The Current Account Version of the Triffin Dilemma

This article reviews the most popular restatement of the Triffin dilemma. It holds that the United States must run current accounts to permit the rest of the world to accumulate dollar reserves but doing so undermines the U.S. solvency. While the original Triffin dilemma pointed to a clear moment of systemic instability, the current account version points to a more amorphous risk of an unbounded rise in U.S. net international liabilities. The empirical work reviewed suggests that savings-investment fundamentals predict narrower U.S. current account deficits than those observed. However, the link to the reserve currency role of the dollar, rather than the U.S. economy’s size or the depth of its financial markets, remains to be convincingly made. Under the circumstances, the proposition that the future of the renminbi as a reserve currency depends on China’s running current account deficits rather than current account surpluses should not be accepted.