Triffin's Dilemma and the MAGA Plan - The Phoenician League

We’ve been talking about the Make America Great Again (MAGA) plan the last two weeks. We can condense the plan into three fundamental planks. They are:

De-lever the US government by cutting out waste, fraud, abuse, and bloat
Re-invigorate the private sector by de-regulating the financial system
Reflate the American middle class by reshoring manufacturing, cutting taxes, and driving down energy prices

But as we mentioned on Friday, there is a major roadblock in front of this plan. That roadblock isn’t related to trade wars or geopolitics… it’s something called Triffin’s dilemma.

At its core, Triffin’s dilemma arises from the inherent conflict between a country’s domestic economic priorities and its role as the issuer of the global reserve currency.

For the US, maintaining the dollar as the world’s reserve currency has required running persistent current account deficits… because the world needs a constant flow of dollars.

These deficits support global liquidity. But they create a dynamic that incentivizes imports and undermines domestic manufacturing competitiveness. We ship dollars to the world and the world ships us goods in return.

Stephen Miran, Trump’s nominee for Chairman of the Council of Economic Advisers, spelled this out clearly in his paper titled A User’s Guide to Restructuring the Global Trading System.

As Miran put it, Triffin’s dilemma has decimated America’s export sectors. And he noted that the Trump administration’s efforts to balance the budget would make it even more difficult to revive America’s manufacturing sector… because the dollar would likely appreciate dramatically against foreign currencies. That makes American-made goods less affordable in global markets.

The fact is, the MAGA cohort believes that having a robust manufacturing sector is the key to having a robust middle class – which is itself the key to social stability. Free trade purists will disagree with them on some of these policies… but they are sincere in their beliefs.

And I think they have a viewpoint that’s worth considering.

The benefit of Triffin’s dilemma and perpetual trade deficits is that they drive mass consumerism throughout the country. But there’s also a human-level trade-off that’s hard to measure. Does consumerism lead to happiness and fulfillment?

Another trade-off is that Triffin’s dilemma incentivizes fiscal deficits as well as trade deficits. This further boosts demand that supports access to cheap foreign goods… but it also causes the cost of living to rise across the board throughout the US.

Houses, cars, rent, food – prices have exploded higher for each of them since 1971. But median wages have not kept up with these cost of living increases. Not even close. This chart tells the story:

This chart compares the growth in median US wages, adjusted for inflation, against total American productivity – the output of goods and services. The data spans from the late 1940s to the present day.

And we can see that wages and productivity were in sync until 1971. The average person’s salary increased proportionally with America’s output of goods and services. Just as it should in a healthy economy.

But look at what’s happened since. Our productivity powered forward… but our inflation-adjusted wages went stagnant. That’s what happens when you run your economy on consumption fueled by debt and government spending.

This chart succinctly summarizes why Middle America has been hollowed out. The average guy has not benefited directly from our productivity gains in fifty years. Sure, foreign electronics have gotten cheaper… but everything else has gotten more expensive.

Reverting back to a production-led economy, as we discussed last week, would help reverse this trend. But there’s no easy path from here to there.

Instead, we’re on the precipice of a once-in-a-generation economic shift. That means some goal posts are going to move, and quite a few things that are considered standard practice today are going to become obsolete.

We’ll continue tracking this story in these pages going forward. But for our next missives, I think it’s time that we take a step back and focus on the fundamentals.

What’s all this mean for each of us and our families? And how should we position our finances given all the uncertainty out there today?