Christian Ghymers
Unveiling the new form of the Triffin Dilemma and its inherent destabiliser: the relative shortage of dollar-safe assets, a critical issue with profound implications for global liquidity
Robert Triffin International - Centro Studi sul Federalismo, April 2024
Executive Summary
This paper delves into the complex issue of the instability and pro-cyclicality of Global Liquidity (GL), which is primarily driven by the structural scarcity of dollar-safe assets. This scarcity, the present expression of the Triffin Dilemma (TD) and its inherent destabilizer, underscores the intricate nature of the problem: the US economy's inability to supply sufficient dollar liquid assets to the global economy. The circular cumulative causality introduced by the use of a national currency as an international reserve currency perpetuates this issue, as it bestows the currency with higher liquidity than other safe assets. This liquidity disparity fosters a cyclical instability between the dollar and non-dollar components within the global “high-powered money” (monetary basis), perpetuating the reversed pyramid of Global liquidity.
The core of the problem lies in the endogenous fluctuation in the perceived advantage in the degree of moneyness of the dollar. In a liquidity crisis, this can reverse the mechanism of creating a monetary base by the non-bank sector using other reserve currencies as a substitute for the too-scarce dollar-safe assets. The advantage of liquidity enjoyed by dollar assets jumps in a crisis moment, activating suddenly a kind of “Gresham Law” between international currencies used as a monetary basis. In this crisis case, the contraction in the monetary basis produced by non-bank markets implies a multiplied contraction on the private GL volume. The dollar's dominant role is directly responsible for the pro-cyclicality of the GL reversed pyramid, which generates potentially significant socio-economic costs that cannot be ignored. These costs include increased financial instability, reduced economic growth, and heightened income inequality.
The proposed solution to the systemic flaw of the dollar system and the eradication of the TD offers a ray of hope. The creation of the missing multilateral LOLR with a multilateral reserve currency, which is issued (or withdrawn) against buying (or selling) national reserves to the central banks, has the potential to adjust the global monetary basis and stabilize the GL reversed pyramid. While political obstacles, such as the US authorities' veto at the IMF level, exist, the emergence of CBDCs and the development of the use of the private SDR, in conjunction with an international coalition, could create market pressures and the conditions for multilateral cooperation paving the way for systemic reform.
This paper is a reedited version of the working paper “The new form of the Triffin Dilemma and its built-in destabilizer: the process of relative shortage of dollar safe assets”, dated 2022.
