the point.

a continuation of international trade will require a reserve currency however.

Nope.

International trade tells you what the reserve currency is.

Too many smoke filled rooms of uber people in your philosphy.

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sure but you can't run a reserve currency on that basis, that is the point.

a continuation of international trade will require a reserve currency however.

If you say "reserve currency" enough times, maybe the phrase will start to mean something. People and institutions are free to hold their assets and do business in whatever currency or commodity suits them best.

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If you say "reserve currency" enough times, maybe the phrase will start to mean something. People and institutions are free to hold their assets and do business in whatever currency or commodity suits them best.

exactly. international traders (of the industrial, goods exchanging kind, not financial market makers) have historically found it necessary to have a reserve currency.

now it is the $US, before that the pound sterling, and before that the dutch guilder or Spanish Dollar (or 'piece of eight').

http://en.wikipedia.org/wiki/World_currency#Spanish_dollar_.2817th_-_19th_centuries.29

international trade using money rather than barter needs a reserve currency.

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The WCU - World Currency Unit (WCU) is an indexed unit of account (unit of account) that stands for a unit of real global purchasing power. Proposed by Lok Sang Ho of Lingnan University, Hong Kong, it was first intended to be the basis for denominating global bonds, a debt instrument that is issued globally and subscribable by people and institutions around the world. Since each unit by design represents a stable unit of purchasing power, the stipulated interest rate on WCU-denominated bonds represents a real interest rate. In principle, the common denomination of bonds by issuers from different parts of the world using the WCU, as well as the greater transparency of real interest rates, will produce more efficient capital markets, as savers and borrowers around the world converge in their understanding of what each basis point of interest means and are protected against two key sources of uncertainty, namely inflation and exchange loss risks.

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sure but you can't run a reserve currency on that basis, that is the point.

a continuation of international trade will require a reserve currency however.

Why is the supply of Dollars limited to trade deficits?

Can they not be supplied by budget deficits instead?

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Why is the supply of Dollars limited to trade deficits?

well, obviously the dollars need to get out of the US otherwise other nations and people can't hold them as reserves.

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What I mean is, surely they just need to run a capital deficit?

surely both will successively weaken the dollar?

[EDIT: and in any case, given the debt levels in the US one would expect US netities to be de-leveraging which does not bode well for creating continued outflows of dollars to buy foreign currency. My point in this thread it to show the obvious sustainability of the $US as world reserve currency, and to discuss its successor]

Edited by scepticus

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well, obviously the dollars need to get out of the US otherwise other nations and people can't hold them as reserves.

As long as the US holds foreign currency reserves, why can a balance of payments surplus and a capital account deficit (resulting from either foreign purchases of US Treasuries to finance the deficit or foreign ownership of US companies) not sustain the USD's role as a reserve currency?

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From Wikipedia:

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.

In August 1971, President Richard Nixon acknowledged the demise of Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.

It was the Vietnam War wot done it. The US only funded it by printing $$$ (they were spending $6bn a month in 1960s dollars.)

Luckily, we ar'nt mired in hideously-expensive never-ending war now!

er...

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As long as the US holds foreign currency reserves, why can a balance of payments surplus and a capital account deficit (resulting from either foreign purchases of US Treasuries to finance the deficit or foreign ownership of US companies) not sustain the USD's role as a reserve currency?

Because for BoP to be that largely positive, you're talking about using the USD as a carry trade currency for Asian investment.

When did the Yen stop being considered a reserve currency? There's your answer.

C = NG.

Edited by AvidFan

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surely both will successively weaken the dollar?

[EDIT: and in any case, given the debt levels in the US one would expect US netities to be de-leveraging which does not bode well for creating continued outflows of dollars to buy foreign currency. My point in this thread it to show the obvious sustainability of the $US as world reserve currency, and to discuss its successor]

US households and governments are deleveraging. The Government are releveraging.

The argument that you need enough Dollars floating around offshore to sustain the Dollar's role as the world's reserve currency makes sense. I do not see this supply as being under any threat.

I am not convinced that the offshore supply of Dollars is under any threat just yet (quite the contrary in fact).

Any change in the world's reserve currency will be because of a better replacement. The Euro seems to have failed that test. The Yuan is still a very immature currency. The whole "world currency" argument is a bit pointless. The UN are politically useless. The currency equivalent of the political arm of the UN would be equally useless.

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Because for BoP to be that largely positive, you're talking about using the USD as a carry trade currency for Asian investment.

When did the Yen stop being considered a reserve currency? There's your answer.

C = NG.

I am more of a finance guy than an economics guy. What are C, N & G?

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The Yuan is still a very immature currency. The whole "world currency" argument is a bit pointless. The UN are politically useless. The currency equivalent of the political arm of the UN would be equally useless.

I think that is wrong.

The BIS functions perfectly well as the central banks central bank.

Needs will align. The US needs to drop its reserve currency status because it is hollowing out their economy. The US can't put their house in order while they retain reserve status.

Everyone else needs a reserve currency they can trust long term. There is no one candidate as you point out and anyone that does step up will get their economy hollowed out pretty quick. That says bancor to me.

The euro farce is going to move this schedule along at quite a clip from this point on I would say.

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I am more of a finance guy than an economics guy. What are C, N & G?

C = current account deficit

N = national debt as a fraction of GDP

G = nominal growth rate.

If you can't devalue your national debt at a nominal "growth" rate equal to the amount of new wealth you're losing to the rest of the world (your current account deficit), you're fecked.

Basically, the US has to grow at 6% in nominal terms to afford a 6% current account deficit.

Which it ain't.

Hence, N is going over 1.0, i.e., debt as a percentage of GDP is going over 100%.

They can't stop it.

Edited by AvidFan

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I think that is wrong.

The BIS functions perfectly well as the central banks central bank.

Needs will align. The US needs to drop its reserve currency status because it is hollowing out their economy. The US can't put their house in order while they retain reserve status.

Everyone else needs a reserve currency they can trust long term. There is no one candidate as you point out and anyone that does step up will get their economy hollowed out pretty quick. That says bancor to me.

The euro farce is going to move this schedule along at quite a clip from this point on I would say.

The BIS lead the global Basel capital adequacy regime. To my mind, the capital adequacy regime in Basel I and Basel II is what got us into this whole mess in the first place.

The BIS and the Basel process are simply not credible. If they cannot manage a global bank capital regime, how can we trust them to run a global reserve currency.

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C = current account deficit

N = national debt as a fraction of GDP

G = nominal growth rate.

If you can't devalue your national debt at a nominal "growth" rate equal to the amount of new wealth you're losing to the rest of the world (your current account deficit), you're fecked.

Basically, the US has to grow at 6% in nominal terms to afford a 6% current account deficit.

Which it ain't.

Hence, N is going over 1.0, i.e., debt as a percentage of GDP is going over 100%.

They can't stop it.

And by this rule, Japan can afford its debt at 200% of GDP and negative nominal growth rates because it runs a trade surplus?

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The BIS lead the global Basel capital adequacy regime. To my mind, the capital adequacy regime in Basel I and Basel II is what got us into this whole mess in the first place.

I go with keynes and zhou and say that it is using a national currency as world reserve currency that got us into this mess. Without a $US reserve the imbalances and volume of international capital flow could never have gotten so large, the US would never have been able to fund the iraq war and the chinese would have been unable to engage in mercantilist practices.

The BIS capital adequacy regime would have been fine without such huge national imbalances.

The world would have been a better place than it is now. However I expect that the yanks will do the right thing in the end, as they say.

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And by this rule, Japan can afford its debt at 200% of GDP and negative nominal growth rates because it runs a trade surplus?

what negative nominal growth rates? its been mostly positive (with some notable recessions) since 1995.

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The world would be a better place if the fiat addicts stopped adding epicycles to their models and quietly packed up and went home. Each country (or currency union) to have its own central bank, each central bank to hold the supply of base money constant, market forces to determine interest and exchange rates. No monetisation of government debt, no hyperinflation, rising interest rates bursting credit bubbles before they get to the insane size this one has, time coordination of investment and consumption, no profits from being a privileged institution able to get its hands on fresh zero interest money before it creates inflation in the wider economy.

Too simple for some I suppose.

Quick, somebody think of a new colour we can paint the printing press so we can disguise what we're doing for a few more years.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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