A New Triffin Paradox for the Global Economy

A New Triffin Paradox for the Global Economy - A New...

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1 Remarks Prepared by Jan Kregel for The Federal Council of Economists and the Regional Council of Economists of Rio de Janeiro meeting of the 13th Brazilian Congress of Economists and the 7th Congress of the Association of Economists from Latin-American and the Caribbean, 15th September 1999. A New Triffin Paradox for the Global Economy 1 J.A. Kregel In the 1950's Robert Triffin warned of the breakdown of the Bretton Woods international monetary system. Economists are not well known for the accuracy of their predictions. Triffin is one the few economists to have made a correct prediction. Yet, no one took any heed of his predictions, even when it was clear that they were coming true. His analysis produced what has come to be known as the “Triffin paradox” or the Triffin dilemma. I am going to suggest that there is a similar “paradox” inherent in the globalisation of the international trading and financial system, and that it threatens the breakdown of the system. I Triffin’s Paradox Under the Bretton Woods Agreement, countries were given the choice of setting the par value of their currencies for current account transactions in terms of gold or dollars. Since virtually all belligerent countries finished the war in debt to the US for aid or supplies, the US held virtually all the gold or a claim on it. Thus, the US was the only country able to fix the par value of its currency in terms of gold, while all other countries set their par values in terms of the dollar. The dollar thus effectively replaced gold in the Bretton Woods System and the value of the dollar was determined by the holdings of US gold reserves. Since all other countries had set par values against the dollar, they required dollar reserves to ensure current account convertibility. This meant that the stability of exchange rates was the result of intervention in terms of dollars by all central banks except the US. It made the US dollar the only intervention currency and placed the stability of exchange rates on the willingness and ability of non-US central banks to intervene in foreign exchange markets to defend the value of the dollar. (It also meant that the US dollar enjoyed an intervention band that was double that of the other currencies since all cross rates were traded and calculated by trading against the dollar.) As a result the US dollar became the source of international liquidity and the basis for the reserves of the international monetary system. It thus effectively replaced gold. However, under the Bretton Woods System, unlike the operation of the gold standard, where the supply of gold was determined by mining and the dishoarding and jewelry, the supply of dollars was determined by the balance of payments position of the US. Immediately following the war, nearly all of the world’s monetary gold was in the US, most
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A New Triffin Paradox for the Global Economy - A New...

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