"I was being called to surrender the very citadel of my self. I was completely in the dark. I did not really know what repentance was or what I was required to repent of. It was indeed the turning point of my life. God had brought me to my knees and made me acknowledge my own nothingness, and out of that knowledge I had been reborn. I was no longer the centre of my life, and therefore I could see God in everything." Bede Griffiths
AEIR
Triffin’s Dilemma, Reserve Currencies, and Gold
By Walker Todd
Nearly 50 years ago, Yale University economist Robert Triffin identified the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system in which the U.S. dollar was the world’s principal reserve currency (instead of gold, for example), the United States had to incur large trade deficits in order to provide the rest of the world with the liquidity required for functioning of the global trading system.
Unfortunately, Triffin wrote, U.S. trade deficits eventually would undermine the foreign exchange value of the dollar because foreign accounts would hold an increasing quantity of dollars. Restating Triffin's argument in contemporary terms, as the proportion of dollar claims held abroad versus U.S. gross domestic product (GDP) increases, the foreign exchange value of the dollar must decline if dollar interest rates do not increase at about the same rate as the foreign dollar claims.
Issuing the reserve currency gives domestic policy makers an advantage by making it easier to finance either domestic budget deficits or foreign trade deficits because there always is a ready bidders' market for any financing instruments from that issuer. Issuing the reserve currency enables the domestic population to consume more goods and services from whatever source than otherwise would be feasible. And issuing the reserve currency gives foreign policy officials of that nation the upper hand in determining multilateral approaches to either diplomacy or military action.
This last reason probably is why U.S. policy makers clung to the original Bretton Woods format for about 10 years beyond the point at which it still was viable, with the whole apparatus finally collapsing in August 1971.
Let us reconsider the effect of reserve currency issuance on domestic and foreign trade for a moment. Unless the issuing authorities can discover a way to allow their currency to depreciate more or less in proportion to the growing foreign trade deficits—by reducing interest rates or otherwise stimulating domestic inflation, for example—then a sustainable equilibrium becomes impossible.
Either the currency remains overvalued (good for the reserve currency status) and the trade deficits continue to increase, or the currency maintains fair external value (implicitly, a proportional devaluation, which is bad for the reserve currency status) and the trade deficits either stabilize or shrink. This latter proposition is what Professor Triffin was writing about in 1960, and it has been called Triffin's dilemma ever since.
Lewis Lehrman and John Mueller revived the discussion of Triffin's dilemma, without calling it that, in an article that appeared on December 15, 2008, in National Review Online. They suggested that the proper international reserve currency should be gold. I agree and wrote as much in a commentary, in the Christian Science Monitor, November 17, 2008.
Lehrman and Mueller argue correctly that no country willingly should volunteer for the reserve currency role. Such an endeavor necessarily leads to the same pattern of persistent overvaluation and trade deficits that plagued the United States since European currencies became generally convertible in 1959. Our abandonment of the international gold exchange standard in August 1971 accelerated and intensified our external deficits and the volatility of exchange rates.
Among advanced economies that were key members of the old Bretton Woods system, tolerating large amounts of external claims in their currencies always was a sore point because they wanted to avoid de facto reserve currency status and the curse (Triffin's dilemma) that accompanies it.
In the last two decades, roughly since the fall of the Berlin Wall in 1989, European countries have adopted the euro and allowed large external claims in euros to arise. The Japanese bubble of the 1980s finally burst and relieved the reserve currency pressure of large external claims there until the last couple of years. Recently prosperous nations like China, India, and Brazil linked their currencies to the dollar and managed exchange rates so as to avoid the accumulation of large external claims. Thus, none of the most likely candidates is volunteering for reserve currency status...
SP 500 September Futures Daily Chart
Still standing at the crossroads.
Gold Daily Chart
Hanging on to its active formation in the face of some determined resistance and repeated bear raids.
US Dollar Intermediate (monthly) Chart
A Bull Rally in the Dollar? Maybe, but spikes higher on euro short squeezes are not a stable platform for a sustained currency rally. Has to break out through overhead resistance and put the spike into thie trading range.
Silver Daily Chart
Bouncing along the 200 DMA looking for the strength for a sustainable rally. Interestingly enough the 50 DMA is overhead resistance. Personally I think this is a possible marker for a multi-party price manipulation. Seems rather convenient.
Mining Stocks HUI Index Weekly Chart
The US Dollar Daily Chart is showing a continuation pattern, indicating the likelihood that its rally has more room to the upside. This implies more troubles for the Euro, the Pound, and the Yen if in fact the dollar can break out from this formation. There is some probability of failure, but not so great as continuation of the trend higher.
There is also the matter of the 3, 10, and 30 year Treasury auctions this week. The dollar is often dressed up for the occasion. If not with the fundamentals, then by weakening the 'competition' to make it look prettier than them.
If the US stock market cannot move up or hold its ground while the Treasury conducts even modestly successful Treasury auctions, then this is a cautionary indication that Wall Street and the Fed are moving capital in a circle of manipulation to attempt to maintain the illusion of growth, in the manner of a Ponzi scheme. 
The Dollar rally is obviously consolidating its recent overbought condition, and has more room to the upside if the trend continues. Keep in mind that the fundamentals work slowly and on the long trends. In the shorter timeframes the price is just a trade, more subject to emotions and fluctuations. Do not try and fight the ticker if you are a trader. If you are a long term investor, then you can ignore what at the end of the day will turn out to be noise. But there are some imperative requirements to do so regarding your cash levels and leverage.
Here is the longer term view of the US Dollar as measured by a basket of currencies.
Can it 'break out' here? Yes, certainly. Europe and Japan have their problems, and in the world of fiat, the grading of the paper is done 'on a curve.' The central banks and their mavens, who intervene at least indirectly in the currency markets with a certain obsessiveness these days of non-stop financial engineering, like to shove their manipulation around the plate as well. They don't 'tweak' the economy; they are the economy, at least at the margins.
Can it also fail and break down here? Yes, certainly. A stronger dollar will step hard on the weak US economic recovery. It will serve to lower import prices, but dampen exports, which is what they call 'bad news' when your domestic demand is slack.
There is the fundamental detail an enormous amount of dollars being held overseas that are not in circulation so to speak. At some point they, like the swallows of Capistrano, will return, and have trouble finding a place to comfortably roost.
But the market does not care about our theories, or even the charts. They are just rough estimates of a very complex reality. This is a disclosure that all pundits should place on their prognostications.
And in these days of thin markets and bank prop desks as a major source the income, the fundamentals are less relevant than the short term reality of the squid's need to feed.
Let's see what happens. Then we will know something actionable.
