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The Federal Reserve, Interest Rates, & Triffin's Paradox
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
There is no way Fed policy can be win-win-win for all participants.
One result of the global dependence on central bank interventions is a unhealthy fixation on the slightest changes in those interventions, oops I meant policies.
Since the slightest pull-back in central bank inflation of asset bubbles could spell doom for the global economy and everyone holding those assets, the world now hangs on every pronouncement of the Federal Reserve in a state of extreme anxiety.
Why the extreme anxiety? Because any change in Fed intervention creates both winners and losers. There is no way Fed policy can be win-win-win for all participants, and to understand why we turn to Triffin's Paradox, a.k.a. Triffin's Dilemma.
The core of Triffin's Paradox is that the issuer of a reserve currency must serve two quite different sets of users: the domestic economy, and the international economy.
Triffin’s Paradox has two basic parts:
1. Any nation that issues the reserve currency must run a trade deficit to supply the world with surplus currency to hold in reserve and as a result,
2. The issuing nation faces the paradox that the needs of global trading community are generally different from the needs of domestic policy makers.
The global trading community requires that the issuer of the reserve currency run trade deficits large enough to satisfy the demand for reserves, while domestic audiences want a strong export sector, i.e. a trade surplus.
You can’t have it both ways: if you want to issue a reserve currency, you have to run a trade deficit that is commensurate in size with the global demand for your currency.
Since supply and demand set price, this push-pull affects the value of the U.S. dollar: U.S. exporters want a weak dollar to spur foreign demand for their products, while foreign holders of the USD want a strong dollar that holds its value/purchasing power.
It is impossible for any nation to maintain the reserve currency and run trade surpluses. If you run trade surpluses, you cannot supply the global economy with the currency it needs for reserves, payment of debt denominated in the reserve currency and domestic credit expansion.
Were the Fed to raise interest rates, as it has essentially promised to do, it will do so to pursue multiple objectives:
1. It's attempting to preserve its credibility, which is threatened by a zero-interest-rate forever policy.
2. It's attempting to maintain its political capital, which is eroding as even the mainstream media has accepted the reality that Fed policy has enriched the already-wealthy at the expense of everyone else.
3. It's attempting to "normalize" interest rates without killing its favorite child, the stock market.
4. It's attempting to raise rates without upsetting the fragile global currency/debt cart.
Note the use of the word attempting. The Fed's success is not pre-ordained (despite its implicit claims to otherworldly powers).
If the Fed raises rates a tiny .25%, the actual impact on debtors is rather modest. But even this tiny increase has the potential to sour carry trades, i.e. speculations based on borrowing U.S. dollars (USD) and investing the money in higher-yielding (but oh-so risky) emerging market gambles.
Those emerging market bets are denominated in the home-country currency, and as those currencies decline against the USD, the carry trade's gains are offset by foreign exchange (FX) losses.
The losers of any Fed hike in interest rates are already clear: U.S. global corporate profits have already been hit by the stronger dollar, and should interest rates click higher, that will only further strengthen the USD.
As the dollar strengthens, the $7 trillion in dollar-denominated debt in emerging markets increases in value relative to depreciating local currencies.
The Fed can't please everyone. That's the dilemma. Some commentators have suggested China seeks a higher USD (i.e. a Fed rate hike) because that lowers the value of China's currency the RMB (yuan), making it cheaper for Americans to buy more goods from China.
But any increase in yields will push down the value of existing Treasury bonds, so China's still-vast hoard of Treasuries will lose value should rates rise.
As I have often noted, many people assume a weakening dollar is a good thing because it makes U.S. exports cheaper. But the larger truth is that a strengthening currency raises the global purchasing power of the currency, enriching every owner of the currency and the issuing nation.
There are many cross-currents in play here, and a variety of opinions on the consequences. I join my long-time colleague Gordon T. Long and fellow blogger/writer Rick Ackerman for a wide-ranging discussion in the hour-long video What to Expect From the Fed:
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If anyone wanted to create terror... Fed Reserve would be on the list. Not that I'm encouraing it... Just saying its a soft spot people need to be looking into. Maybe audit it then abolish it, peacefully.
Off topic...just want to note some local hoodlums shot an elderly janitor in the face with paintball guns, then a third attempted the knock out game as he was blinded.
http://ktla.com/2015/11/17/two-teens-arrested-in-brutal-caught-on-camera-paintball-attack-on-high-school-janitor-in-victorville/
Fuckin' vermin.
http://beforeitsnews.com/conspiracy-theories/2015/11/all-of-your-wars-ar...
http://beforeitsnews.com/conspiracy-theories/2015/11/all-of-your-wars-ar...
WOW!!!! An intelligent piece from Big Hughie!
They will never raise rates. They will be about to, then stocks will turn down, and they will say they will soon. Stocks will go back up, they will say soon, then stocks will fall and then they won't. This will continue forever, until the world figures out there is no gold left to buy in large amounts.
Then the dollar will hyperinflate and gold will be the only form of wealth.
The dollar can't hyperinflate because the average American can't get no dollars to begin with.
I remember back in the 70's when the Fed had the markets firmly gripped by the money-balls.
Participants waited to see what the M-1 was and often the markets would react quite aggressively.
Frankly, with so many people's heads so far up Yellen's butt trying to figure out "Should I raise or should I low?", they don't have much of a realistic view on the economy or world. Probably have a good idea about her hemorrhoids.
They moved the decimal point. Go down to the bank and pull out 500 fiats they will hand you brand new 100 fiat bills. Ask for some 20s and they are old and worn. That should tell you something bad.
Triffin's Scam.
Never really understood it, did you?
Get of the internet and your computer, Flak.
Your warming the planet with your CO2 emissions.
The truth is that The Fed has been very successful at transfering real wealth to their owners....
Of course, such "let the majority eat cake" monetary experiments have been tried before....
If they raise rates, the gig is up.
A Big Nazi Sh-Show Welcome
Finland wakes up, late, buried by Sweden.
The planet oscillates on its axis at a frequency beyond the comprehension of the relatively automaton human race, distilling DNA. The long-term choice is to be consistently distilled out, not in. The short-term choice is to consistently join and ride the ponzi up. The majority vacillates in the middle.
Government is an actuarial ponzi scam, always has been, always will be. GDP measures government and its derivatives, and government grows, all out of proportion, to the benefit of those printing its paper, while special interest groups created to keep the economic slaves busy fight over the scraps. Freedom from personal responsibility is not freedom.
Economics, as practiced from the ivory tower managing the process, is about eliminating economic mobility in prelude to war, the only possible outcome, and the US is just the latest and greatest war economy, to which the majority is completely dependent. And Silicon Valley is just the latest and greatest empire projection and surveillance system, with nothing to show for itself but phantom assets, real estate inflation. Work is a waste of time in the empire, because empire economics can only repeat.
Now, the majority is waking up to the lies they were told and the lies they accepted, as the basis of decision, immobilized, with the latest and greatest weapons about to come of the shelf, with bombs in their pockets. Joining a peer pressure group, to avoid change, to gain advantage over other like-minded groups, doesn't end well. The last peer pressure group standing simply gets wiped out at the end.
You made your choice at birth, whether you like to think so or not, and the only remaining real choice is whether you find one of the few remaining pediatricians fighting the fight, or have your kids in the bush. With relatively infinite mobility as a choice, Pollyanna chose to live in naziland, go to a a nazi hospital, and was assigned an ignorant, black EEO feminazi pediatrician, dropping her baby into the black hole of Obamacare accordingly, and now finds herself in a nazi court, given a false choice between her husband and her baby. I am always offered a position in the 1%, to build weapons called technology.
Labor has no use for the politics of stupid, projecting the past into the past, until the kids so distilled are ready. The only people surprised that public education is run by fascists are those who accepted the blatant lie of government. No one with functioning brain cells makes decisions based on yesterday's data collected by yesterday's bank to its own end, interest rates coming out of the Fed, on risk free money that is neither free nor free of risk.
The entire economy is on the chopping block, and the critters did what?
Automatons chasing automation, complaining about the results, not once considering how it really works, and arguing with the AI guy, is not the best approach. Government doesn't build anything, but that never stops the majority, from thinking that majority rule rules, something other than itself. Good luck with all that.
"Because any change in Fed intervention creates both winners and losers." Guess what Charles, The Fed is currently creating winners and losers. Get a brain.
Our factory’s fund manager says the Fed’s hiking 25 next month and 25 every month after. He wouldn’t bet me on the hike. He doesn’t gamble.
If they raise rates the gargantuan US Government debt pile has to be negotiated at the higher rate sooner or later. They'd have to print and dump at an accelerated rate, growing balance sheets ever faster. Whatever effect this might have on accelerating distrust in the system is hard to gauge in a useful way.
How much of a problem this is depends on public trust in their system. Trust is forced by dependence, which is why this is taking so long to crack. When people realize they have alternatives to the federal reserve note (because they have no choice anymore, they are out of ways to get US currency) people will stop pretending everything is awesome, and things will get moving.
"The losers of any Fed hike in interest rates are already clear: U.S. global corporate profits have already been hit by the stronger dollar, and should interest rates click higher, that will only further strengthen the USD."
Hogwash. In business, we BUY and we sell. If we can buy cheaper, as we do with a stronger U.S. dollar, we don't have to sell quite so dearly. Yes, that means deflation. But it does not affect the bottom line negatively.
In fact, in an inflationary environment, in business we worry about selling too cheaply, because our resupply costs keep going up, meaning we're losing ground at the bank. In a deflationary environment, we worry most about not moving enough product fast enough, because the resupply costs of our competitors keeps going down and we lose market share as a result.
Some of these bone-headed economists have never so much as run a fucking paper cup lemonade stand.
The Triffen Paradox is the reason that the Rothschild group's next step is to use SDR's as the global reserve currency. SDRs are immune to the paradox. Problem solved. All hail the NWO.