We’re Right in the Heart of Triffin’s Dilemma – USD vs World Currencies

The situation of coronavirus’s impact on economy is getting worse day by day. With the US president, Donald Trump saying that the worst of the outbreak could last until August and s US may be heading into a recession, it seems like it’s rather impossible for investors, professionals and pretty much everyone to actually keep things into perspective with these kind of headlines.

Santiago Capital’s CEO, Brent Johnson says, “we really are in unprecedented times here. I’ve been around doing this for over 20 years now and I’ve seen two or three different crises. This is one of the fastest developing ones but some of us did see a crisis coming and I think the crisis is going to last a while longer. Right now, it’s kind of playing out in stock markets around the world but I really think it’s a currency crisis. The underlying cause of all this is a lack of United States Dollars in the system and I think it’s the fight for USD that is just getting started.

The next potential war that would be brewing here would be on the currency front. In the current context, none of the normal or historical parameters seem to apply. With everything in free-fall at the moment, from the dollar to crude to safe haven assets, everything seems to be in free-fall.

It comes down to liquidity when you see markets falling the way that they’re falling now and you have a panic the way that you have now.  Markets are just getting liquidated and it has nothing to do with fundamentals or technicals. It literally has everything to do with ‘just get me cash’ and the reason that is because everybody needs dollars and when I say dollars, I literally mean US dollars.

I’ve been saying for a couple years that we were we were moving towards a currency crisis because the simple fact is that there are not enough dollars in the system to satisfy everybody that needs them. Everybody always talks about amount of debt that the United States owes and we owe a lot and we’re going to have to pay for that at some point and it’s going to be a crisis here at home but the big problem is that the rest of the world, over the last years, borrowed 13 trillion in US dollars, not in their home currencies.

As we’ve moved forward over the last ten years, monetary policy diverged and what US started raising interest rates while the rest of the world was still lowering interest rates. Now we’ve turned that around pretty aggressively in the last 15 months but the problem was already set. When we did that and we started pulling those dollars back in to the United States, our interest rate policy, our tax policy, our regulatory policy; it all made United States the most attractive place for foreign capital to come to. So all the dollars have been coming to United States that leaves a lack of supply outside the United States and it makes it harder for the rest of the world to service the 13 trillion dollars of debt that they owe to the United States.

India, for example has almost 300 billion of US dollar denominated debt with a 3 trillion dollar economy. Now 10% of that a year goes to or needs to go to pay off US dollar debt at some point. Just the interest payments on those adds up to be quite a bit.

The rest of the world needs at least a trillion dollars a year, if not more, just to service the US dollar debt and the United States is not exporting the dollars the way that we used to. There’s a theory called Triffin’s dilemma which says;

When you have a global reserve currency, at some point, the needs of the domestic economy will come into conflict with the needs of the global economy.

I think that’s right where we’re at. We’re right in the heart of Triffin’s dilemma.

The moves by the central banks, the Fed stimulus, the fact that the ECB is now gearing up for a trillion that they may pump in, is actually gonna make it worse. The reason it’s gonna make it worse is because whatever they do, it’s gonna weaken their currency versus the US dollar. There’s not enough dollars in the system. The Fed is doing everything they can to weaken the dollar and to provide dollars to the rest of the system.

Think about everything they’ve done just in the last week. They’ve rolled out about 2 trillion dollars worth of stimulus or potential stimulus in the last week, and the dollar has not fallen. That is a sign of severe lack of dollars supply in the system. If other countries come out and try to stimulate by printing their currencies, that weakens their currency even more versus the dollar. The lack of dollars in the system is so severe that I don’t see how we get out of this without a currency crisis. I think every currency in the world is going to fall versus the US dollar.”

Sarim Mehmood

An electrical engineer to be. Sarim is a blockchain & crypto enthusiast and an early investor in ETH and Ethereum based projects. Contact the editor at editor.opinions@blockpublisher.com

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