Transcription
Trin's dilemma: What is it? Whose problem is it? How big is the problem, and what can be done to fix it? That's what we're going to talk about today. And the reason we're going to talk about this today is it's starting to come up more and more. And the reason it's starting to come up more and more is the fiscal situation of the United States and the return to the presidency of Donald Trump.
Now, this is a very big deal, but it's one that I think is widely misunderstood. So what I'm going to do today is just walk through what it actually is, how big the problem is, and you know, whose problem it really is, and you know, what the different, um, you know, knock-on effects of of of this playing out are. And hopefully, uh, this will provide a little bit more context for you when you hear it mentioned either on a podcast or see it on Twitter or, you know, in some kind of uh research report talking about the monetary system.
Now, I didn't Pro I didn't type up any notes; I didn't create any slides. Um, I'm just going to talk through the various issues surrounding it. And the reason I didn't prepare anything is I don't feel like I don't really feel like I need to prepare a whole lot because Triffin's dilemma is central to my entire framework. Triffin's dilemma is really one way of explaining the milkshake, and I'll I'll explain what I mean by that. But but but but I I'm trying to figure the right way to start this off, and I think the right way to start off is just to tell you what it is.
And so Triffin's dilemma, uh, was uh it was a phrase that was attributed to an economist back in the 60s named Robert Triffin, and he was analyzing the monetary system. And he basically said that any country whose national currency also serves as the global reserve currency, there will end up being a problem because at some point the needs of the domestic economy will come into conflict with the needs of the global economy, or the international community, or the non-domestic markets.
Now, that then played about 10 years after he started talking about this; this actually played out in the United States. And I think this is where many people get the misunderstanding when they apply it today. So I'll walk through what that is. So because the United States was the global reserve currency, and because when you are the global reserve currency, you need to provide enough liquidity to the rest of the world to use that currency, and you end up importing more than you export, and therefore when you import those goods, your dollars or your your currency flows outward to the rest of the world. And because in the 1960s the United States started funding uh the Vietnam War and it started doing a lot of the guns and butter things of the Johnson Administration, they were running chronic not only trade deficits but budget deficits. And at the time, the United States dollar was linked to gold, and then all the other currencies were linked to the dollar. And because the United States was increasing uh the M2, or the amount of dollars in circulation, other countries, specifically France, started converting their dollars to gold and actually asking for the gold back.
This led to France taking a lot of the gold back; they actually sent a warship to New York Harbor to collect the gold. And it was widely rumored that if that were to continue, um, then Britain and Germany may ask for their gold back as well. And that's without going into too much more detail; you can look this up. This is a very, you know, famous historical precedent that led Nixon to come out and uh delink the the the dollar's convertibility to gold. And he said, "No longer can the rest of the world, you know, convert their dollars into gold, and the United States will no longer be shipping gold to the rest of the world uh if they wanted."
Now, that was that was that's known as the Nixon shock, and that was taking the United States off the gold standard, and it was a way to devalue the dollar. Now that caused obviously a lot of problems uh and a lot of uncertainty around the world, and so there was kind of this little mini currency crisis for the next year after that happened. And at a meeting that I think was a G7 meeting—I hope I have that right; it was some kind of—or maybe it was a a meeting of international finance; maybe it was an IMF or international finance ministers in Rome—John Connelly, who was the US Treasury secretary at the time, was trying to, you know, all these other countries were were giving him a hard time about, you know, the US devaluing the dollar. And this is when John Connelly said, "The US dollar is our currency, but it's your problem. You guys figured out we're the United States; this is what we're doing; you deal with it."
And one of the things that allowed the US to quote-unquote get away with that is that shortly after this—about a year after this, I think it was 72, maybe it was 73—this was when the United States signed the deal—well, actually, they didn't sign anything; they reached an agreement, kind of a gentleman's agreement with Saudi Arabia to get Saudi Arabia to price their oil exports in US dollars. And when they received dollars for their oil, they would then buy treasuries. And in exchange for Saudi Arabia buying treasuries, the United States would provide protection to the House of Saud, or the the Saud family, who was running Saudi Arabia. Not only that, they would help them, you know, transform their current desert kingdom into a modern-day paradise, uh, for lack of a better way of saying it. And that's largely what has happened over the last 50, 60 years. Um, you go to Saudi Arabia now, and they've got, you know, ultra-modern highways; they've got up-to-date hospitals; they've got super nice malls and, you know, theaters and airports, and the average Saudi Arabian citizen enjoys one of the highest standards of living in the world.
And so that agreement largely worked out. And as a result of that agreement and as a result of them pricing their oil in dollars, because the whole world needs oil to run their businesses, to run their economies, then the whole world automatically needed dollars to buy or at least to hedge against importing energy prices in their local currencies. And so that kind of put a bid under the dollar, and then that led to the explosion of the eurodollar market, which we have talked about many times on this channel and and other writings and interviews that I've given. So that leads us but but that was that was Triffin's dilemma in 1971; that was Triffin's dilemma; that was when the needs of the domestic economy came into conflict with the needs of the global community, and the global community called the United States out on it, started taking their gold back, and that forced, for lack of a better way of saying it, the United States to delink from gold. But then from that moment forward, when they priced oil in dollars and the eurodollar market grew, then the tables turned because the United States was no longer linked to gold; there was no longer a thing uh a thing that the rest of the world could turn their dollars in and convert to; it was now a free-floating system. So they no longer had the ability to put that to the United States. And with the explosion of the eurodollar market, it actually increased demand for US dollars around the world.
And today, the eurodollar market, the market for dollars outside the United States, dwarfs the size of the market for dollars inside the United States. So when the US delinked from gold, they flipped the script on whose dilemma it was. And so now we're in the situation again where Trump has come back in as president, and part of his entire administration—I shouldn't say part of it; his entire, not part of it; his whole administration—is now focused on one thing, and that is putting America First. And we've talked about this before; it doesn't matter whether we agree with this; it doesn't matter whether we think this is the way it is; Trump won, and Trump's in power, and this is the way Trump thinks it should be, and he is putting policies in place so that he that he thinks puts the United States interest first. And part of that means no longer running these, you know, perpetual budget deficits that sends dollars to the rest of the world and no longer running these perpetual trade deficits, which sends dollars to the rest of the world. And so once again, we have the possibility that the needs of the domestic economy are coming into conflict with the international community.
Now, it's important to remember three things; four things. One is the the thing that we already mentioned that the demand for dollars outside the United States is greater than the demand for dollars inside the United States; that's the trap; that is the prison that the rest of the world has built for itself. Now, the keys to that prison, to keep to to to keep it from crashing in on top of them, is dollar liquidity. And there's three ways the rest of the world can get dollar liquidity: Number one, the US can provide aid to them and send dollars to the rest of the world either through foreign aid or um some kind of uh, you know, some type of an agreement, a treaty, but the unit but but the United States is currently putting the kibosh on that as well. Trump is shutting down US aid uh in in in large measure. The other way that the rest of the world can get dollars is if we buy their goods. So if we buy their goods, they give us the goods; we give them dollars. So that's goods flowing in and dollars flowing out of the United States. So again, through foreign aid, that's one way they can get dollars; through trade, that's another way they can get dollar liquidity. The third way they can get dollar liquidity is by loaning it into existence among themselves. But the problem is now we already okay, so we already talked about the US aid is not flowing as much as it was even over the last year. Um, Trump is currently trying to stop the trade uh imbalance from from from its current uh, you know, large deficit, and he's going to try to change that, which will mean fewer dollars flowing to the rest of the world, either because we don't trade as much with the rest of the world or because he puts tariffs on, which means ultimately fewer dollars get to the rest of the world. And then I said the third way is if they loan it into existence among themselves. The problem there is that the United States isn't providing it; in that case, they have to provide it amongst themselves. And to provide provide it amongst themselves, they have to risk their own balance sheets to do it; it's an extension of credit, and when you extend credit, you are taking on risk yourself that that loan or that credit might not be returned. And because the whole world—not just the United States—the whole world has kind of reached the end of this debt supercycle, not many other countries want to continue or or even corporations or or or global banks want to continue extending dollar-based credit, especially now that they know dollars may not be as plentiful as they were under Biden or Trump or the previous Trump administration or or Obama or Bush or, you know, going all the way back to the 1970s.
So this is now a huge problem for the rest of the world; it is no longer a problem for the United States. Let me step back; it's not that it's not a problem for the United States; ultimately, we're all in this together. And I've mentioned many times that if we're going to have a global crisis or if we're going to have this global trade war or we're gonna have this global fracturing or this fight, this war, however you want to, you know, uh call that, it will hurt the United States. I'm not saying the United States won't get hurt in this scenario; we'll probably get punched; maybe we bleed a little bit, but we're in a stronger position than the rest of the world because of the we have the ability to create the global money, the dollars and the eurodollars out of thin air; we don't have to risk our balance sheet to do it, um, and so that automatically provides us a leg up. The other thing is that, you know, you know, by and large, if we had to be self-sufficient, we currently don't have to because it's currently a globalized world that's changing very quickly. But if you look at all the countries individually and see which countries are most self-sufficient or have the ability to be the most self-efficient, the United States ranks very highly on that list.
And so now we get to this situation where because we have the the the world is starting to slow down economically again around the world; central banks are starting to cut rates rather than raise rates; deflation is starting to overtake inflation as one of the scares. And so they're trying to goose their economies or trying to provide more liquidity by lowering rates, but they also now still need US dollars to fund uh the US dollar debt that they already have to service the invoices that are already outstanding to meet the the needs of all the derivative contracts that are out there; they still need it to buy oil and other needed commodities that are priced in US dollars. And so this is where the United States has the upper hand. In fact, it is Triffin's dilemma, which you will oftentimes hear as the exorbitant privilege of having the global reserve currency. Now, in the last few years, that has been started to be called the exorbitant uh uh oh, what's the sorry, what's the negative word? Uh, the exorbitant curse. You know, they say it's actually a bad thing because it forces you to run these deficits. Okay, let's accept that as true. But if that changes, if we go from a system where the United States is currently running dual deficits and providing the whole world with plenty of liquidity to a system in which the US is no longer doing that and no longer doing business the same way they were before, and if that leads to a new monetary system rising as a result, that transition period will see the US dollar go higher rather than lower because as the rest of the world no longer has access to the supply of dollars and the supply shrinks but the demand is still there due to all the debts outstanding, you get into a credit contraction, and you get into a short squeeze. And this is the root of the United States's exorbitant privilege; this is exactly why the United States has the ability to export its inflation to the rest of the world; this is exactly why the United States is able to use the US dollar as not only a weapon but as the ultimate weapon because they can bring another economy to its knees without even firing a shot.
Now, again, does the US get hurt in this scenario? Yeah, the US probably gets hurt in this scenario, but not as badly as the others who don't have uh the ability to fund their uh industries and their and their governments uh with the global reserve currency. That is this is the One Ring from The Lord of the Rings; this is the ultimate form of power; it's basically global seigniorage. Seigniorage is the ability to print global money, and the United States has had that; that is the exorbitant privilege.
So let's come up with a scenario where all of a sudden we go into another 2020 or another 2008, some kind of a financial crisis where the rest of the world and the United States start to experience a credit contraction. Historically, what has happened in this case is the Fed will drop rates really quickly; the other central banks around the world will drop rates really quickly, and then the United States will extend swap lines to the rest of the world's central banks or to the to the handful of central banks that it has these swap line agreements with, and then those those those countries, those other central banks, will now have access to dollars, and then they will go to their banks and say, "Who needs dollars?" The banks will get the dollars, and then the dollars, and then the banks will hand it out to the corporations or the individuals that need it. That's how it works; that's the United States providing the liquidity uh when needed. But with Trump in power now and with Mnuchin as the treasury secretary now, and they have both said they want to change the way uh the US does business, do you think that Trump is going to be happy with the United States providing a swap line to France, especially if France is not helping the United States in other areas or in other things that the United States wants helping? Do you think that Trump will will will provide a swap line to Canada if Canada is not helping him with the border the way that he wants to?
Now, again, let's take a step back; maybe you think that Trump shouldn't act like this; maybe you think this is not the appropriate way for a president to behave. Fine, let's let's say I agree with you; that doesn't change the fact that this is how he's gonna act; this is Trump we're talking about. And just because he shouldn't act in a certain way or shouldn't do something doesn't mean that he's not going to do it anyway. And I think this is the new reality that everybody needs to get a handle on because this is Trump unabashedly and unapologetically saying, "Yeah, we will help, but only if it helps the United States first. We're happy to help you guys, but we're going to get something in return." This is the new mantra of the entire administration of Trump, and the Triffin dilemma and the exorbitant privilege is the single biggest tool, the single biggest weapon, the single biggest, you know, ace in the hole that Trump and Mnuchin can use use to get what they want. And the idea that they are just going to sidestep their biggest advantage and give it away and no longer use it and provide the rest of the world all the liquidity they need, even if those countries are not doing what the United States wants them to do, I think is being very shortsighted. And even if Trump decides to give or or if if Powell would do it as the as the Fed secretary, but let's say Trump went along with it and Mnuchin along with it, it doesn't change the fact that they could stop that at any moment. That is the power of the One Ring. You you've heard me use this analogy before, but that is it; it is the ultimate power. And does ultimate power corrupt? It absolutely does. Will it lead to bad things happening to the United States in the future? Probably so. Can a bully get away with doing this forever? No, they will eventually fall, but this can last a lot longer than people think it can; it's already gone on decades longer than most people thought it would. So the idea that now when the United States is finally unabashedly using this weapon or has the ability to use this weapon and is unabashedly said, "We are going to put America First," the idea that all of a sudden it's not going to work, I think is extremely naive.
So I think that's probably all we're going to go into today. I could probably talk about this for several hours because this is this again is very kind of central to the whole milkshake thesis. The rest of the world is currently stuck on dollars; they cannot dollarize without going through incredible amounts of pain. Can they dollarize? Absolutely. If the US doesn't provide them, the rest of the world, with dollars, will they have to find another solution? Absolutely. Does that cause incredible amounts of pain and dollar strength in the meantime? Absolutely. And so that is why uh, you know, I just don't think we get out of this mess with the dollar going lower anyway.
I hope that helps understand what Triffin's dilemma is. Um, I'll probably write about it at some point as well. If you haven't checked out our Substack yet or our Macro Alchemist long uh dive deep dive research, I I highly recommend you do so. I've been on on Substack; I've been writing about all of this stuff going on with kind of a reshuffling of the rules-based order, what Trump is trying to do by putting the United States first, what it means for markets, uh, and I'll probably end up writing something about this as well. So I would encourage you to go um to either macroalchemist.com, where you can find all the premium content, or you can go to substack.santiagocapital.com, where you can get all the the the more uh frequent writings on some of the things going on in in the current markets.
In any case, hope you all have a great weekend. Um, you know, markets got a little crazy this last week. We're now entering March, and here's an interesting thing for all of you who have watched for a while: You know, I'm always looking at a number of different indicators, and something I mentioned last year that got a lot of chuckles and a lot of interest was um not only different market indicators that I look at but also lunar cycles. And it just so happens that we are now entering the shadow period of Mercury going into retrograde, and it actually goes into full retrograde on the Ides of March. So I have a feeling March is going to be pretty exciting. So anyway, we'll be back next week. In the meantime, hope you guys have a great weekend; hope you have a great week, and we'll talk to you uh real soon. Bye-bye.