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The “Trilemma” Runs the World
by James Rickards Daily Reckoning
Today we’re considering the real environmentthat determines economic conditions.
It has nothing to do with short-term data, Fed policy, conventional economic models or other factors most economic commentary focuses on.
Instead, it has to do with the “trilemma,” identified in the 1960s by economist Robert Mundell.
Mundell identified three critical policy variables that nations face: the central bank policy rate, the exchange rate and open capital accounts. He said that nations could control any two of these variables, but not all three at once.
If you want to control the policy rate and the exchange rate you can, but you have to close your capital account.