Actions to protect the dollar would hurt it: the Triffin Dilemma

Muhammad Zamir Assadi

An attempt to recreate a monetary and trade order modeled on the September 1985 Plaza Accord, in which developed countries cooperated to reverse the appreciation of the dollar, is gaining momentum inside the White House walls, with the term “Plaza Accord 2.0.”

The importance and benefits of the global currency are intricately intertwined, and the United States' dissatisfaction are directing at the world, which symbolized the “US vs. the world” pattern. Will we see a world without the global currency in the future?

On April 25, the heads of more than a dozen major financial institutions, including Citadel, Balyasny, Tudor, PGIM and BlackRock, appeared in the Eisenhower Executive Office Building. They all looked serious, waiting for the footsteps of the person they were visiting, Stephen Miran, chairman of the Council of Economic Advisers (CEA).

Plaza Accord 2.0 is propagating

Joint intervention by multiple countries to artificially guide the exchange rates of the US dollar, yen, euro, renminbi and other currencies to curb excessive appreciation of the US dollar. This idea, known as the Plaza Accord 2.0 or Mar-a-Lago Agreement, was first proposed by Milan in the fall of 2024.

This was a secret meeting. No one knows what kind of discussion took place behind the high walls. Some analysts believe that the purpose was to exchange views on the severely turbulent US financial market. But a financial insider admitted that “I smelled a dangerous breath from Milan.” Apparently, knowledgeable financial giants were not satisfied with the performance of the new CEA helmsman. Two participants revealed that his remarks on tariffs and markets were “incoherent” and “incompetent”, and the official rhetoric prepared in advance was quickly exposed on the spot. The market is afraid of the uncertainty of not being able to predict what will happen next.

The United States has shifted from free trade to protectionism using tariffs as a weapon, as well as has put pressure on allies such as Japan and the European Union to increase military spending. Moreover, it has also publicly advocated currency devaluation, which will promote Plaza Accord 2.0. From the perspective of protecting the global currency, the dollar, it is not difficult to understand the chaotic actions of Trump and his team that seem to lack basic common sense.

The key to understanding all this lies in the “Triffin Dilemma” that Milan likes to use. That is, the global currency is also widely used abroad, and the result of increased demand is a high exchange rate. If the domestic currency appreciates, export competitiveness will decline, and the trade balance will often be in deficit. Since the global currency countries are in deficit, they fall into a spiral where the more prosperous the world is, the higher the demand for the global currency is, and the exchange rate appreciates further.

That is to say, it is theoretically impossible for the central currency country to balance the stability of the international community with the steady growth of its own economy. The dilemma logic proposed by Belgian economist Robert Triffin in the 1960s is also applicable to the United States today. However, this is not a problem that can be solved through policy adjustments or institutional reconstruction, but rather a structural paradox.

In order to maintain the central position of the dollar as a settlement, investment, and reserve asset, the United States needs to continue to supply a large amount of dollars abroad. In fact, the United States has achieved this by carrying a long-term current account deficit and a fiscal deficit - a double deficit. 40 years ago, the United States, which was troubled by the double deficit, signed the Plaza Accord with Japan and Europe. Now, the wheel of history seems to be running over the same rut.

The difference is in scale. In 1985, the US trade deficit was USD 120 billion, and by 2024 it had reached $1.2 trillion, while the fiscal deficit had increased from USD 210 billion to USD 1.8 trillion. Globalization has made the scale of the dual deficits increasingly alarming.

Protect or kill: the Triffin Dilemma

Global currency and national defense are inseparable. In 1944, British economist Keynes proposed a super-sovereign currency called “Bancor”, but it was opposed by the United States, and the US dollar eventually gained the status of global currency.

As Milan said, “Economists never think about defense.” The appreciation of the dollar due to the concentration of funds has weakened the competitiveness of American exports, and in turn weakened the US manufacturing industry itself. As a result, industries such as steel, automobiles, and shipbuilding have fallen into an irreversible decline, and the security of the United States and the entire West will be questioned.

Ironically, actions meant to protect the dollar will hurt it. The most likely scenario for the United States to lose its central currency is when its own tariff war and debt inflation lead to a collapse of its credibility.

In financial street in London, where global capital gathers, the latest hot topic is “decoupling from the US dollar”. “Middle Eastern sovereign wealth funds feel the risk of US dollar depreciation and are asking to adjust their holdings,” an investment company said.  Moody's Ratings downgraded the US credit rating on May 16, which is the first time in a century that the world’s first superpower has lost the highest credit rating of the three major institutions at the same time.

From a micro perspective, comparative advantage is the core logic that determines the global division of labor, not the exchange rate. The rise and fall of the manufacturing industry fundamentally depends on the relative efficiency of capital, labor, technology and institutional environment. Take Germany as an example. While maintaining a strong euro, its manufacturing exports have long remained world-leading. The key reason lies in its technological accumulation, industrial chain coordination and policy support. If the US rely solely on a weak dollar to improve export competitiveness, it will only be a short-term improvement on the books. Simultaneously, extreme claims such as unilateralism, escalating trade wars, and generalized financial sanctions have made more and more countries realize that the global financial and security order provided by the United States is not a stabilizer, but a potential destabilizing factor.

As the world’s most widely used reserve currency and payment tool, the US dollar is responsible for providing liquidity, stable value and credit anchor to the global economic system. When the United States itself no longer has these attributes, the role of the US dollar as a global currency will face a reassessment. In order to get rid of the huge dilemma, the United States and the US dollar have begun to embark on a path that may lead to self-destruction. Even if the “Plaza Accord 2.0” remains only verbal, the world cannot easily stay out of this dangerous gamble that will hurt itself.