According to Pozsar, there is a new kind of “Triffin Dilemma.” Due to rising inequality, a shrinking numbers of large banks, and a ceiling on Federal Deposit Insurance Corporation (FDIC) insured deposits, there is a shortage of “safe assets.” The private supply of safe assets has occurred through the system of shadow banks, and is based on repos, or Treasury Bonds. But the supply of US Treasury bonds is limited by the ceiling on public debt, and is constrained by neoliberal theories of limits to the size of government. As a result, there is a presumed shortage of safe assets, just when the levels of inequality have increased the order of magnitude of assets under management which are in need of protection. There are also large accumulations of cash pools by large multinational corporations, often held overseas to evade taxes. The private provision of safe assets tends to reduce liquidity and increase costs of information, potentially leading to financial instability. Possible resolutions of this issue include (1) progressive taxes to reduce the size of the cash pools, (2) an increase in the ceiling for insured deposits, and (3) increasing support by the Fed for the role of “market maker of last resort.” This paper concludes with the implications of each alternative. JEL Classification: B5, E44, G01, P1
Triffin: dilemma or myth?
