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The Triffin Dilemma and a multipolar international reserve systemKingdom, Norway, and Switzerland are also held in substantial amounts by foreigninvestors. A further critique of the ‘safe asset shortage view’ can be found in Borio andDisyatat (2011).Suppose the US had maintained the fiscal balance it achieved in 1999–2000. The netsupply of US Treasuries was stable or falling, but private investment exceeded savings,so there was a current-account deficit, with a rising foreign demand for reserves.What would the foreigners have bought? If the dominant source of safe assets was USTreasuries, then the constraint on the supply of these (reserve) assets would not havebeen US fiscal capacity, but US fiscal rectitude – no Triffin Dilemma, as set out byFarhi et al.And finally, note that it is not clear that the US current-account deficits of the 2000swere due to a demand for additional reserve assets from the rest of the world. Thatdemand could have been met by net private capital outflows, as in the 1960s.5 The policy implicationsThe world will move towards a multipolar reserve system. But this will happen notbecause of the Triffin Dilemma and a shortage of safe assets in the current dollardominatedsystem. It will happen because official reserve holders want to diversifytheir portfolios. (See Papaioannou et al 2006). And the correction of global imbalanceswill promote this.For policymakers, the message is to try to convince surplus countries that reserve assetsare not as safe as they think, so that they reduce their demand for these assets (Chinahas already suffered a large capital loss because of dollar depreciation in the 2000s).The asymmetry between pressures on surplus and on deficit countries might be met bydoing the opposite of creating more ‘safe assets’ – that is, by raising the risk premiumon the supposedly safe assets, so that countries accumulating reserves cut their demandfor them, shifting their portfolios towards other assets (for example sovereign wealth51
Rethinking Global Economic Governance in Light of the Crisisfunds). (Goodhart 2011 appears to be advocating policies that would have this effect.)Such a trend could accelerate if the dollar were to continue to depreciate.As the world moves towards a multipolar reserve system, emerging market countries willdevelop their domestic financial markets and will have less need for foreign financialintermediation (cf. Despres et al). Some emerging-market countries may themselvesbecome reserve suppliers. And the development of more international facilities centredon the IMF could reduce the demand for reserves for self-insurance (Farhi et al).Considering the Triffin Dilemma undoubtedly helps us to understand the forcesunderlying the development of the international financial system. But it is not thesource of the system’s present-day problems.Author’s note: This essay is based on my contribution to the conference “TheInternational Monetary System: sustainability and reform proposals” held in Brusselson 3–4 October 2011, to commemorate the 100 th anniversary of the birth of RobertTriffin. I am grateful for comments from Maurice Obstfeld. I am also indebted toTommaso Padoa Schioppa for many discussions of these issues over 25 years and toHélène Rey for more recent extended discussions – even though, in both cases, wesometimes had to agree to disagree, as will be evident from the text.52
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