🧨 Trump Be Triffin, Bro!
FIRE BTC Issue #25 - The Triffin Dilemma is being challenged
The biggest headline last week was the Trump administration’s new tariff regime. This is an evolving story, which feels like is moving at lightning speed. Yesterday, Trump placed a 90-day pause on the new tariffs, at the same time ratcheted up tariffs on China to 125% (!) for their refusal to come to the negotiating table. However, it became clear very quickly that the main target in the administration’s sights is America’s trade deficit with the rest of the world.
The trade deficit reflects the extent to which U.S. consumption depends on goods made abroad and brought into the country. It’s often cited as a key reason for the decline of American manufacturing and the growing dependence on foreign sources for essential supply chains, like steel, semiconductors, medical supplies, pharmaceuticals, and even clothing.
Trump views the trade deficit as evidence of unfair trade practices by other nations and a detriment to American economic interests. He believes that large trade deficits signify that the U.S. is being taken advantage of in international trade.
His solution to address this imbalance is to raise the cost of importing goods and services, aiming to shift the incentive structure in favor of bringing production (and the jobs that come with it) back to the U.S.
This sounds simple, but the reality is much more complicated. And it all stems from something called the Triffin Dilemma.
🧐 What is the Triffin Dilemma?
The Triffin Dilemma is named after Belgian-American economist Robert Triffin. It highlights a fundamental conflict that arises when a national currency, like the U.S. dollar, is used as the world’s primary reserve currency.
Here’s how it works:
As the global reserve currency, the dollar’s value is elevated relative to other currencies because international trade is largely settled in dollars. People, companies, and governments around the world need dollars, which boosts demand for it.
This also creates a structural demand for U.S. Treasuries (essentially future dollars) as a store of value that enjoys the deep liquidity needed by major economic actors like nation-states and multinational corporations.
The strength of the dollar, driven by this global demand, makes imports cheaper for Americans and exports more expensive for foreign buyers. This leads to a consistent trade deficit: imports exceed exports.
The economic incentive then shifts production overseas, where goods can be made more cheaply, contributing to the industrial imbalances that figures like Trump aim to correct.
A key point highlighted by the Triffin Dilemma is that the U.S. trade deficit supplies the rest of the world with the dollars it needs to function. In a sense, America’s biggest export isn’t a product — it’s the dollar itself.
🌊 The downstream effects
Aside from the hollowing out of American manufacturing as seen in persistent trade deficits, there are other consequences that flow from the Triffin Dilemma and the dollar’s role as global reserve currency. You will likely recognize many of them.
Financialization of the U.S. economy: Wall Street grows in power and profitability, while the real economy (factories, local businesses) often stagnates or shrinks. The U.S. has shifted toward an economy dominated by services and finance.
Growing debt levels: The world demands more U.S. Treasuries as the primary reserve asset, which lowers interest rates and incentivizes the U.S. government to run fiscal deficits to issue them. Over time, this leads to a buildup of federal debt, which has now surpassed $34 trillion.
Asset bubbles and inequality: Lower interest rates encourages borrowing and speculation. This contributes to asset bubbles in housing, stocks, and tech as capital assets outpace wage growth. Wealth inequality widens as asset holders benefit while the rest fall behind.
Decline in productive investment: With easy global capital flowing in, the U.S. often underinvests in infrastructure, education, and industrial policy. Why build factories when foreign goods are cheaper and global capital is chasing financial returns?
The world depends on a steady supply of dollars to function. This makes the U.S. monetary policy the de facto monetary policy of the world, elevating the Federal Reserve’s role beyond America’s borders. The Fed is forced to respond to economic issues taking place across the world to combat ripple effects at home.
It also burdens U.S. authorities with the responsibility of maintaining healthy trade flows internationally. America benefits from immense geopolitical leverage by running the world reserve currency, but it comes with significant tradeoffs and relies on trust and confidence in the dollar system.
If trust in the dollar system gets shaky, so does the entire global economic machine.
🤔 What if Trump succeeds?
As the sole producer of the world’s primary money, America enjoys the “exorbitant privilege” of being able to print money to buy goods from the rest of the world. But this comes at the cost of outsourcing its manufacturing base.
On the flip side, the world essentially requires the U.S. to run persistent trade deficits in order to feed the insatiable demand for dollars used in global trade.
So the obvious question is: What happens if the U.S. eliminates this trade deficit, through tariffs or by any other means?
If the U.S. were to balance or even reverse its trade deficit, the flow of dollars out into the global economy would slow dramatically. This would create a global dollar shortage. Countries, companies, and financial institutions that rely on access to dollars to pay debts, purchase commodities, or conduct international trade will suddenly find themselves scrambling for liquidity (a “dollar squeeze”). A dollar squeeze can trigger credit crunches in emerging markets, tank local currencies, collapse trade financing, and cause cascading defaults in places where dollar-denominated debt is widespread.
In short, a reduction in the U.S. trade deficit doesn’t just shift jobs and factories — it also chokes off the global financial plumbing and causes global dollar liquidity to dry up.
Because the global economy depends on abundant dollar liquidity in this fiat monetary order, sharp reductions can trigger chaos in financial markets and bring economic activity to a standstill.
Trump is truly playing with fire.
🧯 Can the liquidity crisis be mitigated?
If Trump succeeds in eliminating the trade deficit to achieve his goals, what steps could the administration take to prevent a dollar liquidity crisis from crashing the global economy and wiping out a tremendous amount of wealth across the world?
The Federal Reserve could re-open global swap lines with foreign central banks, flooding select institutions with dollars to backstop liquidity. Treasury might also lean on international institutions like the IMF to extend special drawing rights (SDRs), or introduce targeted aid packages to specific nations most at risk.
But the most likely way to offset a dollar liquidity crunch would be through even larger U.S. fiscal deficits, combined with direct money creation (potentially in the form of stimulus payments), much like the response during the COVID crisis.
So much for DOGE and bringing U.S. debt and deficits under control!
That’s the paradox at the heart of the Triffin Dilemma. America must choose between maintaining domestic economic self-sufficiency and meeting the world’s demand for its currency. If Trump succeeds in bringing back American industry, he may also set the stage for the next global liquidity crisis, and the U.S. will likely have to print more dollars to fix it.
I’ll leave you with a question to ponder: What do you think the price of bitcoin will do when this plays out?
That’s it for this week. Thanks for reading!
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Until next time,
Trey ✌️