The trilemma, also known as the ‘impossible trinity’ is a fundamental thesis of international economics. I’ve covered in detail previously, so this is a short overview.
It was developed by economists Robert Mundell and Marcus Fleming in the early 1960s.
In its simplest form, the Mundell-Fleming model says that a country cannot have an open capital account, a fixed exchange rate, and an independent monetary policy at the same time.
It can have any two out of three, but not all three. A country that attempts to have all three will fail in one of several ways including a reserve crisis, an exchange rate crisis or a recession.
Despite the warnings that the model provides, China is attempting to pursue the impossible trinity.
At the Daily Reckoning we’ve covered these Chinese dynamics on our extensively, reporting on the geopolitics at play in China, the global dollar shortage and the indicators of a Chinese collapse.
An Update on the Chinese Trilemma
China wants a fixed exchange rate to the dollar, in part to satisfy the Trump administration that it is not a currency manipulator. And China wants an independent monetary policy not tied to the Federal Reserve policy rate, in part to stimulate the economy and keep insolvent SOEs afloat.
This post was published at Wall Street Examiner on June 12, 2017.