by Charles Hugh Smith, Of Two Minds:

Triffin’s Paradox demands painful trade-offs to issue a reserve currency, and it demands the issuing central bank serve two competing audiences and markets.

Judging by the headlines and pundit chatter, the U.S. dollar is about to slide directly to zero. This sense of certitude is interesting, given that no empire prospered by devaluing its currency. Rather, devaluing the currency is a sure path to dissolution and collapse of the empire. This dynamic–devaluation leads to decline and collapse–is not exactly a secret.

So what all those proclaiming the death of the USD are saying is the Imperial Project is consciously choosing suicide, all to boost the U.S. stock market which is now little more than a signaling mechanism and a means of accelerating wealth inequality, as the billionaire class and the billionaire wannabe’s in the top .01% are the primary winners as stocks reach new highs.

(Recall that the U.S. economy is best described as anything goes and winners take most.)

Taking it one step further, those predicting the collapse of the U.S. dollar are predicting that not only will the Empire choose suicide, so will the billionaires because what will their fortunes be worth if the USD goes to zero?

The USD-is-dead crowd (and it is a crowd) present the demise as ordained by some mysterious force, as if the Empire has no will or power to resist the inevitable slide to zero. The helpless giant can only watch as the Federal Reserve debauches the dollar to boost stocks and float the mountains of debt required to keep the U.S. economy from imploding.

The USD-is-dead crowd also seems to overlook the inconvenient fact that all the other issuers of fiat currency are busy debauching their currencies, too by the same mechanisms: the endless digital printing of new currency, distributed to already-insanely-wealthy financiers and corporations. (Debt-serfs can “save themselves” by borrowing more, heh.)

We get it: digitally printing trillions in excess of actual productivity eventually destroys the purchasing power of the over-issued currency. We also get the need to keep interest rates at near-zero so governments can fund endless trillions in stimulus and other giveaways–billions to the billionaires and a trickle of bread-and-circuses to the debt-serfs.

But this isn’t the full list of dynamics in play. The demand for currency is based on a number of factors: yield (the interest rate paid by the issuing central bank) being one, the amount of global debt denominated in the currency being another and the demands of global trade being a third.

Ultimately, every currency is a derivative contract on the resilience, adaptability and innovative capacity of its economy. Every currency is a social construct that reflects the security of social contracts within the issuing economy, and the perceived security of the currency in the global marketplace.

The two are related, of course; but they also conflict. This is Triffin’s Paradox, which I’ve discussed for years. In a nutshell, the paradox is every central bank with a global role as well as a domestic role serves two competing audiences: the domestic economy and the global economy.

There is no way to serve both. The domestic exporters want a weaker currency, while foreign owners want a stronger currency.

Understanding the “Exorbitant Privilege” of the U.S. Dollar (November 19, 2012)

The Federal Reserve, Interest Rates and Triffin’s Paradox (November 19, 2015)

The dollar rises for the same reason anything else goes up: scarcity and demand. If the Fed over-issues USD, scarcity value falls. If non-domestic borrowers take loans denominated in USD, demand rises as this debt must be serviced and eventually paid off in USD.

The Fed’s mandates that are constantly repeated are all about the domestic economy: maintaining control of inflation (Goldilocks: not too hot, not too cold) and domestic employment (if unemployment skyrockets and wages plummet, the debt-serfs might revolt).

But the Fed’s one controlling mandate is to maintain USD global supremacy. Unbelievable as it is to the unwashed masses and the clueless punditry, the domestic economy (and the stock market) are sideshows compared to the primacy of the mandate to maintain USD supremacy as the one and only essential reserve currency.

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