Letter 508, September 2025

In economic theory, the short run equilibrium condition upon which the value of a currency is determined is that the current account deficit must equal the surplus in the capital account, whereas in the long run the current account must balance. 

The long-term condition is not valid for a reserve currency, like the dollar. Its value is shaped by the capital account. Capital inflows are a function of the demand for dollars (in the form of US Treasuries) by other central banks and the general public for US assets (stocks, bonds and bank deposits). 

This leads to the Triffin paradox: to maintain the dollar’s role as the global reserve currency, the U.S. must continually run trade deficits, to supply the world with dollars. 

As a result of the Triffin paradox, the current US policy dilemma is akin to the mid-1980s – how to correct a yawning federal budget and current account deficit. The predominant view now, as it was then is a huge dollar depreciation without undermining the reserve status of the dollar. 

This is all misconceived. This Letter examines the underlying factors that determine the Triffin Paradox, addresses misconceptions, and provides the parameters of available options & implications thereof.