triffin 1960. bis central bankers ’ speeches the dilemma could, however, be formulated in more general terms. given the bw rules, there were domestic policy incentives in the key reserve - issuing and holding countries not to comply with these rules, at the expense of the system ’ s sustainability. this is mainly because using the exchange rate as an alternative rebalancing tool was always a temptation which, especially in case of large shocks, offered a politically more palatable option than lengthy and costly domestic adjustment. at the end of the 1960s, the largest of all shocks – the vietnam war – was financed by the united states with expansionary policies that resulted in high inflationary pressures and took no account of global monetary stability. as a result, the us dollar - denominated reserve assets lost 40 % of their purchasing power, thus making the creditors to the united states increasingly reluctant to finance the war by accumulating reserves denominated in dollars. the system eventually collapsed, as triffin had predicted : faced with the dilemma, the system ’ s core country preferred not to maintain its commitment to keep the value of the dollar in terms of gold, but rather to pursue its internal needs while providing the other countries ( which were not adjusting either ) with its reserve currency. 3. the dilemma today : what has changed? what is still valid? what has changed since triffin ’ s times? well, the way in which the ims works and thus the modalities through which the dilemma operates have changed considerably ; but the fundamental tension between short - term domestic policy incentives and the stability of the ims has not. hence the triffin dilemma is, in its essence, still alive and well. 3. 1 what has changed? there have been three major changes. first, we have learned that the bw rules were too stringent. over the past 40 years, a new informal ims has been developing which has turned out to be much more elastic in nature than the previous ones. the dollar no longer needs to be “ as good as gold ” ; exchange rate adjustment has become an important element in the rebalancing toolkit ; and the ims has been adapting to the different economic conditions and policy preferences of individual countries. in particular, the exchange rates of all advanced economies and some emerging economies are now freely floating, whereas a new dollar area encompassing systemically relevant creditors has emerged, thus making the ims an hybrid floating / fixed system. second, a new globally

accounts, i. e. net capital flows and global liquidity, a proper understanding of global liquidity also needs to include gross capital flows. second, under bw global liquidity and official liquidity5 were basically the same thing, but today the “ ease of financing ” at global level also crucially depends on private liquidity directly provided by financial institutions, for instance through interbank lending or market making in securities markets. given the endogenous character of such private liquidity, global official and private liquidity have to be assessed together for a proper evaluation of global liquidity conditions at some point in time, and there is no endemic shortage of global liquidity, as the empirical evidence confirms. this is not to deny that temporary shortages can occur, as happened after the bankruptcy of lehman brothers in september 2008. but such shortages are a by - product of shocks and boom - bust cycles, not an intrinsic feature of the ims, and can be tackled with an appropriate global financial safety net. 3. 2 what is still valid? first, there remain factors that create triffin - dilemma - like pressures on the ims. in particular, the official sector of several emerging market economies ( emes ) still consistently adds its own demand for safe us assets to the market - based private demand for us dollars. even when a shock originates from the united states, sizeable and persistent official capital flows to that country seek out the dollar as a safe store of value and a precautionary source of liquidity. as a result, total net capital stemming from emes taken as a whole flows uphill to advanced economies ( the lucas paradox ), even though private capital continues to flow downhill, as the theory would predict. this would not be a problem if it did not increase the fragility of the us financial system by pushing down risk premia and real interest rates, thereby boosting financial innovation and encouraging upswings in the degree of leverage. 6 but it does increase that fragility. it should be noted that in bw times the united states had managed to keep a sustainable current account position. the u. s. current account indeed recorded surpluses ( though declining ones after the onset of the vietnam war ) or, at most, minor deficits over the whole bw period. on the capital account side, this was mirrored by large long - term capital outflows from the united states, especially foreign direct investment ( fdi ) by american multinationals,