Tuesday, June 7, 2011
The “TRIFFIN DILEMMA" and QE2
When a country issues the world single reserve currency, it takes the risk to run huge deficit and go bankrupt. Robert Triffin first articulated this observation in 1947.The “Triffin Dilemma” was born. Robert Triffin was a Belgian-American economist at Yale University (1951-1977) and a member of the Federal Reserve Board, serving as chief of the Latin American section of the Board of the Federal Reserve System from 1942 to 1946. In October 1959, as a strong critic of Bretton Wood system, Robert Triffin testified in Joint Economic Committee of US Congress. He explained that as the global economy expanded, demand for reserve assets will increased, the United States will issue a lots of assets: government bonds. The more bonds it issues, the less likely it will be able to honor its debts.
From surplus nation, the USA is now a deficit nation with a debt evaluated at $14.294 trillion, $128,886 per taxpayer and $55 trillion in unfunded obligations for programs such as Social Security, Medicare and Medicaid. In this multipolar world, the Obama administration is challenged by 2 problems: le world financial crisis and the “Triffin dilemma” or “Triffin Paradox”. The U.S government hit the debt ceiling on May 16th, 2011 and by August 2nd, 2011 the United States will no longer be able to pay its bills in full if congress do not raise the country debt ceiling. The debt-to-GDP ratio is an excellent indicator of a country's economic health. The U.S. debt to GDP ratio is about 98%. We are 3rd in the 10 nations with the biggest GDP in the world. Japan is 1st with 225.9%, Italy is 2nd with 118.4%. China, the second largest economy in the world has 19.1 %. The US is not far from Greece (130.2%) and Iceland (115.6%).
The Financial crisis of 2008 must be a catalyst for a profound reform of global financial system. Author of the book ““Gold and the Dollar Crisis: The Future of Convertibility” (1960) and many other books, Robert Triffin was a critic of the Bretton Wood system and a strong supporter of a reform of the International monetary system. On this subject, he said:“ Ideally, from a world point of view, we should base the system fully on the SDR* or, preferably on reserve deposits with the IMF because the SDR is still too dependent on the dollar”. In November 1960, he continued his thought: "A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. Dollar." John Maynard Keynes has theorized this concept of supranational currency in 1940-1942. He called it: Bancor.
In a report dated April 13, 2010: “Reserve Accumulation and International Monetary Stability”, the IMF follows Keynes recommendation with the adoption the world global currency “Bancor”: “A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.” (Supplement 1, section V). The market for SDR-denominated assets will be huge in the new world international monetary system.
The fall of the Berlin Wall in 1989 was a defining moment in the shift of the world economic center of decisions. The model of a world dominated by one super-power was not viable. We are now in a multipolar world where world economic growth and wealth creation are constantly moving from the West to the Economies in Convergence (EIC). At the beginning of the new millennium, many countries and international institutions like China, Russia, The United Nations, called for an alternative to the dollar as a reserve currency. Economic growth in the EIC’s is creating more demand for reserve currency. The satisfaction of this demand by a massive outflow of US reserve currency weakens the value of the dollar. Today, many countries are using The EURO, YEN and YUAN as reserve currency. The strategy is a protection against the declining value of the US dollar. This is a fundamental element of the “Triffin Dilemma”: the disequilibrium in the world single reserve Currency inflows and outflows.
President Obama came to power in a moment of maturation of the “Triffin Dilemma”, 52 years after Triffin warning to the US congress: The US dollar is losing value, and the conflict between the US short term economic objective and long term economic objective is exacerbated. QE2, The Federal Reserve's second round of "quantitative easing" is very good for Wall Street paper wealth and investors, but not good for the big majority of the American families. Unemployment is at 9.1% and in May 2011, employers add just 54000 to payrolls. Moody's says it may downgrade US debt if the debt limit isn't increased and a double deep recession is a possibility. We are one year from the presidential election of 2012.It should not be a surprise if the Republican Party and the Tparty refuse to raise the debt ceiling to score a political point against Obama. The USA will then default on his debt and the world economic crisis will be more complicated. The boomerang effect of the republican political thinking and action will help Obama win a second term in 2012.
In the interest of the United State of America and the rest of the world, a new International Monetary System is the best solution to the world financial crisis. The “Depoliticization” of money and credit will be key in the new international monetary system. The real value of money and credit should not be determined by partisan political opinion and ideology; it is a recipe for instability and lack of efficiency.
"Providing reserves and exchanges for the whole world is too much for one country and one currency to bear."
(
Henry H. Fowler
U.S. Secretary of the Treasury - 1965–1968 - Participated in the 1967-68 in the creation a new international monetary reserve system called "Special Drawing Rights”.)
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*Special Drawing Rights: New World Reserve Currency created in 1969 by IMF. SDR is fully convertible since September 2009.
Aboubacar Sissoko
Los Angeles
