Can America Escape the Triffin Dilemma?
Investment abroad and digital infrastructure could replace trade deficits
🇺🇸 I've spent the past three weeks in the US, speaking with founders, investors, and industry leaders across several cities. These conversations—on factory floors, in boardrooms, and at backyard gatherings—have offered a clearer sense of how the economy feels on this side of the Atlantic, how day-to-day realities connect to the broader macroeconomic picture, and what may lie ahead.
Picture a factory in Ohio shuttering its doors while container ships queue at the Port of Long Beach, California, heavy with imports. This scene—American deindustrialisation amidst consumption plenty—stems not just from poor management or foreign competition, but from a structural flaw built into the global monetary system.
The so-called “Triffin dilemma” means the US must run trade deficits to supply the world with dollars, but these same deficits erode the industrial base that once made the dollar dominant. This essay traces how a theoretical paradox became a real constraint, why the usual fixes fall short, and whether a new mix of foreign investment and digital finance might offer a way out.
This week I'm also introducing curated links to essential reading on related topics, plus highlights from the archive that provide deeper context for understanding America's monetary evolution.
1/ America's monetary success created its own prison
In 1960, Belgian-American economist Robert Triffin testified before Congress with an unsettling message: America's monetary success contained the seeds of its own decline. To function as the world's reserve currency, the dollar must flow abroad in large quantities. But sending dollars overseas at that scale means running persistent trade deficits, which over time raise doubts about the sustainability of America’s external position and the long-term value of the dollar.
Foreign central banks need dollars to stabilise their currencies. Companies use dollars to settle trade. Investors seek dollar assets as safe havens. Meeting this global demand means the US must send about $900 billion abroad each year. US direct investment covers roughly $400 billion, but the rest must come from trade deficits.
Each imported car displaces Detroit workers. Each offshore factory reduces domestic industrial capacity. America now owes foreign investors $24.6 trillion more than it owns abroad, equal to about 90% of GDP. But curbing imports would reduce the global supply of dollars, tightening liquidity across trade, debt, and capital markets. Since most countries rely on dollars to settle trade and service debt, any shortage risks triggering financial instability—precisely the kind of disorder the dollar’s dominant role is meant to contain.
What Triffin once framed as a theoretical contradiction has become a hard limit. The country faces a structural trade-off between financial dominance and industrial strength. That constraint, now baked into the system, took shape under historical conditions that once looked like a permanent advantage.
2/ Victory in 1945 forged today's economic chains
In July 1944, as Allied victory looked certain, 730 delegates gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. With Europe in ruins and Britain's empire in decline, only the US had both the industrial capacity and the monetary gold—nearly 75% of the world’s total—to anchor a new financial order.
Harry Dexter White, the lead American negotiator, used this advantage to override John Maynard Keynes and the British delegation. Keynes proposed a neutral international currency, the “bancor,” to avoid giving any single country outsized influence. White rejected this and pushed through a dollar-based system. The final design reflected American power: other currencies would peg to the dollar at fixed rates, and only the dollar would be convertible to gold, at $35 per ounce.
For two decades, the system worked. European reconstruction created a demand for dollars, which the US supplied through the Marshall Plan and trade. This channelled global commerce through American banks and required foreign central banks to hold dollars as reserves. Wall Street became the world’s financial hub, not just through competence, but by design.
Success bred imbalance. By the 1960s, the volume of dollars held abroad far exceeded US gold reserves. President Charles de Gaulle of France, advised by economist Jacques Rueff, saw the weakness and began converting France’s dollars into gold, putting pressure on the system.
The final blow came on 12 August 1971, when Britain requested $750 million in gold. Though the timing was coincidental, Nixon announced the end of convertibility on 15 August—a decision that had been building for months as dollar holdings abroad overwhelmed gold reserves. That decision cut the system’s golden anchor and marked the shift to today’s fiat regime. Yet the dollar’s central role survived, sustained by habit, practical need, and financial infrastructure—laying the ground for a more complex monetary trap.
3/ Dollar recycling sustained four decades of growth
The post-1973 floating exchange rate system proved more adaptable than many expected. Once freed from the constraint of gold convertibility, the dollar could respond to economic pressures while retaining its central role through market momentum and institutional inertia.
Japan showed how the new system worked. Companies like Toyota and Sony earned dollars by selling goods to American consumers. The Bank of Japan collected those dollars as reserves and recycled them into US Treasury bonds. This loop meant America’s trade deficits financed themselves, with foreign exporters funding US government borrowing in return—a cycle of dollar recycling that kept the system running.
When the balance became unstable, coordinated intervention helped reset the terms. The 1985 Plaza Accord is a clear example: US Treasury Secretary James Baker brought finance ministers together at New York’s Plaza Hotel to manage a controlled depreciation of the dollar. Over two years, the currency fell by half against the yen, giving American manufacturers some relief while preserving the system’s foundations.
For nearly forty years, this arrangement supported global growth. Americans enjoyed cheap imports and easy credit. Export-led economies in Asia expanded their industrial bases. European countries held dollar reserves and benefited from monetary stability. The system’s flexibility seemed enduring—until digital technology and financial innovation introduced strains it could no longer absorb.
4/ The 2008 crisis exposed fundamental contradictions
The 2008 financial crisis began with American mortgages but revealed deeper structural weaknesses. When Lehman Brothers collapsed, panic spread, showing how deeply global finance depended on dollar funding. European banks, heavily invested in dollar assets, faced severe liquidity shortages. The Federal Reserve stepped in as the world’s central bank, extending $600 billion in swap lines to prevent a systemic collapse.
Quantitative easing—the Fed’s electronic money creation—temporarily calmed markets but worsened underlying imbalances. Between 2008 and 2014, the Fed injected $4 trillion, flooding global markets with liquidity. This cheap money flowed not into American factories but into financial engineering. Private equity firms used near-zero rates to strip industrial assets, while corporations borrowed to buy back shares instead of investing in production.
At the same time, China rose as the world’s factory floor, producing 32% of global manufacturing by taking advantage of the very imbalances created by America’s monetary policy. Beijing suppressed domestic consumption to stay export competitive, accumulating $3 trillion in reserves—mostly recycled into US Treasuries. This vendor-financing setup allowed Americans to buy Chinese goods on Chinese loans, speeding deindustrialisation.
An impossible trinity emerged: America could not simultaneously maintain reserve currency status (which requires deficits), rebuild manufacturing (which requires surpluses), and service growing debts (which requires foreign capital). Traditional policy tools—interest rates, fiscal spending, currency intervention—only shifted the problems without solving them. Yet as these approaches failed, new technologies hinted at possible ways out of Triffin’s mathematical trap.