The basis of the “Triffin effect” in the United States

The “ Triffin effect” is the mechanism by which the country that issues the dominant reserve currency (today the United States) abuses this privilege, resulting in it having excessive external debt, which ultimately trigger s a crisis and strip s it of this reserve currency status. The starting point of the crisis in the case of the United States is rising non-resident holdings of US Treasuries, which may lead to a dual equilibrium: One equilibrium where non-residents hold US Treasuries and where the strong demand for this debt leads to low real interest rates in the United States, which ensures its fiscal solvency; Another equilibrium where non-residents stop holding US Treasuries and where the rise in interest rates strips the United States of its solvency. This second equilibrium appears when the external debt reaches a sufficiently large size. The crisis occurs when there is a jump from the first to the second equilibrium . Like in all cases of multiple equilibria, this may merely be caused by the expectation of a crisis. For this crisis to take place, non-resident holdings of US Treasuries must be sufficiently large, but there must also be a reserve currency capable of replacing the dollar, which is not obvious today.