Time to trash Triffin

Apr 6, 2023·Alasdair Macleod

The dollar-based credit bubble is imploding, and emerging economies are seeking protection by accepting trade settlement in other currencies. The US policy of threatening regime change, currency destabilisation, or other means of ensuring nations remain in its sphere of influence are now failing.

Mainstream economists in the West insist the dollar is irreplaceable, and that as a trade settlement medium China’s yuan is strictly limited. Referring to Triffin’s dilemma, China would have to run deficits to provide the necessary currency liquidity. But they ignore the role of bank credit, which can be expanded at will to meet trade settlement demand.

Furthermore, China’s exchanges offer hedging facilities into physical gold, attracting Middle Eastern energy exporters away from petrodollars, until the new trade settlement currency planned by Sergey Glazyev comes into existence.

For evidence of Russia’s intentions to reintroduce gold into trade settlement, a translation of the semi-official position penned by Glazyev jointly with his deputy is appended to this article.

Increasing systemic risk in US, European, and Japanese banking systems is accelerating the movement of international trade settlement away from fiat dollars into safer havens. These are or will be ultimately backed by physical gold.

The world is changing before our eyes…

Quietly, informed opinion is beginning to accept that America has lost its global influence. Even Brazil, Argentina, and Mexico are openly planning for a future where their international trade will turn away from North America and Western Europe to an Asia firmly bound into the rules of China and Russia — rules that insist on evolving payments away from the dollar to their own currencies or into trade settlement currencies being planned.

Whichever way it evolves, the combined membership of the Shanghai Cooperation Organisation, the Eurasian Economic Union, BRICS, and/or BRICS+ accepts a commitment to replace the dollar in pricing of commodities and raw materials and for settlement of cross-border trade. And the fact that nations in the Americas, the whole of Africa, the Middle East, and even Indonesia in South-east Asia are confident enough to jump ship from America and her dollar says it all. America is left looking like a Don Quixote, and Europe its Sancho Panza. It is the potential of 3.8 billion Asian people rapidly industrialising, benefiting a further 1—1 ½ billion or so in Africa and Latin America, against 1.3 billion in North America, Western Europe, and Japan refusing to take part.

Given that very recently the US began ramping up its belligerent rhetoric over China and Taiwan in the east in addition to Russia and Ukraine through NATO, perhaps we should welcome the first signs of this loss of hegemony and the green shoots of peace that may follow. For that is what it could be — an America recognising that her aggression is now untenable and that the battle for global control must be conceded. But that raises a vital question about the dollar’s future.

It is likely that the onset of banking problems in the western financial system becoming plainly evident is playing a large part in the battle of the hegemons — it is certainly consistent with the sudden emergence of multiple countries suddenly appearing eager to abandon the dollar, and therefore the entire western alliance’s currency system. The scene for this abandonment was set by Vladimir Putin at the St Petersburg International Economic Forum in June last year, when 81 official delegations attended to hear Putin alert them to the dangers of holding dollars and euros in their reserves. Thus informed, they now appear to be mobilising.

The flaw in Western monetary thinking

Mainstream financial and economic commentary finds it inconceivable that the dollar will be replaced by anything else as the global reserve currency, the pricing medium for commodities, and the common factor in all foreign exchange transactions. This was the highly respected George Magnus’s take on it, extracted from an article he published in the Daily Telegraph last week:

“The tyranny of balance of payments accounting means that, if China and other nations run surpluses due to relatively weak domestic demand, others like the US and UK must run external deficits and accumulate debt. Cause and effect need to be the right way round.

“So the idea that the yuan can become a truly internationalised currency, perhaps a rival to the US dollar, is a narrative that lacks substance. 

“It could only happen if China allows the rest of the world to accumulate large claims in yuan. 

“That means either China has to run external deficits, which, as a mercantilist state with a single-minded focus on industrial policy, it will not.

“Or it has to permit free outward movement of capital, which it will also not do partly because it does not trust its own citizens to keep money at home, and partly because the resulting outflow of capital and fall in the yuan would destabilise its $60 trillion (£49 trillion) domestic banking system in which the proliferation of bad debt is already a problem. 

Xi’s China is, therefore, stuck between the devil of balance of payments surpluses and the deep blue sea of a closed capital account. Countries and companies may use the yuan more for the purposes of paying and issuing invoices, and even to denominate bonds sold to foreigners.

“Yet in worldwide payments, according to the SWIFT global messaging system used by banks, the yuan accounted for 2.2pc of payments last month, largely the same as two years ago.”[i]

Magnus’s comments are consistent with Triffin’s dilemma. Triffin argued that for the dollar to be the world’s common currency, the US needed to ensure that there is a supply of dollars available for other nations in their reserves. The way to achieve this was for America to run trade deficits to ensure the supply is available. But continual trade deficits are ultimately destructive economic policies. Hence the dilemma: the creation of a reserve currency’s supply is likely to end in an economic crisis for its producer.

Robert Triffin described this problem in evidence to the US Congress in 1960. He was proved right when the London gold pool failed in 1968, when President Nixon abandoned the Bretton Woods Agreement in 1971, and presumably is about to be proved right again as the dollar-based banking system enters a new crisis. But despite the obvious truths in Triffin’s dilemma being proved by events, there is a flaw in it, and that is to not differentiate between currency, which is what Triffin assumed is used for trade settlement, and commercial bank credit which is actually used.

The two forms of credit should not be confused. Bank credit is denominated in a central bank currency, but it is not the same thing. Furthermore, very few economists even with the highest establishment reputations understand how bank credit is created. This was Paul Krugman, winner of a Nobel prize for economics in his New York Times column from 30 March 1912:

“As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.

“This is all wrong, and if you think about how the people in your story are assumed to behave — as opposed to getting bogged down in abstract algebra — it should be obvious that it’s all wrong.

“First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage.”[ii]

Krugman was factually incorrect, and so far as I’m aware still holds this position. Commercial banks do create credit. In fact, they are dealers in credit, not as Krugman claims takers-in of deposits. We don’t know how Krugman thinks bank credit comes into existence in the first place. And yes, they can issue cheques out of thin air, but the preferred method to a banker’s cheque is simply to credit a borrower’s account.

That such a distinguished economist can be so ignorant of the mechanics of credit creation in the banking system is a perfect illustration of the lack of attention the profession has afforded to credit. Keynesians (such as Krugman), monetarists, and even free marketeers in the Austrian school have different and incorrect theories over how bank credit actually arises. It is really disarmingly simple: loans are created concurrently with deposits through the magic of double-entry bookkeeping. Deposits then become detached from the loans that created them as they are paid away. And banks then work together through clearing systems and wholesale markets to keep their books balanced.

Why is this relevant to Triffin’s dilemma? The answer is that so long as it has access to efficient clearing systems and wholesale credit markets in the relevant currencies, any bank can create credit in any currency it wishes to. This automatically frees trade payments from the requirement that there must be a substantial quantity of currency in foreign hands for that currency to act as a reserve currency. Credit for trade settlement is mostly self-extinguishing anyway, and the role of a reserve currency has more to do with state manipulation of exchange rates.

As to Magnus’s claim that capital outflows could destabilise China’s banking system, that is a strawman argument. As he points out, there are exchange controls, but China need not dismantle them. Just as European banks create eurodollars, Chinese and other banks can create yuan credit for trade financing and for settling external commodity transactions. In fact, the two yuan currencies already circulate separately. And if through its disuse, the dollar and other western currencies decline against the yuan, it might even suit the Chinese to relax exchange controls to accommodate capital flowing out of the US into Chinese projects in Asia. But that is for consideration later.

Macroeconomists always analyse finances and economics from a statist viewpoint, which leads them to downplay commercial considerations. Although the political class wheels and deals in trade agreements and quotas, most trade is agreed between commercial entities, and it is up to them to decide on their settlement media. Without a banking crisis, the currency of choice for the non-western world would doubtless continue for the foreseeable future to be the dollar or a mutual currency between regional trade parties such as the euro. But that is no longer the case, and the Asian hegemons and the nations in their camp are revising their position urgently.

The consequences of a banking crisis on emerging markets

While global banking contagion can threaten banks and entire banking systems anywhere, the current crisis is centred on large highly financialised economies. It is where central banks have implemented aggressive interest rate suppression most, accumulated losses for themselves through QE, and presided over commercial banking networks with ultra-high balance sheet leverage. These are predominantly the US, EU, UK, and Japan. While in many cases there is low confidence in many of their currencies, by way of contrast the less financialised emerging market economies are less exposed to global systemic risks. The exceptions are endemic problems where a combination of political leverage over monetary policy and public scepticism over a currency ensures its depreciation.

That being the case, the emergence of bank failures in the financialised economies encourages a secondary tier of less exposed monetary authorities to seek protection against the fallout. This probably contributes to many nations seeking to reduce their dependency on the dollar, the euro, and other major currencies. Instead, they are pivoting to China, Russia, and the opportunities presented for trade and investment in Asia as a whole. There can be little doubt that this is behind policy statements in recent months from multiple jurisdictions that in future some of their trade will be settled in national currencies in preference to the dollar.

But on the face of it, no one would prefer trade settlement in, say, Indonesian rupiah in preference to dollars, unless the additional risk can be hedged. Furthermore, while governments set trade agreements at a high level, the bulk of trade is between willing buyer and seller. Ultimately, it is they who agree on a currency medium. A more stable, trade currency which all participants can accept settlement is needed. It is this which is driving the Russian plan to construct a commodity backed currency for the Eurasian Economic Union and to allow any other nation in the SCO and BRICS+ to participate. It is the ultimate escape from the US dollar.

We do not know the details yet, but we do know the views of Sergey Glazyev, the economist tasked with the design of the new currency. On 27 December, in an article entitled “Golden rouble 3.0: How Russia can change foreign trade infrastructure[iii] written for Vedomosti, a Moscow-based Russian business newspaper, Glazyev laid out his latest thoughts. It was co-authored by Dmitry Mityaev, who is Assistant Member of the Board for Integration and Macroeconomics of the Eurasian Economic Commission — so this article is not just Glazyev’s musings, and it can be assumed to carry official weight on the EAEU committee. The article was published on the same day that the Russia’s largest bank, Sber, announced its new digital gold fund.

An edited version of Glazyev’s article translated into English is appended this article. It is more about the rouble adopting a gold standard than the basis for a new trade currency, but Mityaev’s co-authorship strongly suggests it applies to the planned trade settlement currency as well.

Accordingly, the EAEU currency commission now appears to have dropped its initial proposals for a new trade settlement medium entirely, in favour of using gold and gold related credit instead of baskets of participating currencies and commodities. 

Furthermore, a story circulating in India’s media quotes Alexander Babakov, Deputy Chairman of Russia’s State Duma, saying that BRICS nations are planning a new medium for payments that is not dependent on the dollar or euro, and that it would be backed by gold and commodities.[iv] But it is possible that he is confusing it with Glazyev’s EAEU project, or alternatively that project is being expanded from its original proposition.

Whatever the detail, abandoning the dollar is not a step to be taken lightly. China is highly dependent on exports to America and NATO members. But she appears to be refocusing on Asia and has the exceptionally high savings rate available to back the necessary capital investment without inflationary implications for consumer prices. Both Russia and the Saudis heading up OPEC+ will be fully aware of the impact on the fiat petrodollar from switching payments to yuan, roubles, or other currencies for their primary export product — crude oil. Reserves of western alliance fiat currencies not sold might even have to be written off. Consequently, the Saudis and other Gulf energy exporters are sure to have sought assurances about the stability of the yuan relative to the dollar. And it is also reported that they are using Chinese futures exchanges to hedge some of their yuan into deliverable gold. Anticipating that yuan-gold convertibility would attract settlements away from dollars into yuan, this facility was planned by China in 2017 and subsequently implemented.[v]

Therefore, we have five elements pointing to an emerging gold standard in Asia, and for the nations that are associated with it: 

  • President Putin made it clear that he sees a transition to sound currency values based on commodities (i.e., represented by gold), away from dollars and euros which can be weaponised by America and alliance nations in its sphere of influence.
  • Russia’s largest bank, Sber, has issued gold-backed digital financial assets, confirming gold’s future monetary role in Russia, the timing of which coincided precisely with Sergey Glazyev’s article in the Moscow business paper, Vedomosti (reproduced in the appendix to this article). Glazyev is in charge of the new trade currency project for the Eurasian Economic Union.
  • That Glazyev makes the case for the rouble to return to a gold standard is a broad hint about his recommendation as head of the EAEU committee for how a new trade currency will be designed. Glazyev is also the moving light behind the new Moscow gold exchange proposal.
  • It is difficult to imagine that Middle Eastern energy exporters would accept payment in currencies other than dollars unless they were given sufficient reassurances about their future payment values relative to the petrodollar. The ability to hedge yuan into gold almost certainly played its part.
  • And finally, we now hear from Indian sources that BRICS is involved in a new mutual trade currency project. But we should not rule out Babakov confusing BRICS with the EAEU, or that the EAEU project is being expanded into settlement for trade outside Asia instead.

Until last year, the Russian and Chinese long-term joint policy of doing away with dollars for pricing commodities, settling cross-border trade, and intermediating in virtually all foreign exchange transactions has been defensive, letting America make the geopolitical running and strategic errors along the way. Sanctions against Russia changed all that. Backed into a corner, Putin has had no option but to come out fighting. He arguably sought to destabilise the western financial system deliberately by denouncing the dollar and the euro at the St Petersburg International Economic Forum last June, attended by 81 official foreign government delegations. No longer passive, he is increasingly taking the initiative. And in his efforts to remove the American threat from Eastern Europe entirely, his strategy is both military and financial.

China’s yuan has become a credible trade settlement stopgap

One can imagine that selling the concept of a new trade currency to its participating nations has political hurdles to mount. But by restricting its use, at least initially to cross-border trade, they can retain full control over domestic monetary policies. It must be designed to be a practical alternative to western fiat currencies for as many of them as possible. Surely, this is why the concept of an SDR-like basket of currencies appears to have been ruled out by Glazyev. Constructing a weighted basket of commodities is also contentious and distracts from the objective, so a currency based on gold, which is legal money anyway, is the practical solution, and accords with established laws internationally.

Pending its official announcement, increasing numbers of jurisdictions have telegraphed their intention to accept Chinese yuan. Being firmly under the control of the state, China’s major banks are likely to be a safer haven for deposit balances relative to banks based in highly financialised markets. Furthermore, in contrast to imploding credit in the West, China’s money supply is growing. Its savings-based economy accommodates credit expansion without undermining the yuan’s purchasing power. And this credit expansion is driving investment in production instead of consumption.

By accepting yuan instead of dollars, euros, or even Japanese yen, not only are they a safe haven from the western banking system, but their future value promises to reflect an improving Chinese economic outlook in stark contrast with a collapsing financial and economic bubble in the West.

Obviously, there will be consequences for the dollar and the other fiat currencies allied with it. But that is a mystery which will have to be addressed in a future article…


Sergey Glazyev’s Vedomosti article on gold backing for the rouble – 27 December 2022 (Google translated from Russian with minor edits)

A severe sanctions blockade created the necessary prerequisites for the reversal of Russian foreign trade by 180 degrees. The main foreign economic partners were the countries – members of the EAEU, China, India, Iran, Turkey, the United Arab Emirates, etc. And with each of these countries, the Russian Federation has a surplus in the trade balance. According to a preliminary assessment by the Bank of Russia, in January – September 2022 it strengthened to $198.4 billion, which is $123.1 billion more compared to the same period last year. 

In friendly countries, there is a process of de-dollarization, the share of settlements in soft currencies is growing. In September, Russia became the third country in the world in terms of the use of the renminbi in international settlements. According to the Central Bank, in recent months, the trade in the renminbi accounts for up to 26% of foreign exchange transactions in the Russian Federation. The yuan/rouble pair on the Moscow Exchange has repeatedly overtaken the dollar and euros in terms of daily trading. When used in foreign trade calculations of the Russian Federation, renminbi, rial, etc. and the presence of a trade surplus, the result is the accumulation of multibillion dollar cash balances on the accounts of Russian exporters in soft currencies in banks of the above partner countries.

The accumulation of funds in soft currencies will further increase. But since this money is also subject to exchange rate and possible sanctions risks, there is a need to sterilize its excess mass. The best way is to buy non-sanctioned gold in China, the United Arab Emirates, Turkey, possibly Iran and other countries for local currencies. Gold purchased by the Russian Central Bank from foreign sources can be stored in gold and foreign exchange reserves, within certain limits, in central banks of friendly countries, and can be used for intra-country settlements, currency swaps and clearing operations. Part of the gold can be repatriated to Russia.

Russia's transition in relations with friendly countries to trade in national currencies – is a true tactical solution, but not strategic. If pricing continues in dollars on Western exchanges, trade flows are insured by English companies, then there is no real isolation from the western “curve mirror” derivative pricing systems.

In conditions of unprecedented sanctions pressure, the task of Russia is not to learn how to play according to the “curve rules” of the West, but to build transparent and mutually beneficial rules of the game with friendly countries, create our own pricing, exchange trading, and investment systems. And gold can be a unique tool to combat Western sanctions if you recalculate the prices of all major international goods (oil and gas, food and fertilizers, metals, and solid minerals). The fixation of the price of oil in gold at the level of 2 barrels for 1g will give a 2-fold increase in the price of gold in dollars, Zoltan Pozsar, Credit Suisse’s strategist calculated. This would be an adequate response to the “price ceilings” that the West introduces, — a solid foundation. And India and China can take the place of global commodity traders instead of Glencore or Trafigura.

Gold (along with silver) for millennia was the core of the global financial system, an honest measure of the value of paper money and assets. Now the gold standard is considered an anachronism. It was cancelled in its final form half a century ago (the United States announced the temporary closing of the golden window, adopted in 1944 in Bretton Woods) tying the dollar to oil. But the era of the petrodollar is ending. Russia, together with its eastern and southern partners, has a unique chance to jump from a sinking ship of a dollar-centred debt economy, ensuring its own development and mutual trade in accumulated and extracted strategic resources.

Gold played an important role in both industrialization and the post-war refusal of the USSR to join the dollar standard. By signing the Bretton Woods Agreements, the USSR did not ratify them, determining the binding of the rouble not to the dollar (which was a condition for participation in the Marshall Plan), but to gold and to “the entire property of the country”. “Golden rouble 2.0” ensured a rapid economic recovery after the war, allowed the implementation of nuclear and missile projects. Reformer Khrushchev cancelled the binding of the rouble to gold, carrying out a monetary reform in 1961 with the actual devaluation of the rouble by 2.5 times and its pegging to the dollar, having formed the conditions for the subsequent transformation of the country into a raw materials appendage of the Western financial system.

Now the conditions for “Golden Rouble 3.0” have objectively developed.

The sanctions imposed against Russia boomeranged on the western economy. The geopolitical instability they provoked, rising prices for energy and other resources, inflation and other negative factors put strong pressure on the global economy, in particular the global financial market. In 2023, all these circumstances will objectively affect the change in the stereotypes of investment policy in the world – from risky investments in complex financial instruments to investment in traditional assets, primarily in gold. According to Saxo Bank analysts, in 2023 increased demand for this metal will lead to its price rising to $3000. As a result, there is a real opportunity in the very near future to significantly increase reserves due to the increase in physical volumes of gold, and revaluation of its value.

Large gold reserves allow Russia to pursue a sovereign financial policy and minimize dependence on external lenders. The amount of reserves affects the country's reputation, its credit rating and investment attractiveness. Large reserves allow you to plan the state budget for a long time, buying off many economic and political risks. In 1998, the lack of sufficient international reserves became one of the causes of the crisis, which ended in default for Russia. Now our country already has large gold and foreign exchange reserves, being fifth in the world (after China, Japan, Switzerland, and India) and ahead of the United States. But this is not enough.

In China, which ranks first in gold production, there is a legislative ban on the export of all mined gold. According to the Shanghai Gold Exchange, over the past 15 years customers have taken delivery of 23,000 tons in physical form. India is considered the world champion in gold accumulation. Over the past quarter century, gold has been flowing from West to East through the main hubs (London, Switzerland, Turkey, the United Arab Emirates, and others) with a capacity of 2000–3000 tons per year. Did the western Central Banks’ official gold reserves remain in their storage facilities? Or has it all gone through swaps and leasing? The West will never say, and Fort Knox's audit will not.

Over the past 20 years, gold mining in Russia has almost doubled, while in the United States it has almost halved. By dismantling real wealth, the United States has lost its competence and interest in the production and processing of strategic resources (gold and uranium, etc.). The printing press funds the purchase of everything they want. 

Gold production, which today barely occupies 1% of Russia’s GDP, may well grow (due to the growth of both production and relative oil prices) to 2%—3% GDP and become the basis for the rapid growth of the entire commodity sector (30% of GDP) and the balance of foreign trade, which so far relies on the fiat currencies and the risks of devaluation and insufficient currency convertibility. Instead, Russia will be able to increase gold production from its three large, already commissioned fields from 330 tons to 500 tons, becoming a world leader in this strategic industry. Bonus: we get a strong rouble, strong budget and — in implementing the advanced development strategy, a strong economy.

Authors – Academician of the Russian Academy of Sciences Sergey Glazyev and Executive Secretary of the NTS under the Chairman of the EEC Board Dmitry Mityaev

[i] For non-DT subscribers, his article is accessible from Magnus’s own website: https://georgemagnus.com/xis-china-will-never-achieve-world-currency-domination/

[ii] See The Conscience of a Liberal, 30 March 2012: https://archive.nytimes.com/krugman.blogs.nytimes.com/2012/03/30/banking-mysticism-continued/

[iii] See https://www.vedomosti.ru/opinion/columns/2022/12/27/957178-zolotoi-rubl?utm_campaign=vedomosti_public&utm_content=957178-zolotoi-rubl&utm_medium=social&utm_source=telegram_ved (Western censorship permitting)

[iv] See https://thekootneeti.in/2023/04/03/brics-nations-set-to-create-new-payment-medium-backed-by-gold-and-rare-earth-elements/. This story is widely quoted in other Indian media outlets.

[v] See https://asia.nikkei.com/Economy/China-sees-new-world-order-with-oil-benchmark-backed-by-gold