0:00

Today, approximately 160 currencies

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are used worldwide. Some

0:04

countries share the same currency, while others

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use the currency of another country. However,

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not all currencies are

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equal. One currency always tends

0:13

to become the dominant currency

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in international affairs, known as the

0:18

global reserve currency. There

0:20

are benefits for the country that

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issues the global reserve currency. However, there

0:24

are also major drawbacks, and

0:26

the two cannot be separated. Learn

0:29

more about global reserve currencies

0:31

and the Triffin Dilemma on

0:33

this episode of Everything Everywhere

0:35

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for details. Economic

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issues such as budget deficits, trade

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deficits, and exchange rates are frequently

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discussed and debated in the news.

3:02

They've been discussed and debated for decades

3:04

and will probably continue to do so for

3:06

many more. Many people

3:08

pay very little attention to these matters

3:10

because they can be very difficult to

3:12

understand. However, all of

3:14

these issues that I just listed are

3:16

all interconnected. What

3:18

I want to discuss in this episode is something

3:20

that touches on subjects that I've covered in previous

3:22

episodes. However, this time I'm going

3:24

to be looking at matters in a slightly different

3:26

way. It all starts

3:29

with the concept of a global

3:31

reserve currency. As

3:33

I mentioned in the intro of this

3:35

episode, there are about 160 different currencies

3:37

in the world today. The

3:39

vast majority of them are ones you've probably never heard

3:41

of before. The Laotian Kip,

3:44

the Samoan Tala, the Burmese Kiat,

3:46

the Papua New Guinea and

3:48

Quina, the Malawian Quacha, the Polish

3:50

Zlatan, and of course, the

3:52

Vietnamese Dong. The reason

3:54

you've probably never heard of most of

3:56

them is because they have no use or

3:58

value outside their own country, and there's

4:00

little demand for them. Throughout

4:02

history, there's been a tendency for the

4:04

money of one nation to become dominant.

4:07

These weren't the same as modern

4:10

reserve currencies, but they did exhibit

4:12

similar behaviors. The Persian

4:14

Empire's gold Darek, introduced by Darius

4:16

the Great, became one of the

4:18

earliest widely accepted currencies across multiple

4:20

civilizations. It was dominant from about

4:22

550 to 330 BC in the

4:25

Middle East. After Alexander

4:27

the Great's conquest, Greek silver

4:29

coins, particularly from Athens,

4:31

gained widespread acceptance. The

4:33

Athenian Owl tetradrochum became recognized

4:35

for its reliability and purity,

4:38

circulating well beyond Greek territories. As

4:41

Rome's power expanded, its silver denarius

4:43

and gold aureus became the foundation of

4:45

commerce throughout the Mediterranean world and

4:47

beyond. After Rome's decline,

4:49

the Byzantine Empire's gold solidus,

4:51

later called the Byzant, became

4:54

the premier international currency. As

4:56

Islamic empires expanded, the gold

4:58

dinar emerged as a significant

5:01

international currency. The

5:03

Florentine Floren, the Venetian Ducat, Spanish pieces

5:05

of eight, and the Dutch Gilder

5:07

all had dominant periods during the Middle

5:09

Ages and the Renaissance. Every

5:12

one of the currencies I've mentioned was

5:14

just a different type of gold coin. Why

5:17

would one particular gold coin be valued

5:19

above other gold coins? Official

5:21

gold coins carried the stamp of

5:23

the issuing authority, the Persian king,

5:26

Byzantine emperor or the Venetian Republic. These

5:29

marks served as an early

5:31

form of anti -counterfeiting technology and

5:33

quality assurance. Once

5:35

a particular coin achieved widespread use,

5:37

it benefited from what economists

5:39

call network effects. The more

5:41

people used it, the more valuable it became

5:43

as a medium of exchange. For

5:46

example, the Spanish pieces of eight became

5:48

the preferred coin for Asian trade,

5:50

not just because of its silver content,

5:52

but because everyone knew it would

5:54

be accepted in the next transaction. Chinese

5:56

merchants would accept Spanish dollars knowing that they

5:58

could use them in other markets. Following

6:01

the Napoleonic Wars, Britain emerged as

6:03

the dominant global power, and the

6:06

pound -stirling rose as the world's

6:08

premier reserve currency. All

6:10

of these currencies gained

6:12

dominance organically. But

6:14

this changed after the Second World War

6:16

with the Bretton Woods Agreement. I

6:19

covered Bretton Woods in a previous episode,

6:21

but to summarize, the Allied

6:23

nations came together in 1944 to

6:25

devise the post -war global economic

6:27

system. The cornerstone

6:29

of the Bretton Woods system was that the

6:31

US dollar would be the global reserve currency. The

6:34

United States pegged the dollar to

6:36

gold at $35 per ounce, and

6:38

then other countries pegged their currencies

6:40

to the dollar by holding dollars

6:42

in their reserves. So,

6:44

in this context, what

6:46

exactly is a global reserve currency? A

6:49

global reserve currency is a currency

6:51

that's widely held by central banks and

6:54

other major financial institutions around the

6:56

world as part of their foreign exchange

6:58

reserves. It's used

7:00

to settle international transactions, conduct

7:02

cross -border trade, and stabilize national

7:04

currencies. Essentially, it

7:06

acts as the primary medium of

7:08

exchange, store of value, and unit

7:10

of account in the global financial

7:12

system. The Brentwood system eventually

7:14

fell apart when the United States could

7:17

no longer maintain its gold peg. In

7:19

1971, President Richard Nixon killed

7:21

the Brentwood system by taking the

7:23

United States completely off gold. Instead

7:26

of a peg to the US dollar,

7:28

other currencies were able to have floating

7:30

exchange rates, which is still the regime

7:32

we're under today. In

7:35

its place, the Nixon administration

7:37

negotiated with Saudi Arabia and

7:39

other oil producing countries to

7:41

establish the petrodollar system. These

7:43

countries agreed to price and sell

7:45

their oil in U .S. dollars

7:47

in exchange for defense guarantees by

7:49

the U .S. I

7:51

also covered the petrodollar topic in

7:54

a previous episode. So

7:56

the United States didn't just want the dollar

7:58

as a reserve currency, much of the rest

8:00

of the world did as well. However,

8:02

there was a problem. Yale

8:05

economist Robert Triffin identified it

8:07

in the 1960s. The Triffin

8:10

Dilemma is one of the

8:12

most fundamental paradoxes in international

8:14

monetary economics. At

8:16

its core, it identifies an

8:18

inherent contradiction that emerges when

8:20

a single national currency simultaneously

8:23

serves as the world's primary

8:25

reserve currency. The

8:27

core of the dilemma is that

8:29

for a country to supply the

8:31

world with enough of its currency

8:33

to meet international demand for trade,

8:35

reserves, and investment, It must run

8:37

a balance of payments deficit. In

8:40

other words, it must let more of

8:42

its currency flow out of the country

8:44

than is coming in. The

8:47

dilemma comes into play because

8:49

persistent deficits over time undermine

8:51

confidence in the currency's value

8:53

and stability, potentially threatening

8:55

its status as the global

8:57

reserve. Triffin outlined this

8:59

problem in the 1960s when the US

9:02

dollar was tied to gold under the

9:04

Bretton Woods system. For global trade to

9:06

grow, the United States had to supply

9:08

more dollars than it had gold to

9:10

back them. This created

9:12

a conflict. Either stop

9:14

the outflow of dollars to

9:16

protect the gold reserves, risking

9:18

a crisis in global liquidity,

9:20

or keep supplying dollars, risking

9:22

a collapse of confidence in

9:24

the dollar -gold convertibility. The

9:27

dilemma explained the collapse of

9:29

the Bretton Woods system in 1971

9:31

when Nixon suspended the convertibility

9:33

of gold. Triffin actually

9:35

testified before Congress in 1960,

9:37

predicting that the Bretton Wood

9:39

system would eventually collapse due

9:41

to this inherent contradiction. The

9:44

establishment of the Petrodollar system enabled

9:47

the dollar to remain the global reserve

9:49

currency, but it did not resolve

9:51

the Triffin Dilemma. At the

9:53

start of this episode, I said that

9:55

many important economic issues, especially in the

9:57

United States, are linked and can be

9:59

understood through the Triffin Dilemma. In

10:02

the first subject, is the trade

10:04

deficit. I mentioned

10:06

that whenever a nation's currency is used as

10:08

the global reserve currency, it has to run

10:10

a balance of payments deficit. Money

10:12

has to flow out of the country to meet

10:14

the demand that exists for the currency. Now,

10:17

trade deficit is just part of a

10:19

balance of payments deficit. The

10:21

easiest way for people outside of

10:23

the United States to obtain dollars is

10:25

to sell items in exchange for

10:28

them. Also, when a

10:30

currency is the reserve currency, it

10:32

increases in value relative to other

10:34

currencies. And that makes

10:36

everything in the country with the

10:38

reserve currency relatively more expensive, putting

10:40

it at a competitive disadvantage. It

10:43

is possible to have a trade

10:45

deficit without being a reserve currency.

10:48

However, having a reserve currency all

10:50

but guarantees the likelihood of

10:52

a trade deficit. Now,

10:55

with all those dollars floating around

10:57

outside of the United States, what does

10:59

a nation, company, or person who

11:01

holds U .S. dollars do with them? You

11:04

invest them in dollar

11:06

-denominated assets. In

11:08

the 1970s, news stories began

11:10

to emerge of Arab sheiks

11:12

purchasing American real estate. In

11:14

the 1980s, similar stories circulated

11:16

about Japanese investors acquiring American

11:18

landmark properties such as Rockefeller

11:20

Center. Why were they doing

11:22

this? because they had a lot of

11:24

US dollars that they had to park

11:26

somewhere. These properties were

11:28

attractive investments. Real

11:30

estate isn't even the biggest class

11:33

of dollar -denominated investments. The

11:35

US stock market has seen dramatic growth

11:37

over the last several decades. Well,

11:39

there are many reasons for this, including

11:41

the rise of technology companies. A

11:44

significant contributing factor is

11:46

foreign dollars investing in

11:48

American dollar -denominated stocks. However,

11:51

perhaps the biggest source of investment

11:54

has been in U .S. Treasury notes. When

11:57

the Nixon administration negotiated with the

11:59

Saudis to create the Petrodollar system, they

12:01

explicitly requested that Saudi Arabia

12:03

invest their surplus dollars in

12:05

U .S. government debt. As

12:08

of the recording of this episode,

12:10

the total amount of foreign -held U .S.

12:12

government debt is approximately 20%, but

12:15

it has been as high as 33

12:17

% as recently as 2014. The

12:19

two largest foreign debt holders are

12:21

Japan and China, which have both run

12:23

large balance of payment surpluses with

12:26

the United States. Now

12:28

I should note that despite the

12:30

word deficit, the

12:32

federal budget deficit and the trade

12:34

deficit are different things. In

12:36

terms of capital, the trade

12:38

deficit is dollars going out of

12:41

the country. The

12:43

federal budget deficit involves selling

12:45

bonds, some of which are

12:47

purchased by foreign investors, which

12:49

involves dollars flowing back into

12:51

the country. Also,

12:53

while being a reserve currency all

12:55

but guarantees a trade deficit, it

12:58

doesn't guarantee a budget deficit.

13:01

At any point, Congress could just pass

13:03

a balanced budget. Money

13:05

that goes into treasury bonds would just

13:07

be invested somewhere else instead of those bonds

13:09

if they weren't available. However,

13:11

being a reserve currency does make

13:13

it much easier to run a budget

13:15

deficit. A country

13:18

with a reserve currency can obtain

13:20

lower interest rates, and there's a

13:22

built -in pool of money seeking investment

13:24

opportunities. So this

13:26

is the problem. If the government

13:28

debt gets too big, and if economic

13:30

activity becomes too imbalanced, then the confidence

13:32

in the currency is undermined, which then

13:34

hurts it as a reserve currency. Is

13:37

there any way out of the Triffin

13:39

Dilemma? For starters, you

13:41

can't easily undo being a

13:44

reserve currency. There are

13:46

trillions of dollars floating around the

13:48

world, and that can't be easily undone.

13:51

All of the proposed solutions would involve

13:53

having a global reserve currency that

13:55

is not controlled by any single country.

13:58

Prior to the 20th century, gold served

14:01

this function. While some nations

14:03

had their coins preferred, at the end the

14:05

day it was all just gold. One

14:07

proposed modern solution would be something

14:09

akin to the special drawing rights,

14:11

which is a special reserve asset

14:13

class created by the International Monetary

14:16

Fund. It's not a currency,

14:18

it's just an asset that's used by

14:20

countries. And finally,

14:22

another solution would be a neutral

14:24

asset that is controlled by absolutely

14:26

no government or any person, such

14:28

as Bitcoin. The

14:30

Triffin Dilemma illustrates that there are

14:32

costs and trade -offs associated with

14:35

everything. It's seldom that any action

14:37

will have entirely positive outcomes. It

14:40

can also help illustrate how

14:42

seemingly different economic things can be

14:44

very closely related, even if

14:46

they don't appear so at first.

14:51

The executive producer of everything everywhere

14:53

daily is Charles Daniel. The associate

14:55

producers are Austin Oakden and Cameron

14:57

Kiefer. I want to thank everyone who

14:59

supports the show over on Patreon. Your

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support helps make this podcast

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possible. I'd also like to thank

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all the members of the Everything Everywhere community who

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are active on the Facebook group and the Discord

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server. If you'd like to join in

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the discussion, there are links to both in the show notes. And

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as always, if you leave a review or send

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me a boost of gram, you too can have it

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read on the show.