Bitcoin Forecasting

Bitcoin May Solve the Triffin Dilemma

Where the USD falls victim to the Triffin dilemma, the borderless, digital cryptocurrency bitcoin may hold promise to solve this international monetary flaw, and provide the backbone for a more interdependent global economy.

Although the United States Federal Reserve Note carries with it many advantages for conducting commerce and serving as a world reserve currency, its makeup is not void of imperfections. One of the main shortcomings of the USD is the Triffin Dilemma, a problem which arises when countries must manage both short term domestic and long term international economic objectives. Such a dilemma can lead to trade deficits when a country must also satisfy international demand of its currency. Where the USD falls victim to the Triffin dilemma however, the stateless characteristics of bitcoin may hold promise to solve this international monetary flaw, and provide the backbone for a more interdependent global economy.

The Triffin Dilemma

Reserve Currency Status
Reserve currency status by country dating back to the 1400’s

The economist Robert Triffin first brought to light an international monetary issue involving the nation holding reserve currency status and the impact such a role would have on domestic trade deficits. Such a currency arrangement is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. The countries issuing a reserve currency, which foreign nations would wish to hold, must be willing to supply extra money stock to fulfill global demand. Such an arrangement would inevitably lead to operating a trade deficit.

In March of 2009, in the midst of the recent Great Recession, the People’s Bank of China Governor Zhou Xiaochuan voiced his displeasure of the current makeup of the world reserve currency. Known for his reformist tendencies, Xiaochuan made clear the need for creating “an international reserve currency that is disconnected from individual nations”. Such an international reserve currency, he insisted, could provide stable value, rule-based issuance, and manageable supply necessary for achieving prolonged financial prosperity.

Zhou Xiaochuan’s proposal went largely unheard, as economists were not clear if the IMF’s SDR had the global adoption to overtake the dollar. No solutions have since been proposed. Yet is it possible that such a “disconnected international reserve currency” has been in circulation since 2009? Is it possible that the digital cryptocurrency bitcoin could act as a domestically disconnected money supply and therefore solve the Triffin Dilemma?

John Nash on the Triffin Dilemma

John Forbes Nash
John Forbes Nash, who was said to have made a breakthrough on Einstein’s formulas just days before his untimely death.

The late mathematician John Nash, whom some believe to be a contributor to the invention of bitcoin, was also an advocate of monetary reform in order to solve the Triffin Dilemma. The desirable goal, in Nash’s mind, was to create an international reserve instrument capable of operating independent of individual nation states while remaining stable in the long run, severing deficiencies found in credit-based money.

Such a money supply would be able to provide a national savings outlet while operating in an autonomous, global manner. With an obsessive focus on cryptography and ideal money, the introduction of bitcoin is covered with the fingerprints of John Nash.

Can Bitcoin Solve the Triffin Dilemma?

The Triffin Dilemma, where countries issuing reserve currencies attempt to simultaneously manage national savings levels with necessary international liquidity, remains to this day, a barrier to economic growth. However, could it be that the introduction of bitcoin brings forth a viable solution to the Triffin Dilemma?

If we assume that the prerequisites for a currency capable of solving the Triffin dilemma were to provide the following, it may be possible to argue that bitcoin is the perfect fit.

  1. stable value
  2. rule-based issuance
  3. manageable supply schedule

In a recent analysis of the price volatility of bitcoin, Eli Dourado estimates that the stability of bitcoin could match that of the Euro within 15 years. Largely a product of an increasing number of active users, the Federal Reserve Board of Washington also estimates that the userbase of bitcoin is doubling roughly every 8 months.

Rule-based issuance is perhaps the most interesting aspect of the bitcoin economy. Here, we have a paradigm shift in the management of monetary policy. Where central banking and human decision making were the catalysts for monetary policy in the 20th century, that role is now filled by algorithmic time-bound issuance with cryptocurrency. A computerized function on the issuance of money has the potential to provide a sound basis for monetary policy because it is magnitudes more capable of adjusting to changing externalities, such as the bitcoin mining hash power index.

Finally, the supply schedule of bitcoin is relatively inelastic compared to traditional forms of money. We can predict with a high degree of accuracy the supply of bitcoin at any point in time (past & future) and make the necessary adjustments in domestic policy. Peter Šurda, an economist from Vienna, Austria, argues that the inelastic supply function of bitcoin could result in a reduction of business cycles on a domestic level. This inelastic function of bitcoin’s monetary supply could allow both domestic governments and businesses to forecast changes with a higher degree of accuracy, and therefore, could quite possibly mitigate the destructive nature of the business cycle.

Truly, as bitcoin gains new users in the form of individuals learning about cryptocurrency, transacting it, and crossing the psychological chasm of viewing it as a valid form of payment, it inches closer to its rightful place as a global reserve instrument. Such an instrument, would hold tremendous potential to solve the age old Triffin dilemma.

By Travis Patron

Travis Patron is the founder of Diginomics Corporation and the author of The Bitcoin Revolution: An Internet Of Money. He was an early adopter of both bitcoin and ethereum technology, and continues to educate audiences on emerging opportunities in the digital economy.

5 replies on “Bitcoin May Solve the Triffin Dilemma”

Although nothing is certain, it is possible that John Nash could have been Satoshi Nakamoto. There are very few people with the knowledge of both economics and cryptography that could have invented bitcoin. John Nash is one of the few who had that capability.

That being said, we may never know because Nash was killed in May, 2015 in a car accident.

Sorry Travis, bitcoin is not suitable instrument to solve the Triffin Dilemma. The idea that bitcoin will stabilize with more usage and volume makes sense for short term swings due to liquidity issues, i.e. deeper markets are like supertankers, and take more energy to change direction. However, there is structural issue that will forever hold bitcoin back from being stable, and that is that exact thing you love about it – it has a fairly fixed supply over a short period of time. This means changes in volatility, which are constantly happening and endemic to all currencies, can only result in price changes. To see how it might behave differently, imagine if you fixed the exchange rate by letting supply fluctuate. This is the problem you can do one or the other, but not both.

If you look at the quantity theory of money, you see it’s not the nominal amount of currency that matters, a major misunderstanding of most gold bugs, but the product (multiplication) of supply of money (M) times the velocity (V). Printing money is not always inflationary, as we have seen over the last few years. All the data shows this clearly, as we are fighting a deflationary spiral, but people cannot understand why we don’t have inflation since we printed so much money. The problem is that Velocity has been dropping, so the product of M*V has also been dropping, which is deflationary.

In order to solve the Triffin Dilemma, you need an instrument that is inherently stable, much more stable than bitcoin, and even more stable than the existing currencies. Something people can safely park Billions upon Billions in, because the World bank says we have 199 Trillion in debt globally, and there is no combination of growth and taxes that can possible repay that. Take that in for a moment…

The consequences of that statement are potentially many, many magnitudes more destructive than anything you have ever witnessed or heard of in today’s leveraged global economy.

That means one of two things, either 1) we will have an orderly default, or 2) we will have a disorderly default. Believe me, the FED is closely tracking this problem, and has a plan to solve it, which is to monetize the debt. However, politics are not going to allow this in the U.S., so they have another plan. The good news is it will result in a new global currency that finally removes the dollar from being the reserve currency, which will be great for main street U.S. businesses.

Thank you for the comment Jon.

I agree with you that the nominal supply of currency alone does not paint a full picture of the inflationary rate of a particular money supply. The velocity of a money in addition to the stock is responsible for finding an equilibrium exchange rate.

Currently, we have a toxic imbalance of money velocity. Large corporations and governments are simply sitting on too large of cash reserves, paralysed by uncertainty.

Bitcoin cannot reach a point of stability where it will be capable of solving the Triffin Dilemma in the short run. However, in the medium to long run, I do believe it will position itself as an independent economy and act as a sort of reserve currency for many individuals. This would be a step forward to solving the Triffin Dilemma, although I do believe we will also see government issued, global cryptocurrency in the future.

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