Wednesday, January 14, 2009
The Triffin Dilemma of supplying the world’s reserve currency
First noted by Yale economist Robert Triffin. In a famous warning to Congress in 1960, Triffin explained that as the supplier of the world's reserve currency the United States had no choice but to run persistent current account deficits...The United States is not the first country to discover the perils..The United Kingdom experienced chronic instability during in the 1918-1939 period in part because the large outstanding "sterling balances" overseas. Maintaining sterling's convertibility into gold and the integrity of the sterling area required.."mutually assured destruction" (the United Kingdom would be forced off gold and the Dominions would find the value of their sterling holdings cut)...The United States and China are now locked in a similar embrace.