Triffin's Paradox Revisited: Crunch-Time For The U.S. Dollar & The Global Economy

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The reality is that we're one panic away from foreign-exchange markets ripping free of central bank manipulation.

While all eyes on fixated on global stock markets as the measure of "prosperity" and "growth" (or is it hubris?), the larger force at work beneath the dovish cooing of central bankers is foreign exchange: the relative value of nations' currencies, which are influenced (like everything else) by supply and demand, which is in turn influenced by interest rates, perceived risk, asset purchases and sales by central banks and capital flows seeking the lowest possible risk and the highest possible return.

Which brings us to Triffin's Paradox, a topic I've covered for many years:

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

The Federal Reserve, Interest Rates and Triffin's Paradox (November 19, 2015)

The core of Triffin's Paradox is that the issuer of a reserve currency must serve two entirely different sets of users: the domestic economy, and the international economy.

The U.S. dollar (USD) is the global economy's primary reserve currency. When the Federal Reserve lowered interest rates to zero (Zero Interest Rate Policy, ZIRP), it weakened the dollar relative to other currencies. In this ZIRP environment, it made sense to borrow dollars for next to nothing and use this free money to buy bonds and other assets in other currencies that paid higher yields. Many of these assets were in emerging market economies such as Brazil.

As a result of this enormous carry trade, an estimated $7 trillion was borrowed in USD and invested in other currencies/nations.

Once the Fed started making noises about "normalizing"/raising interest rates in the U.S. (i.e. signaling the markets that a trend change was at hand), the dollar strengthened and the carry trade started reversing: those who had bought assets in other currencies with borrowed USD started selling those assets, which pushed emerging market currencies and markets off a cliff.

Meanwhile, since China pegs its currency the yuan/RMB to the USD, the rising dollar dragged the yuan higher thanks to the peg. A strengthening yuan made China's exports more expensive and less competitive, the last thing China needed as its domestic credit bubble ran out of steam.

So while the Fed needed to "normalize" rates in the U.S. before the next recession required more Fed stimulus, it also needed to weaken the USD to protect China from a destabilizing currency devaluation.

Those holding millions of soon-to-be-devalued yuan in China were naturally anxious to convert their yuan into USD before the devaluation robbed them of 25% of the purchasing power of their money, and this has created an unprecedented capital flow of cash out of China and into USD and other Western assets, such as chateaux in France, homes in Vancouver B.C., etc.

This mad rush of capital out of China is adding another destabilizing factor to China's already wobbly debt bubble economy, and China's weakness has weakened an already wobbly global economy crippled by stagnation and the decline of emerging markets and commodities--two consequences of the rising USD.

This has created a no-win conundrum for the Fed: if it normalizes rates (as it should, after seven years of ZIRP and stimulus) in the domestic U.S. economy, that will strengthen the USD, further pressuring China's yuan and emerging markets, which in turn will further pressure an already-tottering global economy.

There are no winners, regardless of what policy the Fed chooses to pursue. This is why we see such absurd waffling in the Fed: one statement suggests interest rates hikes are on the way, and the next dovish cooing suggests rate hikes are so far away that global markets can safely ignore the possibility.

This push-pull is reflected in the chart of the USD:

As the Fed waffles in response to global markets, the USD has swung up and down in a trading range.

Sorry, Fed: you can't have it both ways. Eventually, the domestic economy will pay the price of essentially zero interest rates, or China and the global economy will pay the price of a strengthening USD.

No nation ever achieved global hegemony by devaluing its currency. Hegemony requires a strong currency, for the ultimate arbitrage is trading fiat currency that has been created out of thin air for real commodities and goods.

Generating currency out of thin air and trading it for tangible goods is the definition of hegemony. Is there is any greater magic power than that?

In essence, the Fed must raise rates to strengthen the U.S. dollar (USD) to keep commodities such as oil cheap for American consumers. The most direct way to keep commodities cheap is to strengthen one's currency, which makes commodities extracted in other nations cheaper by raising the purchasing power of the domestic economy on the global stage.

Another critical element of U.S. hegemony is to be the dumping ground for the exports of our trading partners. By strengthening the dollar, the Fed increases the purchasing power of everyone who holds USD. This lowers the cost of goods imported from nations with weakening currencies, who are more than willing to trade their commodities and goods for USD.

What better way to keep bond yields low and stock valuations high than insuring a flow of capital into U.S.-denominated assets?

There is one more destabilizing possibility: the markets may push the USD higher, regardless of what the Fed says or does. The currency markets trade $5 trillion a day--more than the Fed's entire $4 trillion balance sheet.

Once traders realize China will have to devalue the yuan by a lot more than a few baby-step devaluations, the stampede into USD could overwhelm even coordinated interventions by central bankers.

Of course no central banker will ever admit that markets could wrest free of central bank control, but the reality is that we're one panic away from foreign-exchange markets ripping free of central bank manipulation.

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brada1013567's picture

If only Snowden had worked at the Fed

SomethingSomethingDarkSide's picture

He's very progressive, not sure it would have helped much.  Bangladesh wouldn't have had their funds stolen though, that's for sure.

Thought Processor's picture



I think if we've learned anything after 2008 it's that the worlds central banks (and by extension the banks that own the CB's) are the market.  They can prop, manipulate, influence, regulate, change the rules and if need be destroy the markets at will.


It's all a casino and they're the house.  


And the house always wins.



JRobby's picture

"we're one panic away from foreign-exchange markets ripping free of central bank manipulation."

The moment I have been anxiously awaiting for some time, tick, tick, tick.........

Squid-puppets a-go-go's picture

it is their casino, and the house always wins. but once the punters pockets are all empty, whatchagonnado?

Thought Processor's picture


"If only Snowden had worked at the Fed"


Funny.  I personally think he works for the CIA, but then that's just me putting 2 + 2 together.

Reasons: 1. everything he's outed strangely leaves out any and all misdeads by the one agency where misdeads are common and 2. CIA needs to remain the top dog in western intel, this is one of the ways they do it; ie: you throw your closest competitors under the bus, and yes the NSA is a giant competitor to those with any real power in DC.  and 3. He's still alive, if he were a real threat he would be dead.





Omni Consumer Product's picture

The CIA tried to kill Castro many times but never succeeded.

Evil is neither monolithic nor all-powerful.

Lurk Skywatcher's picture

"The most direct way to keep commodities cheap is to strengthen one's currency, which makes commodities extracted in other nations cheaper by raising the purchasing power of the domestic economy on the global stage."

Another good way is to invade those countries under the flag of "freedom democracy" and have US Corporations steal all the foreign owned commodities. Who needs interest rates when you control all trade?


Joe Cool's picture

Seems like there's lots of 'Lose-Lose' situations out there...And the Fed "waffles" because it has no choice but to "waffle"...

The Fed must speak out of both sides of their mouth...

ZH Snob's picture

china needs to break the peg.  what is taking them so long and why do they even have it?

Flying Wombat's picture

Marc Faber: *NO* Currency War; Rather, Major Central Banks Coordinate Monetary Policies 

yogibear's picture

Round-robin printing and devaluing.

These economic PhDs forgot history from HS and college. This has many times before.

Nothing new. A different name for Zimbabwe economics.

Herdee's picture

DXY is  a very poor measurement by any standard used to measure the value of the USD, let alone anything to do with trade because it is a very poor gauge of that as well. So is the measurement symbol USDOLLAR by FXCM even though it is more evenly weighted.I believe Bloomberg's BUXX? isn't much better,it's uselss too.Anyone trading based on that is a moron.

yogibear's picture

All fiats will go to their intrinsick value.


Right now it's a CB game of confidence in their currency destruction.

scubapro's picture




why oil at 2:30 edt?   thoughts?

SomethingSomethingDarkSide's picture


Clowns on Acid's picture

" here is one more destabilizing possibility: the markets may push the USD higher, regardless of what the Fed says or does. The currency markets trade $5 trillion a day--more than the Fed's entire $4 trillion balance sheet."

Author forgot to mention gold/silver rising / screaming higher as another possiblity. 

lasvegaspersona's picture

Too bad Chuck can't afford a grammar check...spellin's good though...

Amazing what does not get editted on the web, even by guys who make their living selling words.

N0TaREALmerican's picture
N0TaREALmerican (not verified) lasvegaspersona Apr 5, 2016 2:23 PM

Hard it is to your own stuff edit. 

N0TaREALmerican's picture
N0TaREALmerican (not verified) Apr 5, 2016 2:23 PM

I think the Fed creates their own reality.  This means they'll "normalize" rates and have a weaker USD.  

Kagemusho's picture

Perhaps the Chinese are trying to ascertain just how much gold their potential rivals actually have before they devalue the Yuan again.

Present RMB in circulation might become worthless if after April 19 they decide to back a New Yuan with gold and disavow all old Yuan. In which case the dollar becomes an instant nothing as other countries race to dump their dollar reserves - like China has been dumping Treasuries.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Kagemusho Apr 5, 2016 2:27 PM

I recall this topic from some time ago.    Just wondering if a gold-back yuan would benefit their top 10%.    Nothing else matters in a society other than how it affects those at or near the top. 

Professorlocknload's picture

Stronger buck? Well, the process might go the other way. And in short order after the pin is pulled.

the grateful unemployed's picture

the US is really worried about Communist China? especially if a real republican like Trump gets elected. of course the Fed doesnt know who will be elected do they?

falak pema's picture

Keynes was right Dexter White was wrong!

Dr. Engali's picture

"This has created a no-win conundrum for the Fed: if it normalizes rates (as it should, after seven years of ZIRP and stimulus)"


I have no idea why this is so difficult for people like Charles. The fed can't and won't cut rates. If they attempt it they will have an inverted curve before they hit 1%.

Consuelo's picture



"No nation ever achieved global hegemony by devaluing its currency."


Really, Dr. Smith...?   And what the bloody hell do you call the period of time between 1989 and the present...?

If the U.S. isn't already the globe's hegemonic power, then why the need for CIPS, or the SGE, or the AIIB...?

viator's picture

These are the best and the brightest, the smartest people in the room and in the world, they will figure it out.

turnoffthewater's picture

The USD will be range bound as the Yuan will be constantly repegged to support the USD and Yuan (Chinese debt overhang) during this transitory period. This allows the Yuan the time to equalize with all USD's currently in existence and attain more equal footing per IMF inclusion.

Stormtrooper's picture


Markets break!  No more free FX trading and the Fed wins the game.

BitchezGonnaBitch's picture

Saudi Arabia will be the first to really feel the peg. If dollar keeps riding up they will eventually HAVE to de-peg or there will be pitchforks outside the palace.