World economies are in a trilemma, not just a dilemma

As the world economy struggles to recover from its various ailments, the international financial order is coming under increased scrutiny.

Currencies and exchange rates, in particular, are getting a hard look.

In thinking about these issues, the place to start is with what economists call the fundamental trilemma of international finance.

Trilemma describes a situation in which someone faces a choice among three options, each with some inevitable problems.

What is the trilemma in international finance?

The trilemma stems from the fact that in most nations, economic policy makers would like to achieve these three goals:

• Make the country's economy open to international flows of capital.
• Use monetary policy as a tool to help stabilize the economy.
• Maintain stability in the currency exchange rate.

Without doubt, the financial system presents policy makers with difficult tradeoffs. Americans should not be too harsh when other nations facing the trilemma reach conclusions different from their own.

In this area of economic policy, as well as many others, there is room for reasonable nations to disagree.