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Bitcoin, U.S. dollars, and the Triffin Dilemma

Can the dollar persist as the world's reserve currency and at the same time without requiring the United States to run ever-growing deficits? How U.S. seigniorage privilege affects the global economy.

Chess pieces on a board
U.S. dollars, and the Triffin Dilemma. Checkmate? (Pic by @felix_mittermeier on Unsplash)

One of the reasons we see Bitcoin as a technology that empowers the individual is that the current monetary system favors one country to the detriment of all others. The mechanism by which all countries trade gave the United States of America an unprecedented privilege that remains today. Those privileges started with the Bretton Woods Agreements and then uncoupling the gold standard with the dollar in 1971.

A concept that allows us to explain this privilege and the consequences that in the long term will probably be detrimental to the U.S. is the so-called Triffin Dilemma or Paradox. The world's reserve currency is the U.S. dollar. When we say it is "reserve," it means that the different countries use it to make their transactions abroad, i.e., countries export their products, charge in dollars, and reserve a big chunk of dollars for importing goods. Governments sell another part of these currencies to their Central Banks, converting the dollars to their local currency, which gives liquidity to the country's internal economy. The exchange rate definition comes, such as the dollar against the Euro, from these conversions.



The Triffin Dilemma (or Paradox)

Robert Triffin was one of the most influential economists of the post-World War II scene. Triffin became world-famous for criticizing and forecasting -correctly- the collapse of the Bretton Woods system. Triffin had predicted (through his famous dilemma) its downfall as early as 1959.


The dilemma goes as follows: to maintain liquidity in the world payments system, the number of banknotes must grow steadily. Triffin assumed that the number of transactions should also rise due to the growth of GDP and wealth. Triffin further asserted that gold production could not increase fast enough to sustain the growing transactions in the world economy. In other words, Triffin assumed that gold production was insufficient to maintain the demand for new banknotes.


In the Bretton Woods system, the increase of circulating dollars supplemented the supposedly insufficient gold production by increasing the total amount of reserves. In this scheme, Triffin argued that the U.S. Central Bank should steadily expand the number of dollars to provide the world economy with sufficient paper money. On the other hand, Triffin argued that, since the dollar was a promise by the Federal Reserve to deliver a quantity of gold, the government should avoid a massive issuance of dollars to maintain confidence and monetary stability.


We can summarize Triffin's dilemma: an increasing amount of dollars is necessary to sustain the growing amount of international payments, but the creation of dollars weakens the U.S. financial position because it cannot adequately back the issuance of its dollars. Under this scheme, the U.S.'s privileged position of maintaining the dollar as the world's reserve currency creates a chronic trade deficit for the U.S.


In principle, the U.S. benefits since its main exports are not goods and services. By simply printing dollars necessary to grease the wheels of world trade, it only exports dollars and receives goods and services from other countries in exchange. The problem with all this is that, over time, the world gradually loses confidence in the dollar, giving rise to a high level of debt in the United States. As a consequence of Nixon's decision in 1971, does not back every dollar with gold. The dollar is a promise to a payment in the future. It is debt.


Every action has consequences. It is worth remembering that countries keep dollar reserves for their imports. If the U.S. issues dollars to keep the system running and buy products from other countries, these reserves lose purchasing power over time due to inflationary effects. It is clear, then, that the scam is planetary in scope.

How does Bitcoin fit into this system?

The alternative that Bitcoin can offer in a hypothetical case of global adoption lies in the fact that their developers designed its protocol so that, in principle, no country can have the privilege of exercising seigniorage over the currency. In other words, the issuance and distribution of Bitcoins are entirely decentralized. The issuance of Bitcoin is a product of the rewards granted to miners to obtain the random number that protects the transactions every 10 minutes. The distribution develops organically from the marketing of the currency through the mechanism of supply and demand. The exchange of goods and services made worldwide by the economic agents that use Bitcoin also distribute and shuffle newly produced Bitcoin, eliminating the need for a country to provide liquidity to the world economy.


Bitcoin is not debt. Therefore, it lacks counterparty risk. The risk of default is always present in the case of an obligation (debt) of any kind. In the case of Bitcoin, its design makes it the soundest money ever created. It is of utmost importance to note that in the current monetary system, it is the central banks that gradually hoarded gold in their vaults, removing citizens from exchanging their promises for gold (banknotes) whenever they choose to do so. Bitcoin returns sovereignty to the individual, as individuals, businesses, and governments can access, trade, store and spend Bitcoin with its instantaneous settlement system.

The deflationary supply of Bitcoin and its issuance limit (there will only be 21,000,000 Bitcoins) are enough to satisfy the world's monetary demand. There is no need to issue more coins. Since each Bitcoin splits into fractions, called Satoshis, its divisibility offers versatility for easy trading. It also causes the price discovery system to trend downward, the quality of the goods produced to increase, and each Bitcoin satoshis to improve in quality in terms of increased purchasing power. Many worldwide banks are adopting Bitcoin, offering their clients new crypto-related services. Bitcoin creates an excellent store of value, medium of exchange, and unit of account. Bitcoin is a revolutionary monetary system that can perfectly function ubiquitously given its wide geographic dispersion thanks to the Internet, its guaranteed scarcity which makes it valuable, and the inability of governments to confiscate it.


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