Trump’s Trilemma – and its solution
The trade problem that the US president must face is not new. It is known as the Triffin Trilemma (also called the Triffin dilemma or Triffin paradox), named after the Belgian-American economist Robert Triffin. This theorem highlights a fundamental contradiction inherent in the role of a national currency, such as the U.S. dollar, serving as the global reserve currency.
The trade deficit is the natural consequence of an overvalued US dollar, and its overvaluation is the consequence of the global demand for the American currency. Being the issuer of the world’s main currency for international reserves and world trade is a boon and a curse simultaneously. The benefits arise from the fact that such a country does not face immediate limits on importing more than it exports. The foreign debt of such a country may rise, but for a long time it will not be regarded as a problem because the foreign debt exists in the country’s own currency, and many countries want this currency.
Being the leading issuer of the world's reserve currency also has the temporary advantage of making this country’s budget deficit more easily financeable. The foreign holders of the US dollar apply their reserves to debt instruments of the federal government and buy US treasury notes and bills. With some setbacks, this process has been going on since the launch of the post-World War II monetary order, the so-called Bretton Woods system.
While it is great for the United States to receive all kinds of goods from all over the world just by printing more money, or, even, cheaper, just be issuing electronic blips, the twin deficits of the government budget and the so-called current account (mainly international trade), accumulate from period to period, and these flows become stocks in form of the public debt and the foreign debt.
President Trump faces the challenge that these debt mountains are rapidly approaching the limits. They might have already reached the point where confidence in the US dollar gets shaky. Latest data say that the US government’s debt has reached US-$36.2 trillion (May 2025) and is rapidly rising. In terms of its overall gross domestic product, public debt has crossed the mark of 120 %, with one-third of it held by foreign entities. Given the dynamics of the non-discretionary public spending and the prospect of a stagnating or even shrinking gross domestic product, these figures are about to rise drastically in the coming years. The same holds for America’s foreign debt. At the end of 2024, “net international investment position” (NIIP) amounted to US-$ 26.2 trillion.
President Trump and his team are well aware that this trend cannot go on. Something urgently must be done. One of the government’s aims is to “weaken” the dollar to get rid of the trade deficit and impose high tariffs for this purpose. At the same time, however, the US-Presidency proclaims that it wants to maintain the role of the American currency as the main international reserve currency and has even threatened the countries that want to abandon the US-dollar.
Already in November 2024, the future chairman of the Council of Economic Advisers, Stephen Miran, published “A User’s Guide to Restructuring the Global Trading System”, also known as the Mar de Lago Accord, which gave an unofficial outline of the plans to cope with America’s precarious economic situation.
The starting point of Miran’s analysis is the dollar’s persistent overvaluation, which weighs heavily on the American manufacturing sector. The loss of a strong manufacturing base threatens America’s security. Reserve assets are a form of global money supply. The demand for US currency is decoupled from the US domestic trade balance. Inasmuch as the relative share of the US economy is shrinking, this problem becomes more acute. World trade is rising relative to the size of the American economy. The US is stuck in the Triffin trilemma. Imposing tariffs, however, to solve the issue, is not the right solution. Its destructive consequences cannot be overlooked. Managing international trade is not the way out. The solution must be found in the heart of the matter, the existence of a fiat currency system run by governments and their central banks.
The Triffin Trilemma was first articulated in the 1960s during debates over the Bretton Woods system and exposed the tension between domestic monetary stability and the international demand for liquidity. This contradiction has not only had lasting effects on the structure of the international monetary system but remains acutely relevant in ongoing debates about global financial governance, reserve currency reform, and the future of monetary stability.
Robert Triffin outlined his dilemma in his book “Gold and the Dollar Crisis” (1960). At that time, the Bretton Woods system required the U.S. to maintain the dollar’s convertibility into gold at a fixed rate of $35 per ounce. Simultaneously, the dollar functioned as the primary international reserve asset. For the world economy to grow and maintain liquidity, the U.S. had to run persistent balance of payments deficits, supplying the rest of the world with dollars. However, such deficits would eventually undermine confidence in the dollar’s convertibility into gold.
Triffin pointed out that the U.S. could not simultaneously guarantee convertibility and supply the growing global demand for dollar reserves without eventually compromising the dollar’s gold backing. In short, if the U.S. continued to supply liquidity to the world, it would deplete its gold reserves, yet if it stopped doing so to protect its gold reserves, the world would face a shortage of reserves and a global deflationary slump. Therein lies the fundamental structural flaw of the Bretton Woods arrangement: the dependency on a national currency to perform a global function. The U.S. faces a policy dilemma: it could pursue domestic stability, reducing deficits and safeguarding gold reserves, or it could meet international demand for reserves by issuing more dollars and risk the sustainability of the system.
As predicted, this contradiction contributed to the eventual collapse of the Bretton Woods system. In 1971, President Richard Nixon suspended the dollar’s convertibility into gold, effectively ending the Bretton Woods arrangement and inaugurating the era of fiat currencies and floating exchange rates.
Also after the end of gold convertibility, the essence of the Triffin Dilemma continues to persist. The U.S. dollar remains the dominant global reserve currency, used for trade invoicing, foreign exchange reserves, and international financial transactions. This global demand for dollars means that the U.S. must maintain external deficits to supply the world with liquidity. However, as these persistent deficits lead to rising debt levels, questions about the sustainability of America’s debt position arise. Over time, such a monetary system becomes ever more vulnerable to the structural tension Triffin identified: the requirement for a national economy to bear the burden of global monetary stability. To escape the paradox, Triffin himself proposed a greater role for the International Monetary Fund (IMF) to issue Special Drawing Rights (SDRs) as a supranational reserve asset to reduce dependency on the U.S. dollar. Other proposals include the creation of a multipolar currency system involving the euro, Chinese renminbi, and other currencies. The emergence of digital currencies and blockchain-based financial architectures has also renewed interest in creating decentralized or algorithmic alternatives to national currencies as global monetary anchors.
From an Austrian economics perspective, the Triffin Dilemma underscores the distortions created by fiat currency systems and the political manipulation of money. Austrian theorists, such as Ludwig von Mises and Friedrich Hayek, warned against the instability of government-controlled monetary systems. The dilemma affirms the Austrian critique that using inflationary credit expansion to meet international liquidity demands leads to malinvestment and cyclical crises. A commodity-based monetary system (e.g., a gold standard) could prevent such dilemmas by anchoring the money supply to real assets, thus avoiding the need for politically driven deficit spending. While Austrians are skeptical of supranational fiat solutions like SDRs, they support efforts to restore sound money principles and decentralize monetary authority.
From the perspective of Austrian economics, the ideal global monetary system would be fundamentally different from the current fiat-based, central bank-dominated framework. Rooted in the principles of individual liberty, sound money, and spontaneous market order, Austrian economists envision a system that minimizes state intervention and maximizes monetary stability through market-based mechanisms.
At the core of the Austrian view of an ideal monetary system lies the concept of sound money. Money should be the product of the voluntary interactions of market participants rather than being imposed by state decree. Historically, commodities such as gold and silver have fulfilled the criteria of sound money due to their durability, divisibility, portability, and scarcity. In an ideal system, the monetary base would be composed of such commodity money, with gold being the preferred standard.
Sound money imposes fiscal discipline on governments by limiting their ability to finance deficits through monetary expansion. It also provides a stable unit of account and store of value, essential for long-term economic calculation and coordination.
An ideal Austrian-style monetary system would allow for free banking and currency competition. Rather than a centralized monopoly on money issuance (e.g., by a central bank), private banks would be free to issue notes redeemable in a commodity such as gold. These banks would compete for customers based on their reputations for solvency and prudence.
Theory and history show that central banks are inherently destabilizing due to their ability to manipulate interest rates and engage in discretionary monetary policy. These actions distort market signals, encourage malinvestment, and contribute to boom-bust cycles. In an ideal system, central banks would be abolished, and fiat currencies would be phased out.
Without a central authority setting interest rates, the natural rate of interest would emerge from the supply and demand for savings and investment. This would restore a more accurate coordination of intertemporal resource allocation, in line with Austrian capital theory. The global economy continues to face the challenge of balancing liquidity provision with monetary stability. Any reform of the global monetary system must confront the fundamental insight that no national currency can indefinitely fulfill the dual role of domestic anchor and international reserve without inherent contradictions. This insight also says that the substitution of the dollar with the Chinese currency or any other system linked to a nation state or a group of nations must fail.
What is required is the rigorous depoliticization of money. The world needs a monetary system free of government intervention. This is easier to achieve than most people seem to think. All that is needed is that governments abandon their “legal tender laws” – the requirement that the official currency must be accepted for the payment of debts and financial obligations within a jurisdiction, and instead give legal freedom to its citizens to use and issue private currencies without any restrictions. Such competition would align the incentives of currency issuers with the preferences of users, fostering monetary stability and innovation.