With so much focus on currencies at the moment, let’s talk about the Impossible Trinity, also known as the Policy Trilemma.

This is the theory that a nation can maintain up to two of the three conditions with respect to their national currency (but not all three):

  • Sovereign Monetary Policy
  • Fixed Exchange Rates
  • Free Capital Flow

For instance, taking the Euro member nations (or the States in the US), who have pegged their currency to a regional currency union, they have put a fixed exchange rate in place, and have free capital flows, but have ceded their monetary policy in the process.

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This poses a set of opportunity costs upon national currency regimes. As with all things in Economics, no system is ideal. Whatever system you opt for comes with innate limitations and constraints.

When I advocate for a capitalist system, I understand there are some severe limitations of the system such as a widening wealth gap, or income inequality. I just believe the limitations are less negative than the constraints posed by other systems.  We gain technological development and capital stock as a trade-off, although objective meritocracy is important for the system to function.  Contrasted with socialism which aims at a equal equity, we are liable to sacrifice resources and potential economic growth to maintain that dream which in turn is likely to impact living standards over time.

Part of existing in the real world is just accepting that often we cannot have our cake and eat it. At best we should be optimizing our use of the ingredients so we can get some of the left over frosting.

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